Lending Suggestions for LLC

[Nick Mast]

My partner and I are looking for viable solutions to our current obstacle. We formed an LLC for the protection that it offers us as individuals and also to have a binding agreement between us via our Operating Agreement. We are now running stuck on the eventual step that involves refinancing after we complete the cash purchase and rehab of our potential properties.

The bank lenders that we have spoken with are telling us that the commercial loans we would eligible for would be in the neighborhood of 5% interest or greater and be 15 year fixed or 20 year ARM loans(depending on property type). We are also being told that we can only refinance up to 70% of ARV. It goes without saying but this obviously throws all of our numbers out of whack when analyzing properties and preparing for the next deal.

My question is, would you suggest that after the initial purchase and rehab we refinance using a loan made to an individual (either my partner or I) and deeding it over to the LLC if the bank allows? Would you suggest that whoever is not the primary borrower on the loan have the other member of the LLC co-sign for the loan? We know that the bank will have both of us as personal guarantors on the commercial loans and this is not an issue for either one of us. Just looking at ways we can lower our interest rate and increase the term of the loan as well as acquire 75-80% LTV as are offered with individual loans.

We will speak with the attorney who drafted our OA for the legal implications but just wanted to get some feedback from members of the BiggerPockets community who have dealt with similar situations. Thanks in advance for any insight or suggestions that you can share.

[Ken Calvin]

A couple things to consider. 

First, if both of you are planning to grow your real estate portfolio, individuals can you have max 10 financed properties to fit in current conforming loan guidelines, even if someone else is on the loan. This includes title being held in LLC with 20%+ ownership, I believe, but check with your lender and maybe some other lenders as well. If you and your partner structure your deal together like this, I think you can collectively have 10 properties. But if one partner is on one financed property, you can collectively have 20, but that might not be a partnership anymore.

Second, if you are going to be the primary person on the loan, which means more responsibilities, you might consider having more rights or ownership in the LLC. I don't know much about how personal guarantees work though.

Here's something worth considering. You take on the loan individually and your partner applies a junior position loan on top, so your partner is a debt investor instead of an equity investor. Then, on your next deal, your partner takes the loan individually and you'll be the debt investor.