LLC or S-Corp for Rentals?

Question

I'm sure i'm beating a dead horse here, but i'm still very puzzled.

I have no issue with finding 60-70% ARV properties in my area (I'm a RE Agent) So, i REALLY want to buy some, as i can't find enough real investors to work with me. There's a over-abundance of good properties for renting, and no one wants to deal with it locally.

I've got the available cash on hand to do it , which is good, but here's my issue :

How do I Hold the real estate in the LLC/S-Corp's name? From my understanding , most mortgage companies will use an acceleration clause or something along those lines to call the debt in full and that just won't work. I need to be able to get a mortgage for the properties, and have the LLC/S-Corp distribute the proceeds, as i will have multiple investors with the property.

I want to protect myself and the investors, as well as use it as a tax benefit as well. How do I do this ? From my understanding,there's only one or two banks in the US that will loan outright to LLCs and S-Corps, i don't have a issue with getting mortgages in my name.

Thanks!

Joe Wilson · Answer

Reissuing and refi are the same in my book. I contributed the property subject to the mortgage to the LLC and the bank changed the name from my personal name to the LLCs name. No sale. If all members are equal owners, then it will be a lot cleaner. I got a commercial loan so it was not on my personal credit report, but it costs a little more. It is about 1-1.5% more than personal mortgages. I got 0 down and actually walked away from the table with money on the first set of deals and then when I got over $250,000 I had to come up with money down. This was 4-5 years ago and now things are much different. The mortgage market is changing everyday and now even commercial lenders are looking at personal scores where before they were looking at the business itself to see if it can carry itself without credit scores becoming a real factor. You would have to speak with your lender. I don't see a problem with all members are on the loan personally and then putting it in an LLC where the members are the same ones who took out the loan personally. They may require a personal guarantee by each of the members for the loan. If you have some new members coming in when you transfer into the LLC, then you would have a sale issue. Joe

Dustin Callahan · Answer

RECPATAXMAN, So a lender reissuing a loan in the name of your LLC is different than refinancing a loan into the name of your LLC? I imagine that will also prevent the IRS from potentially classifying the refinance as an ordinary sale and taxing 15%. What about a loan that has all members of the LLC as co-signers on the loan? Do you think a lender might be more willing to do a transfer into LLC if all three members of the LLC are named on the original version of the loan? Also, what kind of terms were you able to get for your commercial loan... no money down, or 5-20%? thank you! Dustin C.

Joe Wilson · Answer

Maybe I was lucky. I have two loans for 6 condos (1 for 1 condo & 1 for 5 condos) at Suntrust and BB&T. Both are in the commercial lending departments and do not show up on my report. I had originally purchased them in my name 5 years ago and now both of them will reissue a new loan in my LLC's name provided I sign a personal guarantee on the loan. I agree you need to discuss this with your lender. Each situation is different.

Account Closed · Answer

You have a problem. You are talking about multiple investors in 1 LLC plus yourself. If you took out a loan in your name and then transfered the property title you would gain some liability protection (other than to the lender). If you want to transfer it into a multi-member LLC the lender might still ignore the transfer but they might not. More important is you will get tapped out as the loans are still in your name. Many lenders stop at 10 mortgages to any one person. If you lower the LTV you are seeking a commercial lender will do the deals when the number stack up. They will care about the Debt Service Coverage Ration (DSCR). Many residential properties will not meet the DSCR minimum. John Corey

Joe Wilson · Answer

It shouldn't be a problem. The banks usually make you sign a guarantee. That's what Suntrust did with me. I had no problem. Joe

Richard Warren · Answer

A solely owned LLC, in other words you are the only member (a spouse is ok), would be treated the same by the majority of banks as if you owned it yourself. The due-on-sale clause would not be triggered. An LLC is generally a better option than an S-Corp for rental properties. I own numerous rental properties in my LLC, most have been “quit claimed” from me to my LLC after purchasing them in my name. I have checked with the lenders prior to doing it and they had no problem with it. If I am doing a cash transaction or using seller financing I just purchase the property by my LLC directly. I have also just added HELOCs to two of my properties that are owned by my LLC and had no problem. I had to provide the bank (Washington Mutual) with LLC documents but that was the only hassle. 8)