Personal financing for loans but LLC handles the business

[Justin Sandall]

We are preparing to close on our second investment property (SFR) in the next month. Like the first, in order to secure financing with a competitive interest rate and 20% down, we put the loans in the names of the LLC partners. Putting it in the name of the LLC was not feasible.

The LLC receives all the tenant checks, pays all the expenses including the mortgage, has separate savings and checking accounts etc. Other than the mortgage, there really isn't much in the names of the partners.

Is this an acceptable way to do things? Any issues with it? 

Part of me is tempted to try to transfer the title and mortgage to the LLC but I know I risk triggering the Due on Sale clause. It could make things more simple (if no issues with the clause) and keep us from running into the issue with number of property loans per person I've read about.

Thoughts?

Thanks for your time.

[Bill Gulley]

@Ned Carey

 The 3 or less comes from SEC regulations for small partnerships and raising funds, care needs to be taken that the entity is not recognized as raising capital and a note is a bond. Mortgages are exempt as to small entities or individuals from being recognized bond financing. When I was setting "investors" into LLCs a securities attorney in KC Mo advised keeping the members to 3 or less, saying that where ever 3 or more gather to gather in the name of business, there the SEC will be. (Advice of Biblical proportion)

Now, say you had 10 members, 5 use their money, the other 5 work, that should not be an issue as the entity is not obtaining funds from non-accredited investors. Institutional loans or even hard money loans would be exempt as they will be regulated lenders, but with a private lender you could have issues.

LLCs can also borrow from each other or partner. Other entities can be a member of an LLC as well. While additional LLCs will take more accounting, it can be simplified. If you use additional LLCs folks need to properly fund them as well and have reserves available.

Also check state securities law.  :)