LLC required for more than 10 properties?

Question

I think I'm confusing myself with the information I'm reading.

I currently have 8 properties in the Baltimore City, Maryland area. All properties are financed through FM confirming loans. My goal is to grow past 10.

Do I need to create a LLC to refi them out of my name?

Will a portfolio lender do a cash out refi under my name?

My fear is I'm combining strategies without the need for it. Any assistance and guidance is greatly appreciated!

Additional info: BRRRR investor. Acquire with HML, rehab, then refi with a Fannie/Freddie loan. Acquire to refi is completed around 4 months

Randall Alan · Answer

I know your pain.  We are at 41 doors, my wife has 10 FM loans in her name, and I have 7.

Things I can tell you:

You probably know that Fannie Mae has a 10 count limit per person on loans, which is likely the crux of your question.

But be sure to know that above 7 loans you have to (1) have a 720 credit score or higher, and (2) you have to have a personal residence in your own name).  Our residence was only in my wife's name.  They made me put my name on the property (via quit claim) which subsequently ate up one of my 10 financing slots.

We have done a cash-out refi with our portfolio lender, so I know the answer to that is 'yes'.  With the Covid 19 scare those are harder to come by right now.  I wrapped mine up in March, and went back to him in May and he said they weren't writing them until things settle down.

I refi'ed 4 properties into 1 commercial loan, but kept it in my name.  I'm sitting here kicking myself wondering if I should have deeded to an LLC to get them out of my name and if that would have effectively 'erased' them from the Fannie Mae 10 count?  Hmmm... will have to check that out.  Thinking it through, my guess is that if the Portfolio lender would require you to be personally responsible for the loan under the LLC (personal guarantor), and the loans would then show up under both names (yours and the LLC).  At that point I feel positive Fannie Mae would still count the ones in the LLC against you, as you remain responsible for the debt.  Fannie Mae looks at "total number of financed properties" in the calculations.

What we did was to do a cash-out refi to use the proceeds to pay off a FM financed property to free up a loan spot for another Fannie Mae purchase.  That part worked fine... hope it helps.

Randy

Kris Mann · Answer

Yes @Randall Alan, I am well above 10 in my LLCs. But my lender/broker (a good friend) chose not to add them in the application as part of the real estate owned since they are in a LLC, very much like the guidelines above. But I can see how the guidelines are open for interpretation, and the outcome could largely depend on the lender.

Nat Rojas · Answer

@Kris Mann thanks for the response! That certainly helps build my confidence in the answer moving forward!

@Randall Alan following up as requested!

TLDR: Dependent upon the specific lender and interpretation of Under writer. Ex: local community portfolio lender responded directly to me via email, "If you are a 25% or greater owner in LLC you have to sign a PG on our loans. Keep in mind, our loans that are closed under an LLC with Tax ID number we do not report to credit even though you sign a PG"

Another email from my conventional lender: "If the loans are refinanced through a commercial loan either individual or blanket and they are paid off with current lenders on your credit report then the answer is yes you should open up the availability to add more."Here is my research along with conversations with lenders:

Strategies for > 10 Properties

https://www.biggerpockets.com/member-blogs/4658/46453-hitting-your-10-financed-properties-limit-with-fannie-mae

- transfer, buy, or own your properties in entities such as LP, LLC's, or partnerships where your ownership is less than 25% since any property with financing only counts against this 10 count if your ownership in these partnership style entities only counts when your ownership is at 25% or greater

- Use a spouse whom you trust who can keep or own 10 financed properties in their name and 10 in your own name

- Use commercial and or portfolio financing from local banks once you hit 10+ financed properties so you can acquire additional financed properties and allow you to continue to grow your portfolio

https://www.biggerpockets.com/forums/311/topics/586760-how-are-people-getting-more-than-10-loans

You need to find a reputable portfolio lender. The amount of financed properties will not factor into approval. If the properties are located in the sate that you will I would recommend trying a local community bank first. If out of state a national portfolio lender. Local community banks in my area typically lend 3-5 year balloon -20 year amortization in the 5.5 - 6% range. National portfolio lender may offer 30 year fixed in the 6.5- 8% range depending on credit and LTV.

Get 10 loans and then seek out a commercial lender and have them do an umbrella loan for the entire portfolio. The existing loans will all be paid off and you'll have 1 loan with that commercial lender. Now you can start all over from scratch and start accumulating your 10.

https://www.biggerpockets.com/forums/50/topics/254965-financing-more-than-10-properties

I just went through this very question with my underwriting staff and there are some interesting answers that came up. According to Fannie Mae, if you own more than 25% of an LLC that the properties are financed via a portfolio loan on, you must still count the properties in the 10 financed property rules. However if you own 25% or less, then you don't have to count the properties that are in the portfolio loan so long as the financing is in the name of the LLC.

Here is were it gets interesting, if you have the homes in a Corporation or a Sub S Corp and the portfolio financing is in the name of the corp / Sub S, then you don't have to count them into the 10 financed property rule, even if you are sole owner of the corporation?.

To get around the issue mentioned by Kevin Guild, make sure that you "control everything, own nothing". That gets you around the ownership considerations for the LLCs, since none of your business entities are owned by a human person.

Beyond amazing @Stephanie P. provided:

The rule is 10 properties financed that you're personally liable for, but if you refinance them into a commercial loan, then your entity and not you are responsible freeing you up for more loans.  I've attached the Fannie seller's guide for your review.   https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B2-Eligibility/Chapter-B2-2-Borrower-Eligibility/1736858041/B2-2-03-Multiple-Financed-Properties-for-the-Same-Borrower-08-07-2019.htm#Limits.20on.20the.20Number.20of.20Financed.20Properties

The first couple of paragraghs are key as well because they define the criteria for number of financed properties.  I bolded and underlined the key phrase that exempts liabilities when they're in an LLC.  The regulation reads:

"The number of financed properties calculation includes:

• the number of one- to four-unit residential properties where the borrower is personally obligated on the mortgage(s), even if the monthly housing expense is excluded from the borrower’s DTI in accordance with B3-6-05, Monthly Debt Obligations"

So if the properties are financed through an LLC and you're not personally obligated, they are not counted.  Don't put them on the 1003 (Application) in the real estate owned section because you don't own them, the LLC does and they won't be counted by DU (Desktop Underwriter).

Randall Alan · Answer

The thing is, Fannie Mae (your broker really) wouldn't have brought the LLCs up until they became an issue.  I believe they would have counted any personally guaranteed LLC loans against the 10 count limit FM holds you to... but as long as you were under 10, they would not have been a factor, so would have flown under the radar of needing to be mentioned. Just my best guess.  @Kris Mann, would the properties under LLCs have put you over the 10 property limit with FM?

Randy

Kris Mann · Answer

Hello again @Nat Rojas. My 2 cents based on my experience which is limited to LLCs only. I have always held all my rentals in LLCs, but a couple of my previous primary homes were turned into rentals when I moved. They are still under my name. When I tried to get a FM loan on my most recent primary residence, I was only ever questioned about the two loans in my name. None of the loans on my rentals came up, though they were personally guaranteed by me. @Randall Alan could be right since he seems to have dealt with this more, but my understanding is that commercial loans thru an LLC on residential properties won't count towards your limit.

Nat Rojas · Answer

@Chris Mason @Upen Patel

Please advise! Would love your wisdom and direction!

Searching for an expert that could help!

Randall Alan · Answer

Nat,

I know where you are trying to turn this - that the commercial loan makes the consolidated properties commercial real estate - but that’s not the case as I understand it.  Your loan is commercial, but it is financing residential properties.  1-4 door residential properties are “residential” to Fannie Mae. Properties with more than 4 doors don’t qualify for residential status for Fannie Mae and would be considered commercial.  I don’t think you will be able to duck that definition... at least that was what underwriting’s position was on my file.

Let me know  if you find out anything different. Randy

Nat Rojas · Answer

Great points all around, Randall! Thank you so very much for the detailed response.

First - congrats on acquiring 41 doors! An incredible achievement as I strive to follow suit.

I've seen several places that touch on this. If the borrower is not personally obligated to those commercial loans then yes it will free up or reset the number of financed properties in the eyes of Fannie and Freddie. Through BP, I was guided to the following website: https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B2-Eligibility/Chapter-B2-2-Borrower-Eligibility/1736858041/B2-2-03-Multiple-Financed-Properties-for-the-Same-Borrower-08-07-2019.htm.

If I read this correctly: “The following property types are not subject to these limitations, even if the borrower is personally obligated on a mortgage on the property: commercial real estate, ….”

I have heard of the alternative solution Of paying off a loan. Beyond glad to hear that it worked out well for you. My goal is to continue to leverage hence the desire to better understand the ins and outs of surpassing this 10 loan limit.

Is your goal to continue to grow the number of doors? If so, how do you plan to finance?

LLC required for more than 10 properties?

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