Rental home (w/ bank mortgage on personcal credit) in LLC

[Kat N.]

Dear Bigger Pockets Members, 

I have already bought my primary SFH (for living) with traditional bank mortgage. I am looking buy an investment SFH with traditional bank mortgage again on personal credit. I want to rent out the SFH. 

So the idea is to put the investment SFH into the LLC to (a) Limit liability to the LLC and investment SFH only, and (b) To deduct expenses and take advantage of depreciation.

Here are my questions:

(1) I have heard that since my investment SFH using bank mortgage on personal credit, I can't make LLC because bank won't allow it. Bank wants it be on my credit. Is that true? Anyone has done this before?

(2) Anyone has tried to do 1031 exchange with investment SFH? I know 1031 is more for commercial, but try a long shot if anyone has tried it for SFH.

I am looking forward to your advice. I really want to limit liability and deduct expenses through LLC.

Thank you very much, 

Best Regards, 

[Jeff Copeland]

1. It is definitely true for the most part that conventional loans require the asset (property) and the liability (mortgage) to be in your personal name. There were a few lenders doing conventional-type loans to LLCs (Finance of America being the only one I'm aware of), but that was before the pandemic. I doubt you'll find an appetite for that any time soon.

1.a. That does not necessarily mean you cannon run the income and expenses through an LLC. Talk to your CPA.

1.b. Commercial financing rates/terms are pretty competitive right now if you absolutely insist on using an LLC or corporation. But lenders will want to see some experience and cash reserves in addition to underwriting the deal itself.

1.c. There are other ways to provide liability protection. Solid liability insurance being the obvious way to transfer that risk.

2. There is no prohibition on doing a 1031 exchange with a SFH. In fact, there are no prohibitions on the type of real estate whatsoever; You can exchange a SFH for another SFH, an SFH for commercial, or land, or whatever - as long as it is real estate.  Moderators tend to freak out and remove posts when external links are posted in the forums.