LLC or sweat equity?

[Christian Manhard]

My fiancé and I just completed our first BRRRR and cash out refi. We turned a duplex into a triplex making 90k in equity over 15 months. Being a contractor I did all the work (sweat equity) besides plumbing and electrical. So here is my question to the BP community!

Would it make sense to close on our next duplex under an LLC so the LLC could then pay my business to do the work and thus keeping everything in house?

Do we even need to be an LLC to be able to do that and still get the benefits?

My thought process behind this is getting any sort of loan being self employed is a absolute pain (just learned that with our last refi!).. so going about it this way would then add more income to my business along with my normal everyday client jobs. In the long run making it easier to refinance at the end of the project.

I love the process and honestly don’t mind the sweat equity part at all I can honestly say I have not been happier needing to work 17hr days! Just looking for alternative ideas to be able to grow. Sorry for the long winded post it is the first one I have done. Anyways thank you for reading and any thoughts or input would be great!

[Andrew Postell]

@Christian Manhard I think you have your answer above but I wanted to expound on it a little.  Being self-employed is actually quite simple for lending - meaning, a lender can know if you will qualify or not within minutes.  Now, if the lender took forever to find this out...that is a bad sign and maybe a different lender is warranted.  Now, let's assume for a minute because you ARE self-employed you don't show ANY income...well, that would also warrant a different lender.  You can 100% receive a loan with ONLY the income of the property being considered.  There are 2 main loans that we have as investors...but more on that in a moment.  

Now, to address more of your question directly about HOW you should claim income.  This will depend on what TAX method you want to choose.  You can certainly claim your self-employment income from your "Schedule C", Schedule D is for Capital Gains, Rental Income can be on your "Schedule E" and then there's separate C-Corps, S-Corps, partnerships, etc. Which one is the right method?  I would certainly recommend a CPA to answer that question.  But as long as you CLAIM your income, it will count towards a traditional loan that will need income on your tax returns to qualify you.

Generally speaking there are 2 main types of loans for investors: “Conventional” and “Portfolio”

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. The most common portfolio style loan in Texas is a 20 year adjustable rate loan. These loans are easier to get but the terms are different.

Fannie/Freddie types of loans will be available everywhere and those rules might change SLIGHTLY between lenders. Portfolio loans can run the gambit. Since each lender controls it’s own money you will have to call around to ALL the banks to learn about all the programs. A mortgage broker will help with this some…but even the best mortgage brokers don’t have access to ALL portfolio loans out there.

We try to use Fannie/Freddie when we can because their terms are usually better but they require that taxable income in order to qualify you.  The portfolio loan usually don't require it.

*WHEW*  I know this was a lot but hopefully this helps in some way.  Thanks!