Why LLC vs Personal Name?

Question

A Topic, I would like seeing discuss, is why an individual with more than 5 properties is force to finance in LLC vs Personal name? Its a scam they do not care about the property value and only care about their borrowed amount. I see it in the insurance documents. The dwelling is only 5-10k more that what the loan is for but general liabilities is 1 million bucks. What that means is if something happens to the physical home, you are screw. I planned on paying these guys before their first payment is dues and eat the 3 points. Another area of concern is, you have some lender keeping your rehab money in escrow and wants to draw interest why the hold the funds. Believe m, a lot of other lenders charge interest only on borrowed funds, look around before closing a deal. I think its disgusting to keep the funds and charge interest. I spoke to my lawyer about this issues and he said just find another lender that will charge interest for what's borrowed.

New investors, do some basic due diligence, call 10 or 20 HML with all your questions before closing on these loans, Lenders will say anything to get the deal across the line but you and your money is at risk. I will start listing bad hard money/Good Hard Money lenders by name on this platform. Something like the pros/cons.

New investors, do some basic due diligence, call 10 or 20 HML with all your questions before closing on these loans, Lenders will say anything to get the deal across the line but you and your money is at risk. I will start listing bad hard money/Good Hard Money lenders by name on this platform. Something like the pros/cons.

Caroline Gerardo · Answer

#1 you do not need a LLC for your first 10 loans. Conventional loans DO NOT want you to put in LLC.

You do not need LLC vesting or ownership for NonQM and hard money loans.

#2 I think you are speaking about umbrella insurance which is also not required for any loan BUT is a GREAT plan to protect yourself. Generally the liability insurance you carry on a lower value home will not cover if the house has a fire, someone is burned and lives.

Insurance amounts must cover guaranteed replacement cost for a loan. This dollar amount is determined generally by the appraiser, not the lender. If you don't have enough coverage and the property has a flood for example and tenant moves out you cannot rebuild with half the cost to rebuild. You also still have to pay the mortgage, taxes and insurance with no income.

#3 not understanding your point about interest. Here are my three guesses as to your point:

impound accounts do not charge borrowers interest.

reserve accounts are not secured or taken

rehab costs can be held back as you complete a project- you provide proof stages are up and done via inspection and money is released. Otherwise the lender is foolish to give you cash for something that does not exist. If you are doing construction and none or half is completed there is no valuation for this. If contractor fails you he can lien the property without doing the rehab and the value of property may be less than you paid at that moment as is not rentable, title is a mess, and lender is not a contractor

#4 calling twenty hard money lenders is like hunting for fireflies west of the rockies.

Get recommendations from knowledgeable people. Hard money is expensive and not for a beginner, you can lose your shirt and so can they.

Know exactly what your situation is: FICO, cash in bank, experience level, property type, property location, goal, terms, vesting BEFORE you start dialing. Keep notes. Do it by email not phone it's too easy to mix up the details.

I hope this helps guide you towards meeting your goals.

Caroline Gerardo · Answer

Appraised value is not the number that lenders use to condition for hazard insurance. The cost to rebuild is extrapolated. Guaranteed replacement cost often is more than the loan amount. Loan amount is product specific, it does not correlate to the insurance coverage needed. Say you only borrowed $20000 on this same house that would not be anywhere near what it would cost to get the house back up and running- if there was a fire $20000 would not rebuild and make it rentable.

Million dollars for general liability does sound high but without knowing that the neighborhood/location is, what construction risks you plan to undertake/how long to complete, and all the ins and outs of your deal, I cannot comment.

An insurance policy in a LLC is going to cost more as is commercial in nature.

I don't do HML but you say you have been using all your investment life, so some worked for you. HML has a temporary place to springboard an investment if a borrower can exit in less than ten months. HML is costly and high risk. HML use their money to invest how they they please.

Darway Dalmeida · Answer

Ans # 2, No Caroline, I have a separate Umbrella policy for 2 Million bucks with USAA. This is the home owners insurance policy, under the LLC.

Quick example: Home appraised for 128K, The dwelling coverage is for 91K, loan amount was 83.000 but general liabilities 1 Mill. I have never seen such policy and I am a license insurance guy.

Policy breakdown:

Property: $91,000.00Loss of Rent: $10,200.00Contents Coverage: 0Other Structures: $0.00Liability: $1,000,000 occurrence$2,000,000 aggregateI have all lines in NC, Life, Health, Medicare and P&C. I know how to read these policies. The home was closed in an LLC therefore it confused me, I thought the dwelling should cover the appraised amount. I had this home insured with USAA  prior and the had the dwelling 158Kt therefore I compared both and the LLC policy sticks up and down.

My Fico is always over 700 and this is not my first, second or third go around. I owned 8 Rental plus my primary. I have DTI issues but as of 2023 take year this should be resolved.

I been dealing with HML all my investment life, Some are decent and other are scam or have little money to invest and will squeeze every little pennies out of the borrower.

Darway Dalmeida · Answer

I really do not care if I don't gets loans from a hard money lender that applies such tactics. I am at a point with my rental portfolio that does not requires any HML, I have guys that can raise fund for me to use.

Other lenders doesn't charge interest for escrow funds therefore, I am directing new borrowers to such firm. I made these mistakes during my rookie years and do not believe someone with less fund as me should make the same mistake. If they can get a better loan option elsewhere I will direct them to those lenders.

Larry Turowski · Answer

@Darway Dalmeida you’re biting the hands that feed you. Everyone has an interest and you shouldn’t begrudge them for protecting it. If I were a hard money lender (I am not) I’d definitely want to charge interest on money set aside for you, for you to draw one whenever you get around to it.  Otherwise I could lend it to someone else. How would you like it if the lender said they leant their idle funds out and would get them to you whenever they got around to it?

Why LLC vs Personal Name?

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