Loan products and LLCs.

[Anthony Bratina]

My wife and I are looking to invest in our first short term rental and I would like to set up an LLC for legal protection. I was considering using a second home/vacation home loan to finance the property and I would like to know how this would work in conjunction with an LLC. I am assuming that this type of loan cannot be given to an LLC but I am not sure. If I were to purchase a property with a vacation home loan would I be able to move it to the LLC without triggering the due-on-sale clause? I hope this question makes sense, I am just trying to figure out how to line up financing and legal protection at the same time. Thanks!

[Andrew Postell]

@Anthony Bratina I read the responses above and just wanted to provide some clarification in case it was helpful.

The actual term "second home" means something specific in lending.  Primary Home, Second Home, and Investment Property are all defined differently.  So, in traditional, conventional lending, meaning Fannie Mae or Freddie Mac (if you recognize those names), a second home is one that you occupy for "part" of the year.  When you occupy a property for "part" of the year, that means you cannot rent it for 12 months of the year...because how could you if you were occupying it for "part" of that year?  However, using a Second Home as a Short Term Rental for when you don't occupy is fine.  They can only be one unit homes, can't be in a time share, and a few other little details.

Now, the benefit to using Fannie/Freddie money to purchase a "Second Home" is that the downpayment is lower and the rate is lower.  However, the mortgage industry is quite different now.  In some certain situations you won't be able to put 10% down and the rate may not be lower.  

So, if you are using this property exclusively to rent out...then it won't officially be a "Second Home" and it would be an investment property. In that scenario, Fannie/Freddie have a 15% down option (but see above about market conditions) but they still won't lend to an LLC.

Now, I feel that transferring your property to your LLC after closing is a non-issue. I wrote an entire post on that topic that you can read HERE including clips of the language in the note and what to be aware of.

*WHEW*  Hope that wasn't too much information but maybe some of it made sense.  Feel free to reach out with any questions.  Thanks!