What Is An LLC And Why Do I Need One For Real Estate Investing?

We are glad you asked! An LLC stands for Limited Liability Company and offers some of the benefits of both a partnership and a corporation. It is essentially a corporate structure that allows for the pass-through taxation of its members as in a partnership while limiting overall liability as in a corporation.

Financing Options

As a real estate investor, you have several options when it comes to financing your next fix and flip and buy and hold property. If you have built up a nest egg, you may choose to self-finance the project. Or maybe you are interested in going the traditional route and decide to apply for a long-term residential mortgage from a bank or other financial institution. Both of these options are viable but not without significant drawbacks. Our previous blog post delved into this issue closely. But there is another alternative—a short-term business loan backed by a hard asset, sometimes called a hard money loan offered by a private lender.

Why Private Money?

Some people shudder when they hear the terms—hard money or private money—and imagine greedy loan sharks offering exorbitant rates. But these loans when offered by reputable private lenders fill a need not met by other lending institutions. Many real estate investors, often having been turned down by traditional banks, find that many private lenders offer highly competitive rates (often in the single digits) and flexible terms.

Why An LLC?

By now you are probably wondering what establishing an LLC has to do with anything. Well, we mentioned above that private or hard money loans are based on the value of the hard asset associated with it—in this case, the rehabbed property. Unlike a residential home mortgage where the owner occupies the property, these short-term hard money loans are business loans—not consumer loans. And as such, borrowers are required to establish an LLC to receive the funds. Since these loans are for investment purposes, private lenders (like NavCap) are not subject to some of the stringent regulations put forth in the Dodd-Frank and SAFE Acts in 2009. This allows us to design loan packages which uniquely match each client’s needs.