All Forum Posts by: Jon Passow

@Jon Passow few things:
HML are still going to want you to have skin in the game and require down payment. Only way to get most/all your money out of a house is buy cash (or heloc/credit) and do a cash out refi. No seasoning if done w/ in 6 months. It's delayed financing.

Local bank will be the way to go, you won't have a problem w/ out of state. If you do, you don't have a good/investor friendly loan officer and you need to find someone else.

Loan amounts also come into play here. I see you mentioned indy, a lot of lower priced homes in indy that big banks won't do because it's too low. Typically a bank will need 50k or more for the loan.

Now there are also lot of turn key providers in indy, and one is being talked alot about here... if this is a morris deal WALK AWAY FROM IT. Indy is cheap, if your buying cheap houses (that have good returns on paper) I highly suggest against it if you don't have experience. They're also expensive and have lots of issues that make it a lot more difficult to mange out of state.

And lastly, CA doesn't care where your LLC is, they still want the 800 min....

@Jon Passow

A $1M or $2M umbrella policy goes a long way in protecting that than an LLC. But LLCs are nice too, as Alex mentioned. Although Alex doesn't have to deal with CA LLCs.

It never hurts to talk to the small banks to see what your options are.  Even if you aren't qualified now, at least you'll know what to expect and how to strategize your investing career so that you can eventually qualify.

However, if you're looking for deals that require 1-3 weeks to close, you'll almost never be able to close that fast with a bank.  I haven't seen it happen, but I always give myself room to be wrong :-)

Smaller banks have more flexibility and are quicker to respond.  The big ones can take a while to get back to you. It's also pretty hard to get financing from a local bank for an out-of-state investment.

@Jon Passow The LLC route may not be as hard as I made it sound. To be completely honest with you, I have found that it is easier to qualify on the commercial side of a bank than it is to qualify on the residential side. If you are wanting to do the BRRRR strategy, you should not face the "due on sale" clause because you will be pulling out a new note with your LLC on title during the refinance. You will only run into the "due on sale" clause if you do a quiet transfer of deed to your LLC while retaining the initial residential financing.

My personal advice would be to go to a commercial lender and get their opinion on your personal current financial health. They will be able to tell you real quick whether or not they would even considering loaning to you. If they come back and say you are years away from qualifying, find someone to partner with who will be able to qualify. Building bank relationships is one of the most important things in this industry, and it is crucial to build as many contacts in the banking world as possible. All banks are different and have different underwriting requirements and guidelines. 

As far as which bank you should start at, my advice would be to try and talk to as many as possible. You will most likely have the greatest success with smaller, local portfolio lenders. These tend to be your local credit unions and neighborhood banks. You probably want to look for a lender who services all of their loans in-house. This means they do not sell of their loans on the secondary market and it will allow them to be more creative with their guidelines and lending terms. 

Additionally, if the BRRRR strategy is what you want to focus on you may consider using hard money or private lenders to act as a bridge loan until you get the property rehabbed and stabilized. This is, of course, if you cannot qualify for bank financing to start. Once the property is rehabilitated with a history of stable rent, a bank may factor in the strength of the deal and the cash flow more than they will look at your personal finances. Typically the bank will need you to "season" the property which basically means showing them that you have stabilized this property over at least 12 months. If all goes as planned, they should give you 70-85% LTV and you should be able to pull all of your cash out. At that point, you know what comes next: rinse and repeat!

@Jon Passow I was in shoes like yours a couple years ago, desiring the same outcome and asking the same questions (though I had a handful of properties at the time, so had to consider existing REI assets). The route I took, in case it's helpful for you:

I had enough personal assets I wanted to protect. I created an LLC for my buy-and-hold property for two reasons: (1) I wanted asset protection and (2) it makes getting private loans easier - people equate that with "having a company" and take you more seriously. I decided against multiple LLCs - too expensive ($800 each/yr for state fees alone) and too complex (separate bank accounts = headaches for managing each property).

So I had the LLC. I went to re-title each of the properties and faced a dilemma (alluded to above). I have low rate, long term FNMA financing. I believe rates will rise. I count that financing as a key asset to my long term success. I can't accept risk to losing that financing. I wasn't willing to move title into the LLC name. I purchased additional umbrella insurance.

What I did do was move all of my property management functions under the LLC. This wasn't so much about asset protection as it was about appearance to tenants. And, clarity for bookkeeping and tax purposes.

While practical considerations prevented using the LLC for asset protection purposes, it has still be very valuable. Some things that it caused to happen:

1. It forced me to start doing real accounting (I use Quickbooks Online).  Best process change, by far, that has improved my investing.  I thought I was slick with spreadsheets and macros - I had no idea what I was missing.

2. I took a fast hard money loan for one project. The lowest rate lender (2pts, 7.99%) would only lend to LLCs. Because I had the LLC, I was able to make that happen.

3. Going through the LLC formation motions taught me how it works. As I moved on to bigger and more complex projects and raised capital from outside investors, I leveraged that knowledge and have had to create other entities for other purposes. Though my initial actions were naive, the knowledge I gained set me up for bigger things.

TLTR: I'm glad I created and now operate that first LLC, but it isn't really providing asset protection like I thought it would.

@Jon Passow

My advice to you is to start worrying about asset protection when you have a decent net worth and assets to protect. If you're just starting out in real estate or have low net worth, people don't really target you. A good umbrella insurance policy will go further than an LLC in this case. If you're starting out, I'd focus on keeping things simple and doing the things that make you money, not the things that drain your wallet.

Also, you can get long-term loans for your LLC from asset-based lenders who care more about the property's cash flow than your personal financials. These loans tend to be more expensive than conventional loans (i.e. 5-8% interest), but they're much less headaches and hassles. However, if you can get a conventional loan, that's always your cheapest option. Plus if you're buying in CA, my guess is you need the lower rates in order to have any cash flow.

Also since you're in CA this is going to be expensive (800 min) regardless of where your properties are.

Generally speaking (this isn't advice, rather observation) unless you have a unique circumstance most people don't go the LLC route. Some reasons people do are: High net worth/assets or "risky" investments. If neither those apply, you may consider umbrella insurance to offset the risk vs a LLC.

Everything that has been said on this thread so far is correct. However, there can be some complexity to purchasing and financing through an LLC. First, you are obviously going to want to make sure your LLC has been filed correctly through the Secretary of State and that you have obtained an EIN number from the IRS. You should have an articles of incorporation, and LLC Certificate, and an EIN number to identify your LLC. Additionally, you will likely need an Operating Agreement that spells out the function of the LLC and lists you as the owner and manager of the LLC. (I am in Oklahoma and this is the procedure for this state, I make no guarantees that this is the same across all states - additional documentation may be required)

My company has 240 LLCs because we set up and purchase each property in an individual LLC that is wholly owned by our umbrella LLC. I won't go too far into the reasons behind this, but this structure is the best route to go if you are looking for maximum liability protection.

Additionally, to @Nghi Le's point, banks will not give you a conventional loan with an LLC on title. You would have to go through and qualify through a bank's commercial loan department. If you are new to real estate investing and this is your first LLC, there will be no credit history for the LLC and your loan qualification will almost entirely be based on your personal financial health and credit history. Once you become a big player with dozens of transactions under your belt, banks will begin to look at your overall business, business credit history, and business cash flow to determine credit worthiness.

The last thing I will address is @Scott Michael's comment. I believe what he was referring to is submitting a contract with your personal name and qualifying for a conventional loan like a normal home buyer would. Then, the idea is to quit-claim deed the title over from your personal name to your LLC - thus securing conventional financing on what is actually a commercial transaction. This is certainly an option, but a quite risky option at that. This will trigger the "due on sale" clause that 99% of loans have these days. If your bank never finds out that you transferred the deed to your LLC, it should not be an issue. However, if the bank does find out that the title has been transferred to an LLC and your personal name - which is on their loan - is no longer on title for the property, they have every legal right to call the loan due immediately. The chance of a bank actually calling the loan due is very unlikely if you are current on payments, but it is certainly an option that the bank could exercise and leave you in a terrible position. I would certainly recommend avoiding this strategy at all costs!

Just quick disclosure: I am not a lawyer nor do I convey my comments as legal advise. I am just giving you my experience with LLC in hopes that you are able to use that information to best position yourself legally and ethically in your own real estate business.

Hope this helped, good luck! 

 Hi Jon, Columbus is a better place to invest.  Always good to diversify and I like Cleveland too but Columbus far outshines Cleveland for investment property.  As the state capitol, with the projected population and job growth over the next 5 years, with OSU graduating 6000+ students a year and the tax incentives that are bringing new business to Columbus, there is no comparison to Cleveland.  Columbus is the only city to show positive population growth in Ohio - the rest are declining.  That alone is a big reason to focus on Columbus first.  Best of luck!