All Forum Posts by: Corey Demuth

Alex check with M&T bank about a commercial loan. They will do a commercial loan on a residential property and they are much more concerned with whether the unit will cash flow on paper (if you have tenants in there with leases it helps a lot) rather than your DTI.

I have seen countless threads about using LLCs to hold real estate. It seems like it is fairly typical for people to come on here and ask about whether or not they should use one. Several very seasoned investors on this site have repeatedly advocated using LLCs. 

However, I also see plenty of threads where people (including myself) who have actually tried to follow that advice, have run into major roadblocks with financing, taxes, and even insurance. Those threads tend not to have any fantastic answers, and eventually someone just says "well you don't really need to use an LLC" and the discussion ends there.

I am in favor of using LLCs, however I am running into a lot of roadblocks. I'd love to get some feedback from experienced investors about LLCs, and for those who use LLCs, how you have gotten past these obstacles.

Obstacle #1 - Financing. This is arguably the biggest issue with using LLCs. The second you tell banks you want to take title in an LLC, they run for cover. Most banks have said they will only do a commercial mortgage in that case. Then it ends up being higher closing costs, a higher rate, and typically a short term (like 5 years) with a longer amortization, and you are basically forced to refinance the loan every 5 years. These costs will literally kill many deals. Plus with the amortization dragged out, you are not going to build up much equity in the property.

Of course it is possible that some people are simply buying with cash, but without using the leverage of a mortgage, the return on real estate is much lower. I have to believe there are investors out there who are getting around this.

Obstacle #2 - Insurance. If you can get financing in place, then you need to get insurance. What I am also finding is that when you want the insured property to be owned by an LLC, many/most insurance carriers will also charge you a much higher rate. What is the reason for this, and how do you get around it? Again, paying more for the same level of insurance coverage = killing deals. If you pay $100/month more for your financing, and another $50-100/month more for your insurance, the next thing you know there is little to no profit/cashflow left. Again... what are the experts doing?

Obstacle #3 - Legal/Taxes. An LLC is only helping you if you follow the rules, and treat it as a true separate business entity. What are some of the common mistakes that can be made to render the LLC invalid? How much capital should be left in the LLC at all times? What is the appropriate way to withdraw profit from the LLC as it generates revenue beyond expenses?

Do you need to file a separate tax return for the LLC in order to maintain the protection of the LLC as a separate entity?

Les, can you share the details? Is it a 30-year fixed loan? What were the caveats?

Thanks Steve. Can you elaborate? Are you saying insurers will have an issue with the property being titled in an LLC? Also, what are the additional tax filing burdens... I thought a single-member LLC = income and deductions flow through to your personal tax return?

Does anyone have experience actually doing this? As I said, I know I have seen many posts where people alluded to this, but never specifics (ie which bank or company they worked with.)

My understanding is that you do not need to do a separate tax return for each LLC, assuming they are single member LLCs then I believe the IRS disregards the entity / the income and deductions just flow through to your tax return. Check with your CPA though...

I am trying to buy a SFH to rent out. I am running into a problem where residential lenders don't want to let me take title into an LLC (even though I would personally guarantee the loan.)

OK.

So I talked to some commercial lenders, but they are offering me what seem like pretty difficult terms to make a deal work. Mostly 5 year fixed rate loans amortized over 15 years. The payments are too high (going to cut into my profit too much vs a residential 30-yr fixed loan) and on top of that the closing costs are higher and you basically MUST refinance every 5 years due to the balloon payment (which leaves me vulnerable to interest rates going way up, AND means I have to pay some closing costs again every 5 years.)

Is there any other way to do this?? I have heard a few times (including on this site) that people have said there are some places where you CAN get a residential loan when buying property for an LLC.

One person mentioned that she has a special "closer" who can get these deals done, but who charges 2 pts to do them.

A banker told me she knows someone who knows a way to get it done in some cases (and I am waiting to hear back from her.)

Another article I read pointed out that it is not specifically disallowed by Fannie/Freddie as most people think, but that you have to get a bank that understands the fine details of the underwriting rules.

Also, I read a few posts on here where people mentioned getting deals like a 20 year fixed rate business loan (not amortized over 20, just literally 20 year fixed.) Another guy said he gets 25-year fixed commercial loans at 5-6%.

Can anyone tell me either:

-Specific banks that do loans in NY, which will allow me to do a residential loan for a rental property that's going to be held in an LLC

or

-Commercial banks that can offer me better terms than 5yr fixed with 15yr amortization, again they must lend in NY however.

Please note, I am not interested in simply buying under my name then quit-claiming, and/or using land trusts to try to hide the transfer of title; I can't risk the whole DOS clause coming back to bite me.

I appreciate any help or advice you can give me! Thanks!

To clarify, you can absolutely 'create' a deal in almost any market. If you are able to rehab skillfully to create extra value, or if you can navigate through a short sale, (which is EXTREMELY involved in NYC and requires you to have significant capital) or manage to acquire a tax lien property, etc then of course you can get a cash flowing property.

However, I'm not looking to do any of that - I was talking about doing a straight conventional deal ie 20% down mortgage, not a foreclosure or other overly complicated type of deal.

Also, to play devil's advocate, if you can use these strategies to convert a property into a cash flowing rental in NYC then imagine what kind of cash flow you could create in a market where the NORMAL sales already cash flow...

First, I am not giving legal or any other kind of official advice here. But just some food for thought.

It is possible to do what you are suggesting. Is it easy? No.

The reality is that most of the time, you are just going to be making phone calls and responding to mail/email. For example, the tenant calls you and says the sink isn't working in the bathroom. What do you do? Well, you would probably call a plumber, right? Being 10 hours away rather than 10 minutes away really just means you can't easily go there and watch the guy do the job.

So the real issue is going to be, can you make good relationships with people so that when you call someone and ask them to go do a job, you know they are doing the job well, not doing anything they shouldn't be, and not ripping you off. This will be probably the biggest factor in whether or not you are successful at this, in my opinion.

You will also need someone to show the property to new tenants, possibly deal with evictions, etc. Who is going to take pictures and do the report showing the condition when the tenant moves in, and then do it again when they move out? How will you know if they are keeping up the condition of the property? These are some things you need to think about.

James, I feel your pain. I first got interested in real estate around 2006-2007. I looked for years and never found a scenario that worked for me around NYC. So now I am considering other areas.

In general, I have found that anything within an hour or two of NYC is not priced to cash flow - unless it is in what I would consider to be a bad neighborhood. There is so much demand around NYC that the prices are driven up beyond what makes sense on paper. Additionally, the taxes go up faster than you can raise the rents. It's a losing game.

Now, are there successful landlords in the area? Of course. But most of them ALREADY BOUGHT most of their properties before the prices went insane. In the 80s and 90s, prices were not so inflated. Also, there are a FEW out there who have connections, and get great deals (many of which never even hit the MLS.)

Finally, because appreciation is so strong, I have seen some rich landlords who buy a property and either lose money or break even for the first few years, because they know in the long run appreciation and rents will put them into the black eventually. For me, I want cash flow from day one. I'm not looking to get that speculative and I don't have the capital to just bleed money. But wealthier investors do. I knew of one who bought a strip of properties, demolished them, and build brand new beautiful apartments. Is he making money the first several years? NO WAY! But he knows that in the long run, eventually he will make a large profit on that deal.

Now, to be fair, there ARE properties that will cash flow around NYC - in some neighborhoods. The problem is for me, I'm not investing in an area where I wouldn't feel safe to walk around at night. So I tend to avoid those houses on the corner of crackhouse lane and rape avenue. YMMV.