For all of you experts, can you please explain what the benefits are on keeping your rental property in a LLC compared to having the title in a individuals name?
The reason I am asking is that with only one property (just getting started) it is hard to get a regular mortgage/loan in the name of the LLC, the banks I have talked to would gladly do 5 year ARM loans but I would like to stay away from ARM loans all together.
In a perfect world, I would like to get up to 4-5 properties with tenants in them all cash-flowing nicely and then talk to a small local bank about getting a blanket loan for all homes in the name of the LLC?
There is no benefit to an LLC from what you have said unless you have significant wealth outside of the LLC, plan to have others run it, or plan to invest with partners.
I do have a partner (father in-law) that is wanting to join me, is there a way we could keep the property in a individuals name but letting the LLC manage the property through a Special Warranty deed or Quit-Claim deed?
I have a meeting scheduled with my CPA next week to go over the options but if you could educate me some more of the options we have it would be greatly appreciated.
If you hold properties in your personal name, you’ll probably get to the point where you cannot finance any more properties. Getting a commercial loan to the LLC will keep the mortgages off your personal credit.
We’ve talked to a lot of banks about financing properties for our LLC. We have never run into anyone offering a fixed term of more than 5 yrs. These loans are usually amortized over 10, 12, or 15 yrs depending on the amount. Most want between 15-30% down as well. I’m not a fan of ARMS either, but we’ve tried to secure the most favorable financing we can for our properties.
I’m sure there are other ways to keep the loans off your personal credit. This is just what we’ve done for our business.
I do realize that we will sooner or later get to the limit, even if/when Fannie and Freddie changes the rule to 10 properties per individual, I would still have to have too much cash in the bank. I think after 4 properties they want you to have 6 months reserve, let’s say I have 8 properties with a monthly mortgage of 500, that 4000 per month times 6 equals 24K in cash just to get financing.
Do you usually target local small banks as well or have you had any luck with the larger banks?
All our loans are with smaller banks. The big banks have tried to talk a good game, but haven’t delivered when the rubber met the road. One lady at a corporate bank acted like she was begging people to get mortgages from them because no one wanted any money. She told us 20% down. All sounded good. When we approached her with a potential purchase, she came back and said they weren’t able to do NOO loans for amounts <$50K. We can’t find anything that will cash flow above that purchase price because of market rents. I refuse to change our business model to suit a lender’s directives so we moved on.
With another local bank, I had the banker willing to give us 100% financing on another purchase. That seller decided he wanted to play hardball and refused to negotiate down his asking price for his house that has been on the market for about 13 months.
Banks are hit and miss right now. We went bank shopping. Many banks have changed their standards or completely got out of the game for NOO loans.
The local banks we’ve run into don’t necessarily have hard/fast rules for cash reserve amounts. They’ve tended to look at the big picture. We have 750+ FICO, stable income from the military, and a DTI ratio of about 28%. We don’t have a huge savings account, but we’ve still done ok getting lending. It’s getting more difficult, but we still have people willing to work with us. We go into banks with our portfolio and financial info. It’s better if you have everything to show up front. We keep print-outs of all our property listings. That will show most pertinent info for the bank. We also have the last 3 yrs of tax returns, P&L statements from the last 2 yrs (how long we’ve been in business), and current pay statements.
So far, the banks have been relatively impressed at our organization. I don’t go somewhere just hoping they’ll lend us money. I go in there and show them why they should work with us.
Deeds convey ownership. You only need a management contract, but I don’t see a use for an LLC if you own the property and manage it through an LLC. Just use a fictitious name for less cost and hassle.
I am currently the only one on title, my FIL wanted in since he is fed up with the way 401K and retirement plans are doing. He contributed with cash to the LLC and I have registered him as a 50% owner (Managing Manager). If we keep the property in my name, how could he benefit (tax wise) from the investments?
Our goal is to keep purchasing at a minimum 2 properties per year. Once we get to where we can not get financing as individuals, we would like to do what Justin explained. Take our financial records etc to a local bank and get a blanket loan for the LLC to take title/ownership of the properties.
I am still trying to figure out what exactly it means if I do a Quit-Claim or Special Warranty deed to the LLC. Will the LLC then be the name on the title? Or do I still have my name on the title? I understand that the LLC would control it.
One of the reasons we want to use the LLC is to build some kind of credit history, so far we only have one cell-phone acct reporting to the credit bureaus.
Sorry for all the newbie questions but I am trying to learn and do things the right way.
What will a blanket loan do for you that several single property loans won’t do? I don’t see any advantage to a blanket loan, so if you could educate me a little, I would like to know what benefit you are getting.
Stefan,
Understand transfer of ownership to the LLC could transfer the DOSC (due on sale clause) of your loan. In theory, your lender could call the loan due in full because of the transfer of ownership. If you qualified under a FHA program with more favorable terms (longer fixed term and lower down payment), the LLC won’t be able to use that same loan. You can’t get LLC financing thru FHA. So that’s one problem. You’ll be looking at commercial loans like I described earlier.
If you go the LLC route, you won’t run into issues with the Fannie/Freddie property limit because you can’t use them anyway. The only limit on commercial loans for you will be your capital, credit history, etc. - all things you have control over.
We only have one blanket loan. It’s for 4 of our houses we purchased at the same time. The bank decided they’d rather do it this way. I don’t really care that it’s like that and it doesn’t really do anything for me. In fact, if I was to sell one of the houses, I would have to ask the bank how much they would require to be paid to the blanket loan in order to release it.
We still personally guarantee all our loans with our signatures. It will likely take you a strong business history of at least a few years with a bank before they would make a loan to the LLC without your personal guarantee. Our first banker we had our business acct. with told us about how we could start building a credit rating with Dunn & Bradstreet, but it cost money to set up and I never figured it was worth messing with. If you are positive cashflow on your properties and you have good performing loans, you’ll have a good case for the bank to want to work with you.
Our LLC owns all our properties. We own and operate the LLC. The only places our names show up is as a guarantee on the loan paperwork (but not on title) and as registered agent for our business.
I am not sure if there are any advantage with a blanket loan, that’s why I originally asked what everyone thought of the strategy.
Long term I would like to separate the rental properties from my personal finances. Mainly from a liability standpoint. I don’t want everyone to be able to log on to the County tax database and see my name as the owner, I would rather them see the LLC.
I know I probably don’t need to worry to much about it know but I want to make sure I know what the best setup is from the start.
Managing member set up is risky. It’s better to own in an entity and manage yourself or own yourself and have someone else manage.
Borrow the money from him just like you would from the bank. He gets paid and stays out of your business. What happens when the stock market returns and he wants to cash out his investment? What if he doesn’t like the return or doesn’t want to wait many years to get paid? What if he needs money in the near future?
They are ways to convey property. Do a google search on the terms and you will get excellent definitions (at least they are better than what I can write).
The owner controllers the property. If you are on the title, the LLC isn’t doing anything.
The others can speak better about financing. I self-fund or use private money to buy for cash.
