Should I set up a company (since that is my ultimate goal) prior to buying my first investment property?
If your goal is to hold properties, I would set up an LLC before the purchase of your first property.
we did, then set up a bank account and put some money in it. easier to track expenses such as mailings, bandit signs, etc.
Make the offer on your property, have the offer accepted, do an inspection, sign the P&S and while you’re waiting for the bank to close the loan, then set up the LLC before you close. It’ll be a waste of money to set one up prior to all that and then for some reason you don’t close on the property. It’s a few hundred per year to maintain depending on what state you’re in.
make sure your bank knows up front that you will be purchasing in an entity. most “banks” won’t do this, but other lenders will. but don’t surprise them.
The way I’ve done it in the past is to buy in my name to use my credit score and then move it into the LLC after closing. I think the trick with this is that technically the property is in the name of the LLC so the bank could call the loan, but I’ve never heard of it happening as long as the loan gets paid, they don’t seem to care so it’s a minor risk. When I do the purchase though, I play by the rules and do it as an investment property so they shouldn’t really complain. It would probably be 1/4-3/8 of a point cheaper if it were bought as an owner occupied property.
If you try to buy in the name of an LLC that doesn’t exist yet, the banks won’t loan the money because there’s no credit history.
well, you have to have the LLC before “it” can enter into a contract.
Lenders will loan to an LLC with a personal guarantee. they qualify based on your ability to repay, but title the loan in the LLC’s name. stays off of your credit AND builds credit for the LLC.
Does it stay off your credit in the event of a foreclosure, etc since you are personally guaranteeing it?
you’re basically a cosigner. long before it’s foreclosed, they’ll come to you asking for money. if you don’t pay at that point, it will have a negative impact on your credit.
It’s an interesting theory, but I don’t really know anyone who seems to know how to do this. Is this one of those things where the laws vary from state to state? I think Massachusetts just had LLC within the last decade or so, so maybe there’s not that much history on it or knowledge. How does the corporation fill out a 1003? If it’s a corporation maybe it’s a commercial loan then? The normal process for doing a loan is to order credit and then look at income and all that. None of that’s there for the LLC as it doesn’t have any history. The first attorney I used suggested that method and the second attorney I’m using now says the same thing. The mortgage broker is really saying it’s the attorney’s job to handle it, I’m not sure if an account exec with the bank would be of any help.
If the bank won’t loan to the LLC, the title can be with the LLC and the mortgage can be with you personally. As long as the payments get made most banks don’t much care. As Henryinma says, if you have to, you can buy the property personally and then transfer the title to the LLC, though it’s cleaner if you can take title in the LLC in the first place. Different banks will see it differently. It’s true that the title transfer can trigger termination of the mortgage. I might worry if I had terrific terms that the bank wanted to get out of, but usually they won’t care.
You’re making this far more complicated than it is. All of my properties are owned by LLCs. Banks will loan to LLCs with a personal guarantee from the owner of the LLC (you). It is just that simple. The bank understands that the LLC is used for asset protection purposes and may not have any credit history. They will check YOUR credit history and make the loan based on that. You will sign the mortgage for the LLC (as member, managing member, etc) and then you will sign another form guaranteeing the loan personally. I have done this many times and this is certainly not a theory. I’m not sure what a 1003 form is, but you will sign all the documents: “For XXX, LLC, Henryinma, Member”
What is a little more complicated is putting the title in a land trust. I also have some of these, with the LLC being the beneficiary (real owner). Land trusts aren’t even really an entity (no asset protection, no tax treatment), and the beneficiary (real owner) is not shown in any recorded documents. Moreover, the legal owner is a third party. Even with this complex stricture, it is not too difficult to get a loan in the name of the land trust.
Of course, not every bank will do these loans just as not every bank will loan on a flip (seasoning). The key with any deal is to be in control. I have found that dealing with small local banks is the best way to get things done. Also, you should get to know a decision maker at the bank - the president, vice-president, chief loan officer, etc. If you are going to be borrowing millions of dollars from them, they want to know you too.
So if you’re a cosigner shouldn’t the entire payment history show up on your report (postive or negative)?
If you own the property and wanted to transfer to an LLC. Does the old mortgage cancel out???
nope. you can’t transfer/cancel something you don’t own. the bank owns the mortgage and there’s no way they’re letting YOU off the hook. See, they made the mortgage to YOU, not the LLC.
Now, you can start paying the mortgage from the LLC. They’ll probably never notice and not care. You can even assign the mortgage to the LLC. Since the mortgage probably has language that requires you to get the bank’s approval of any assignment, they won’t care about this either; they are still going to hold YOU responsible for payment. And report on your credit.
Note that this is different from transferring the property to the LLC. Since you own it, you can deed the property to the LLC. Now, since the bank has a mortgage with YOU on this property, this violates your contract with the bank (the DOSC). They will care, if you bring it to their attention. If you don’t, and as long as the loan is performing, they probably won’t notice (or care). Personally, I’ve never seen a performing loan called due for this reason.
If you want to get the mortgage off of your credit and into the LLC, you will need to refi, taking title and a mortgage in the LLCs name and giving a personal guarantee.
What if I sell the property to my LLC??? I wonder if that can be done!!!
of course. but you’re gonna need a new mortgage.
Thanks Mark. Correct me if I am wrong, with LLC I have to put down 10% as it is the min requirement. Do you know any banks in the area who are easy to deal with as far as LLC is concerned. I am in DFW.
What you have to put down depends on the lender.