New LLC - Problem Getting Financing?
I'm considering establishing an LLC to own rental properties that I am planning to buy. Will I have a problem obtaining a mortgage in the LLCs name because the LLC has no credit history? Can I personally guarantee loans in my name?
You might want to talk to a mortgage broker and a CPA, between the two you can determine the best solution.
I only say this becasue everyone is different and they know what questions to ask you to determine what to do.
As a general rule, your business entity needs to have a track record and its own credit rating to obtain financing. As a business entity, your financing from institutional lenders will be commercial loans.
Since you are just starting out, lenders will want you to personally guarantee the loan. This usually means getting the property and the loan in your own name, then transferring title to your LLC later.
Dave is exactly right. You need about 2 years of profit and loss statements to get a mortgage in the L.L.C.'s name. Your bet is to get the mortgage in your name and then transfer the deed to the L.L.C.
If you get the property deeded to you personally and the loan personally would this not cause problems when transferring title to a LLC?
Since the LLC is a separate entity, this could trigger the DOS clause, correct? Of course, I'm aware of the unlikelyness of the bank invoking DOS, but people considering this should be aware of it.
Also, if you personally sign for the loan, the LLC gets no credit history for it. Would it not be better to be a co-signer of the loan with the LLC? That way you are still personally liable for the loan, but the LLC gets some credit history from it.
On an added note, If an LLC or corp owns a free and clear property, could it get an equityline against it, or would it still be based on commerical rate/terms?
Roger
Thanks for the replies. Is transferring a deed from myself to a LLC fairly easy? What is a DOS clause mentioned above?
DOS means "due on sale"
It's a clause that lenders have placed in their financing documents (back in the late 70's early 80's to prevent the original borrower from transferring his/her ownership to someone else.
The lender has the right to accelerate the mortgage (call the note due) if title is transferred from the original debtor to someone else.
You can avoid the DOS clause by transferring the property into a land trust which can be owned by your corporation or yourself. Talk to an attorney about the logistics of the whole process.
Lenders will allow you to transfer title to a land trust (for estate planning) purposes
If need be, get a blank lease agreement signed by your seller in the case the note is called due. You can fill out the agreement and send it to the lender to show that you are leasing/renting the property. Most lenders will allow an owner to rent their (owner occupant status) home for up to 30-35 months before they accelerate the note. I would check on your state guidelines...
Hoped that helped~
You could also co-own it with your L.L.C. as a fifty-fifty partnership. This gives you some protection and seasons your L.L.C. for future purchases. This would also bypass the DOS clause. [ Edited by jfmlv1950 on Date 11/02/2003 ]
I get title and mortgaged loans in new LLC's all the time. ( I use a different LLC with each property.)
Now getting credit in a new LLC is a different story. I still have to personnaly guarantee the notes. The good news is that now the banks no longer ask my wife to sign.
Gregg
[addsig]
Quote:
On 2003-11-02 20:25, GFous wrote:
I get title and mortgaged loans in new LLC's all the time. ( I use a different LLC with each property.)
Now getting credit in a new LLC is a different story. I still have to personnaly guarantee the notes. The good news is that now the banks no longer ask my wife to sign.
Gregg
OK, sounds like you have no trouble getting a mortgage loan for a new LLC. But "getting credit" is a different story - what do you mean by "getting credit"?
The heck with the credit, how do you get loans for a newly created entity, Gregg?
Roger
Hey all,
I don't want to beat a subject to death but i'm bumping this thread back up cause there's a couple good questions in here.
1. If you get the property deeded to you personally and the loan personally would this not cause problems when transferring title to a LLC? (I think Raj meant IF you still had the loan on the property?)
2. if you personally sign for the loan, the LLC gets no credit history for it. Would it not be better to be a co-signer of the loan with the LLC? That way you are still personally liable for the loan, but the LLC gets some credit history from it. (is this possible?)
3. If an LLC or corp owns a free and clear property, could it get an equityline against it, or would it still be based on commerical rate/terms? (Heck, could a new LLC or Corp that owns a free and clear property get any type of loan on it?)
Number 3 is the question i'm most interested in, as i recently purchased a condo in florida for a rental with a HELOC and will be transferring it to my brand new LLC as soon as the paperwork comes back . I had planned to have the LLC get an equity line against it to start establishing credit but i need to educate myself alittle more before approaching the lenders. Is it possible? Is it a good idea?
UGH, new year investing qualms!!
Becki
Quote:
On 2003-11-02 11:03, wcarr01 wrote:
I'm considering establishing an LLC to own rental properties that I am planning to buy. Will I have a problem obtaining a mortgage in the LLCs name because the LLC has no credit history? Can I personally guarantee loans in my name?
The short answer to the second question is yes (from my limited experience).
When I called banks about this same question - they said they could do it but it would be a 15 year amortization with a balloon due in 5 years. That puts a strain on cash flow. They also wanted at least 20% down payment.
If you want to use a Fannie or Freddie vehicle - with good interest rates for a long term - you need to do it in your own name - IN MY EXPERIENCE.
HI to all..my experience with this issue has been some what of a "catch-22", my "INC." has been in place for a period of time , no major activity- hence no track record to speack of- so no credit-
After reading the "Q & A"s.. has any one "found" a concise solution? Or.. as it was stated above.."every one has different situations / different questions".
Thanks to you all for your views, next transaction with my mortgage broker ,I will be more informed and to get the "INC." on the road to success
--best to all--mcldavid
[addsig]
here in NV you can buy a property in your name and obtain a loan in your name and then transfer it to an LLC. takes about 10 days to be processed. If you have mulitple partners in an LLC then there are transfer taxes complications with the other members of the LLC. This might be different in other states.
Roger-
When I buy an investment, I title it in a new LLC, set up for that purchase.. The LLC gives a mortgage to the bank. I personnally have to guarantee the note . (I sign the note as the LLC member and personnaly.)
The only exception to this is on non-recourse notes. This they will give to a new LLC ( For multifamily purchases, for example.)
Non recourse money (Some of you folks call it "hard" money) is feasible at attractive rates only for very solid, larger deals. (otherwise the rates are too high.)
[addsig]
I just Re read the entire thread.....
I think I need to comment on what I am trying to accomplish by forming an LLC.
Personnaly I do not care if the LLC established "credit" ( Or it's own borrowing power) For my purposes I use and LLC for a few distict reasons:
1. To limit my liability
2. To make resales easier ( I sell the LLC that owns the property.)
3. To make it a bit harder to identify me as a purchaser.
I have had one very profitable LLC for four years. It owns a large multi -tenant property - but has a full resourse loan signed by me. It has it's own borrowing power now and credit cards. But I seriously doubt that any mortgage lender would loan it money with out me signing. (The credit we do have is from suppliers and the like. The car lease it has is guaranteed by me, even.)
Hope this helps.
Gregg
[addsig]
Quote:
On 2003-11-02 13:33, rajwarrior wrote:
If you get the property deeded to you personally and the loan personally would this not cause problems when transferring title to a LLC?
Not if you are up front on the reason for doing the transfer. Esp if you are stil the major owner of the LLC.
Since the LLC is a separate entity, this could trigger the DOS clause, correct? Of course, I'm aware of the unlikelyness of the bank invoking DOS, but people considering this should be aware of it.
Also, if you personally sign for the loan, the LLC gets no credit history for it. Would it not be better to be a co-signer of the loan with the LLC? That way you are still personally liable for the loan, but the LLC gets some credit history from it.
Raj - IT is my experience that guaranteeing the loan for the LLC will not prevent the LLC for getting credit for it. But I still do not think a bak it going to give an LLC a mortgage loan w/o a guarantee.
On an added note, If an LLC or corp owns a free and clear property, could it get an equityline against it, or would it still be based on commerical rate/terms?
I have done this - not a free and clear but lotsa equity in a property - and have recieved a line of credit. I still had to sign for the LLC.
Roger
[addsig]
In short,
It would be better for you to take title in your name, make any loans in your name, then transfer title to the LLC. If you take title in the LLC, you'll have to transfer title to your name to get loan without difficulty. An Inc. and LLC both can get a loan or a line of credit, however, there has to be a garantor. You see, LLC's and Inc. would protect you in the likelihood that you were sued or to give you a tax shelter, however, the lender knows this and wants some type of assurance they get thier money.
I see no reason to put title in your name and then transfer. Please explain why you would do this? Why not start out with the LLC?
[addsig]
Quote:
On 2004-01-09 06:44, GFous wrote:
I see no reason to put title in your name and then transfer. Please explain why you would do this? Why not start out with the LLC?
My attorney and broker advised me to do this because otherwise it's harder to get a good loan.
Couple of things,
- I have had no problem titling a property into a LLC, but, getting a loan in the LLC name is tough. Most times you will have to sign for the loan personally.
- You can transfer title of the property to a Land Trust and make the LLC the benificary of the Land Trust. This will NOT trigger the DOS clause.
[addsig]