A wise investor once said, no single aspect of real estate and real estate investing is that difficult to understand! He put is like this:
Imagine a farm field that is a mile long and wide with nothing in front of you....This is the opportunity! -- Now envision the challenges...The challenges are often not seen and lay 1" inch deep ready to surface! Reflecting a bit deeper on this statement it basically says there are MANY obstacles to consider when investing in single family rental properties but, none are really that difficult to overcome!
Arguably, one of the basic foundations of investing in single family rentals is asset protection and protecting against as many perils as possible. When you control rental property, it's a fantastic idea that it be titled into an entity such as an LLC, in order to limit the personal liability in case something goes wrong that is unforeseen such as a tenant slipping on a sidewalk, falling off a porch, stairway or who knows what else a greedy plaintiff's attorney can find as fault to your personal and family assets.
Some lenders such as Fannie Mae, Freddie Mac, or other "bank type" lenders don't allow for LLC financing and require the loan to be closed into a personal name(s) and can often be tricky to obtain mortgage into LLC difficult due to guidelines or other reasons. Great news! -- We offer a streamlined LLC Mortgage Loan backed by our DSCR underwriting with competitive 30 year rates for our blanket loans or single property loans for LLC's and other corporate entities!
What is an LLC?
LLC Basics for Real Estate Investors
- A limited liability company (LLC) is a type of business owned by a single person or multiple individuals.
- The tax burden on LLCs is not the same as that of C corporations. In contrast, LLCs are "pass-through" entities. This means that the net profit or loss is passed directly to each member of the LLC, and reported on Federal Tax Forms. It is then taxed according to their individual rate.
- A single member LLC is possible, or a multi-member LLC. For example, a joint venture for investing in rental property can be formed by a person. The state is responsible for forming LLCs, and the formation of an LLC will differ from one state to the next.
Benefits of Owning Rental Property Through an LLC
Limited Liability
Protect your personal assets by limiting legal responsibility to only the assets held within the LLC.
Easy Partnerships
Simplify joint ventures with flexible ownership percentages and profit-sharing through the operating agreement.
Privacy Protection
Keep your identity private from tenants and vendors. States like Wyoming and Delaware offer complete anonymity.
Limited Liability
A limited liability company can limit your legal responsibility to the assets that are held by the LLC. If you ever have to deal with a lawsuit against a vendor or tenant and you receive a judgment, your assets are only at risk if they are held by an LLC. There are exceptions to this protection, for example, when an investor is guilty of fraud or "bad boy carveouts".
Partnership Investment
- LLC's simplify partnership investments because the entity owns the real estate and more accurately describe the specific investment property within the LLC.
- The LLC operating agreement can specify that each member may have a different percentage of ownership or different shares in the profits and losses. The options and flexibilities are limitless.
- The LLC's income and losses are transferred directly to its owners at the end of each year. The income will then "pass through" to the individual using a K-1 statement. The member then pays taxes based on their individual tax bracket.
- Comparatively, a C-corporation pays double taxes! -- A corporate tax while its shareholders pay individual taxes.
Improved Privacy
- The anonymity of property ownership is also improved by LLCs. There are some states like Wyoming and Delaware that are completely invisible to the public eye.
- Tenants and vendors will not know who owns the property if it is registered in the name LLC. Investors use a property manager to manage the day-to-day operations.
Keep Rental Properties Separate
- Forming a separate LLC is a great idea for every rental property you own. You can keep your business assets separate from your personal assets.
- If there is a legal action against one of your properties, your other properties and personal assets will also be protected.
Don't Mix Business and Personal Expenses
If you are ever audited by the IRS, it will look to see if your personal and business expenses have been mixed up or co-mingled. Some states like Florida actually say it's against the law to co-mingle funds between security deposits, rent deposits, and personal funds. Just a solid practice NOT to co-mingle funds!
Your LLC should be able to have its own debit and credit cards, as well as a bank account.
Mortgage Options for LLCs
Many mortgage lenders can make it hard for you to obtain a mortgage if you have formed an LLC. This is because they want to protect your personal assets. Rental Home Financing Loves to Finance Rental Property
If you are not an experienced investor, or have a proven track record of success in real estate investing, you will likely be asked to personally guarantee your loan. A lender will not only look at the financial statements of your rental property and your rent roll but also your credit history and your assets.
Let's examine the documents you need to prepare and your options for an LLC loan.
Documents Required for LLC Mortgage Loan
What You'll Need to Apply
- Articles of Incorporation - You'll need to register your LLC with the Secretary of State if you haven't already.
- Operating Agreement - If you plan to have investors, it's important that your LLC has an operating agreement.
- EIN -- SS4 Form - You also will be required to obtain an employer identification (EIN), which is available online at IRS EIN Application Page
- Certificate of Good Standing (or Certificate of Existence) -- Basically states that the entity is up to date with all state reporting obligations for that year.
LLC Loan Options
Conventional Mortgage
Best rates and terms with personal guarantee. Great for building LLC credit history.
Portfolio Lenders
Faster funding with flexible terms structured to meet your investment goals. Refinance later for better rates.
Blanket Loan Lenders
Finance multiple properties under one LLC with creative mortgage structures tailored to your needs.
Conventional Mortgage
- The best mortgage terms, rates and down payments are available with a conventional mortgage. The lender will want to see your personal guarantee along with your credit report, personal financial information and a personal financial statement.
- Although there are drawbacks, guaranteeing a loan is a great way to start building credit for your LLC. This is especially true if you're just starting out.
Savings and Loans and Community Banks
- Banks and savings and loan institutions in the area where your rental property is situated are excellent options to get a mortgage for your LLC.
- They may be more willing because they are more focused on the community and you provide a needed rental property in the market.
Portfolio Lenders
- Portfolio lenders, such as rentalhomefinancing.com can structure LLC mortgages in a way that meets your investment goals. The funds are funded faster by portfolio lenders than smaller banks and conventional lenders, but the fees and interest rate may be higher.
- These lenders are a good option for obtaining an LLC loan. You can refinance at a future date to get better terms.
Blanket Loan Lenders
- Private lenders can provide short-term funding for investors who are looking to rent out a rental property. This is especially true if the property needs extensive renovations.
- Private lenders may ask you to collateralize your loan by using other assets. Private lenders are often very creative in designing a mortgage to fit your LLC's needs.
Create a Credit Line for Your LLC
Build Your LLC's Credit History
It may be worth it to go through the hassle of obtaining your first LLC loan. When you add a new rental property to your portfolio, you can get additional loans easier by building credit for your LLC.
You'll eventually reach a point where lenders will consider your performance as an investor in real estate and the cash flow generated by your investment, instead of your personal financial status. Call us today at 888-375-7977 to learn more about LLC mortgage options.