Love Austin Homes Investing Blog

I have a group of houses, mh’s and lots for sale as a package. The
portfolio has a discount and some parts have owner financing with 10% down.
Value of 827K for only 591k A almost 30% DISCOUNT!!!!

Email me with questions. some of the properties are listed some are not

Ron

ANSWER

Ron,

I am interested! I have many rentals and these look to be complementary to my portfolio. I would like to buy the entire package. Let me do some research. Please call me before accepting an offer.

Regards,

Phill Grove

Hi,
I am a new investor and have done a few flips with my own money. Now I would like to learn about leverage and use a bank loan and buy a rental property - with the intention of holding it for 5 -10 years.

Oh, yeh I do have an LLC that I have run all real estate investing through in the past. Yes, I paid cash and there were no issues holding the property in the name of the LLC.

Here is my question - Why are the banks telling me they will not lend money on property held in an LLC?

Am I structuring this properly?

How do other investors do this?

I understand a commercial loan is at a higher rate, is that what the banks need to assume I am doing? One loan officer mentioned transferring the property to the LLC after closing. Is that what you do?

Ok….that was more than one question… I am genuinely baffled.

Barbara

ANSWER

Barbara,
Corporations, such as LLC’s, have to get commercial loans. These are available from commercial lending institutions, but usually at 2-3 interest points higher than personally guaranteed loans.

Buy your properties in your own name and then transfer them into an LLC or other entity. I suggest you have a separate entity for buy and hold properties, than your ‘flipping LLC’. Presumably you are using an LLC to flip properties for liability protection, and thus you logically don’t want that entity to have assets in it long term.

You may also consider an LP (Limited Partnership) or FLP (Family Limited Partnership)­, which costs a little more to set up, but may save you in taxes due to the franchise tax imposed on LLC’s that make profits. This is what I do. Coombs Property Holdings, LP has a nice ring to it. Some people also suggest creating a new entity for every 1-3 properties. Frankly, I think this creates far too much paperwork, tax filing, and overhead, especially after you own 10, 15, 20 properties…

Some people bring up the concern about having a loan called due if the deed is transferred (The ‘Due on Sales’ clause found in every loan agreement). While this is legally possible, no matter what you do (and I’ve done some crazy stuff) it’s much more likely that you will win the lottery than get your loan called, as long as you are making the payments. So, if you are one to worry about such things, just buy a lottery ticket each time you get a loan and each time you win, use the winnings to pay off the mortgage

Another trick people use to disguise the transfer of ownership of a property into an entity, is to use a trust. You can move a property into a trust and then transfer the interest in the trust to your entity. The trust itself offers no liability protection, and indeed the lender can still call the loan (because the deed is still being transferred)­, however, some people believe that this extra layer of shielding of ownership may make it less likely that the lender will find out that a deed was transferred (mostly because the beneficial interest in the trust is not recorded). I don’t personally use trusts, because they also creates more paperwork, you have to assign a trustee, etc. but I have considered this for other reasons.

Additionally, don’t forget about insurance – the topic the so-called experts seem to gloss over when dealing with these issues. You will need to make sure that your policy is changed to a corporate policy (or a policy that will cover a corporation) from a personal policy when you transfer ownership, else you are insuring something you don’t personally own, which is a waste of money… The corporate policy may cost a little more. The property will probably no longer be covered under your own personally liability umbrella. You’ll want to get the balance of the original personal policy refunded to you (explain all this to your insurance agent before you buy). The problem with all of this is that it does create additional paperwork, and a paper trail documenting that the deed was transferred. Does that matter – no, buy lotto.

Finally, from time to time you may have to provide the new insurance declaration to your lender. Have yourself, and your LP/FLP, and the lender all listed as insured by the policy, and you should be fine. If you escrow for insurance (I don’t recommend this), you will want to file the new insurance declaration with the lender many months before the policy payment is due, so that they pay the right policy. Unfortunately, for some reason, lenders always screw this up and pay the wrong policy anyway, causing me to have to repeat this step, so you may need to do this last step a couple of times…

Regards,

Phill