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Shooter, Other/Just Looking in Big Lake, MN

How do I buy a home under a LLC with 30 year financing with no or minimal money down?

Asked by Shooter, Big Lake, MN Fri Dec 4, 2009

How do I buy a home under a LLC with 30 year financing with no or minimal money down?

I currently live in the state of MN, I am looking at buying a home for rental use under a LLC for liability and tax reasons, I currently don't have any extra money in savings as I currently own a home now, however I have an investor that has income showing they can afford the home payments until it is occupied, I have talked to local banks and my attorney for creating a LLC but no one has any insight for me, thanks

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OK. Here's the answer.

First, a bank won't lend to a newly formed LLC. Many won't lend to any LLC unless you agree to secure the loan personally. After all, they don't want your liability to be limited to whatever little the LLC is worth.

However, you say you're interested in having it in an LLC for liability reasons. That's easy. Buy it in your own name (or your name and the investor's name), then transfer the deed to the LLC. Then the LLC owns it, not you. Yes, the mortgage is still in your name (or you and your partner's), but the property itself is in the LLC. Note: That could trigger the mortgage's due-on-sale clause. Check into that. Still, most lenders aren't interested in foreclosing on performing loans. So, while it's a consideration, it's not a deal-killer.

You can transfer the property into a land trust without triggering the due on sale clause. There's an exemption in the Garn-St. Germain Act for that. And a land trust can provide much better protection than an LLC.

You say you're also interested in putting it into an LLC for tax reasons. I'm not an accountant, so this isn't accounting advice. For that, please consult with an accountant. But you'll probably find there are no tax advantages for putting it into an LLC. Profits and losses still flow through to you and your partner.

So: There's no problem in getting the property into an LLC or land trust so long as you're willing to be financially responsible for the mortgage payments.

Now, if your attorney couldn't offer you the information I just provided, get a new attorney. I'm not a lawyer, so this isn't legal advice, either. But it is the advice of someone who knows real estate, and knows that an attorney should be able to answer the questions you posed.

Incidentally, the advice below regarding hard money lenders is not fully accurate. Their rates will vary, but probably be around 5 points and 12%-15%, for a loan of 3-6 months. They lend primarily on the equity in the property, so--despite the comment below--it's entirely possible to retain a huge amount of equity in a property using hard money. And it's not necessary to buy at 30-50 cents on the dollar. The real figure is anything less than about 65 cents on the dollar.

But hard money lenders will be the first to tell you that they should be the last resort. Before you use them, look for private money, as you apparently have with your investor. Rates will vary, but private investors charge a lot less than hard money lenders, and sometimes will lend for longer periods of time. Also note that, at least where I am (Washington D.C. area) hard money lenders won't lend on rental properties. They want to be in and out. They'll lend if you plan on rehabbing and selling. But they're not interested in rentals.

So, here's what you do:

(1) Get rid of your attorney. Find one who knows and understands real estate and real estate investing.

(2) Work out an agreement with your investor. Who puts up the money? Who manages the property? How long will the property be held? What's the ownership interest in the property? How is the rental income divided? Who is responsible for paying for maintenance? When the property is sold, how are the proceeds divided? A decent attorney will know to ask all these, and many other questions. And a decent attorney will know what legal structure to go with. (Most will recommend an LLC over a land trust just because they're more familiar with LLCs. Again, land trusts offer certain advantages that LLCs don't, but--really--you'd be fine with an LLC.)

(3) Build your "team." That means a lawyer (who you'll already have), a Realtor, and a loan officer . . . among others. You'll want a Realtor who is comfortable working with investors. Not all are. And you'll want a sharp loan officer. Ask your lawyer for recommendations. And/or network with your local real estate investment group. You can find a listing at http://www.creonline.com

(4) Determine what you'll be able to afford by working with the loan officer. Then use your Realtor to help find properties that meet your criteria.

One other suggestion: If your investor falls through, you can accomplish your goals using a sandwich lease-option. I don't have enough space to explain the whole process, but you can search "sandwich lease-option" online for an explanation.

Hope that helps.
3 votes Thank Flag Link Fri Dec 4, 2009
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
Contact
Just to expand a bit on my previous answer, specifically regarding hard money lenders:

Hard money lenders lend short-term only. So it's OK to plan on holding the property for the long term. But in that case, you'd use a hard money lender to purchase and rehab. Then you'd refinance conventionally, getting the hard money lender out of the picture. One problem that you can run into, though, is the issue of seasoning. Example: You buy a property that'll have an ARV (after repair value) of $200,000. You can buy it for $100,000 and it needs $20,000 of work. Hard money lenders would lend up to about $130,000, so in that case they'd lend the full amount. However, when you try to refinance, a lot of lenders will think there's something shady going on: "You bought it for $100,000, did some repairs and now 3 months later you claim it's worth $200,000. Uh huh. No way."

Keep in mind that there's even the seasoning issue with FHA loans, if one planned on reselling it. You can't write a contract until after the 91st day of ownership. So you buy it on January 1, do the rehab in 2 months, but then you have to sit on it--not even get in a contract--for another month. I know investors who've run into exactly that problem.

The other link you posted has to do with liability and managing the property. Whenever you have a rental, you want insurance designed for landlords. It's similar to regular homeowner's insurance, but doesn't cover things like personal possessions. The tenant should have renter's insurance for that purpose. In addition, you should have an umbrella policy for liability coverage. A $2 million policy should cost you around $300 a year. Many asset protection experts recommend putting the property into an LLC (or a land trust). However, there's some debate about whether you should put more than one property into an LLC. Some people are comfortable with that; others prefer a separate LLC for each property.

Make sure the lease is written for your specific state and, ideally, for your specific county or city. A Realtor will have a lease that's landlord-friendly and is customized for your area. Whatever you do, don't go down to Office Depot and get a generic lease. You might find that there's some conflict between that lease and local regulations, and you'd probably be the loser in any dispute. One size does not fit all.

And, as I said in my original post, you and your investor must work out the details up front about who's responsible for what, and how revenues and profits will be divided.

Hope that helps.
1 vote Thank Flag Link Fri Dec 4, 2009
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
Contact
ps. Sorry for the previous posts. typed them from the iphone and noticed it changed some words and may not gramatically sound correct. Dont see a feature to edit the posts...only delete them.


Sean Dawes
Web Reference: http://www.SeanDawes.com
0 votes Thank Flag Link Fri Dec 4, 2009
Thank you for your help everyone, I have posted another link possibly in the direction if I just have the investor purchase the home using a 30 year term, if you have any input please let me know, thank you for your help, link is below

http://www.trulia.com/voices/Property_QandA/what_steps_to_ta…
0 votes Thank Flag Link Fri Dec 4, 2009
And I'm talking no point 30 yr loans that I can refi when I want

to say I'm not "fully accurate" isn't true

depends on the market and what HMl you work with

sean
0 votes Thank Flag Link Fri Dec 4, 2009
Don

if you buy with no money down and finance the whole amount at 15 percent. After how much you get in rent coupled with insurance as well as cash for repairs it won't make sense unless you below the 65 cent mark
0 votes Thank Flag Link Fri Dec 4, 2009
Hi, check a community bank with their own funds but most probably you will need more than 20% downpayment . Do not expect low rates since this property will be an investment.

Benito.
0 votes Thank Flag Link Fri Dec 4, 2009
I agree with Carl, It's not going to work.
0 votes Thank Flag Link Fri Dec 4, 2009
Shooter,

You will have to find what is called a Hard Money Lender. Team up with another investor and go from there.

There are no lenders out there in terms of banks who will lend.

A HML will. Be prepared to get practically 0 equity and have 15% interest rates.

If you fork over some of your cash as a downpayment, you can get the equity and just pay 15% interest but at those numbers you must secure properties at .30-.50 cents on the dollar to make it work.


Sean Dawes
0 votes Thank Flag Link Fri Dec 4, 2009
With out a minimum of 20% down you will not find a lender willing to finance an investment property. When you ad in the LLC even with a down you will be hard pressed to find a lender. What you are seeking is unavailable in the current lending environment. How do you think we got where we are at? Avoid forming the LLC and save the attorney fees for a down payment. Good Luck
0 votes Thank Flag Link Fri Dec 4, 2009
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