LLC limits type of mortgage lenders you can use. Putting rental properties in an LLC limits mortgage access to commercial lenders.
Q: I formed an LLC for real estate purposes. Now my mortgage guy says his company does not do mortgages to LLCs. Is that common? Should I stop putting rental properties in the LLC? What about liability?
A: A limited liability company (LLC) is an entity generally used by businesses to insulate the owners of the company from liability. Some years ago, people had a choice between a corporation and a partnership. Both of those types of entities had limitations. A limited liability company allowed owners to have flexibility in the manner in which the owners of the LLC entity would distribute profits and allowed other tax benefits.
Most commercial lenders have no problems giving loans to LLCs and that’s the problem you have run into. You probably aren’t getting a loan from a commercial lender, but from a residential lender.
LLC Limits Type of Mortgage Lenders You Can Use
Residential lenders may have much lower mortgage rates than many commercial lenders, but the rules residential lenders must abide by differ greatly from the rules followed by commercial lenders. One of the rules followed by residential lenders is to make loans to individuals not corporations or companies and, in addition, the property being financed must be residential — it could be a single-family or it could be a four-unit apartment building.
If you have many properties and run your real estate as a business, you may want to have all of the properties owned by the LLC, in addition to benefiting from the protections from liability that the LLC would give you personally.
Before you decide to stop putting rental properties in an LLC or taking properties out of the LLC, you need to make sure that any transfer from the LLC wouldn’t trigger any adverse federal income taxes. Also, in some states, it can be costly to transfer title from the LLC to the individual.
Issues to Discuss with a Real Estate Attorney
You should sit down with an attorney to discuss these issues. The first issue in deciding whether an LLC is right for you is knowing how it will help you. If you have all of your life savings in the properties that are in the LLC and little in terms of assets outside the LLC, you stand to lose almost everything if your company is sued and loses the case.
For some property owners in your situation, they are better off spending more money on broad coverage liability and property insurance than in the costs to set up and maintain an LLC. For others, the answer may be to have multiple LLCs, one for each property they own. Depending on your circumstances, you may decide to keep the LLC or not use it at all.
Finally, when you ask about liability, you need to determine what kind of liability you are trying to protect yourself against. Do you have sufficient insurance to cover you for that issue? If you manage your own properties, could you be personally liable for your poor management? Do you have a third-party management company taking care of the buildings? Will you be able to escape liability if one of your tenants is hurt as a result of your direct actions? If you make your own repairs on your building and you do something wrong and someone is hurt, would they be able to sue you directly anyway?
These are the issues you need to discuss with your attorney, and perhaps even your company tax preparer. You may find that a better option is to keep your properties out of the LLC, buy additional insurance to cover any potential liability and obtain cheaper financing from residential lenders.
More on Topics Related to LLC and Mortgage Matters
Using an LLC to Transfer Property from Parent to Child
How to Avoid Paying Taxes When Selling a Rental Property to a Child
What Are the Implications of Transferring an Investment Property to an LLC?
What Are the Property Tax Implications of Dissolving an LLC?
Personal Residence to Rental Property in an LLC: Calculating Cost Basis and Taxes Owed
Putting a Rental Property in an LLC to Minimize Taxes
What Happens to Taxes When You Co-Sign a Mortgage for Your Child?
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There is a fundamental difference between title to the property being merely held by the LLC or other legal business entity, and the owning business being the obligee on the note. The two are separate instruments for a reason, and they do not have to have the same names on them. As a residential home mortgage applicant, you should be able to apply for the loan based on your personal credit, income, and assets, including the intention of actually residing in the premises and meeting all other home loan underwriting requirements, but actually hold title to the property in the name of the LLC. Particularly wise to do if it is a multifamily home with separate rental units. The deed may list the LLC as the property owner of the collateral, but you are borrower on a personal basis. So long as you can show that you have a controlling interest in the business (to ensure that you will have an actual right to reside in the property for the minimum period required), this should be an acceptable arrangement to the lender.
Do you know of a lender that will refinance a second home where the title is in an LLC? Thank you Jim Avery 732 754 5327
Putting any home into an LLC makes it very difficult to refinance – even if it is your primary residence. You can try to get a commercial lender to finance the property, though that will mean higher interest rates and more fees.
You can try a local mortgage broker and talk to the bank where you do most of your financial business where the second home is located and see if there are any options.
I’m just wondering why the property is in an LLC to begin with. You might wish to revisit that decision with your attorney or tax preparer.
Hope this helps. Thanks for your comment. Ilyce
We have an inherited family home that my siblings and I have renovated (with loan) and are choosing to use the house as a rental property in order to pay off the loan and pay for any house/tax expenses. We need to refinance the loan before December of this year and are trying to determine the better route between choosing an LLC or a TIC (JC). Can you give any insight to help?