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Forming LLC to buy rental property?

TangoJuliet

TangoJuliet

Diamond Member
Heres the situation - my wife and I had to move out of our condo (that we own) this past summer because we outgrew it. We tried to sell it but the market is down and we owed more then it was worth.

We were able to refinance it and get the payments down so that we could rent it out. We found a renter and we were able to find a home to rent ourselves.

Well, things really haven't been working out to well with the home we are renting and I was thinking about moving and buying a new home. I spoke with my loan officer that has been working with us on our first loan and then the refi about how much we would be able to qualify for and that was around $460,000 which is short of the $550,000 needed to buy some homes we were looking at.

I was thinking if I formed a LLC and purchased the home from "myself" we would probably be able to get an even lower rate then the refi. Is this even possible to do?

cliffs:

own a condo that is being rented
would like to buy a new house
can't get a loan for more then $460k by holding both mortgages
form a LLC and "buy" home from myself
possibly get a even lower interest rate
since the condo is in the LLC name; my wife and I could qualify for a higher loan
profit / fail?
 
Ok, this might be a stupid suggestion but... maybe buy a cheaper home? I mean, I see what you're trying to do but doesn't it seem like too much hassle when you could downgrade and save yourself some cash?
 
xanis said:
Ok, this might be a stupid suggestion but... maybe buy a cheaper home? I mean, I see what you're trying to do but doesn't it seem like too much hassle when you could downgrade and save yourself some cash?
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I don't want to buy something cheaper. Unfortunately I live in one of the most expensive housing markets in the nation and you pay through the nose for something nice.
 
Ummm... Not only does this all sound like a bad idea, I don't think anyone would let you do it. Essentially you are the LLC and will have to guarantee the loan. So if you cannot get the loan now, you won't be able to get it with some magic company you think up.
 
it will not fly because it is no longer an arm's length transaction, and you will have a hard time convincing the bank to finance the transaction... and even if the bank were to go along with it, you still have the problem with the appraiser..

Edit: re-read your post and i think i may have misinterpreted your question. however, it still won't fly. if the bank allows the transaction, however unlikely, they'll still want both of you to guarantee the loan in addition to the new LLC, which will make the entire scheme moot.
 
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Caecus Veritas said:
re-read your post and i think i may have misinterpreted your question. however, it still won't fly. if the bank allows the transaction, however unlikely, they'll still want both of you to guarantee the loan in addition to the new LLC, which will make the entire scheme moot.
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what if I were to get a couple family members to join the LLC but I was the chief financier of the property?
 
You are really asking how to get a loan of your personal books and onto the LLCs. To do this, you will need to find a lender who will lend to the LLC as an entity via a business loan secured by the real property, after transferring the property to your LLC, with or without a guarantee (guaranteeing a loan does not necessarily put it on your credit report).
 
the LLC will have to pay off the loan on the condo that you're currently carrying.
 
TangoJuliet said:
what if I were to get a couple family members to join the LLC but I was the chief financier of the property?
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at that point, you'd be handing over partial ownership of the property to your family members through the LLC. You'll also probably need to reduce your ownership to the point where the bank: 1. would not request for your guarantee for LLC loan 2. would not count the LLC when calculating cash flow for your new loan.

to simplify the process, and if you do have family members who would be willing to lend you their credit (and they'd be doing that by joining your LLC), the better way may be to "sell" or gift the house to them at remaining mortgage value (make it non arm's length transaction to negate future impact on FMV). I'm sure you trust your family members, but you should execute a separate agreement (notarized of course) outlining that they would transfer ownership of the house at your request with the value set at mortgage balance. or something like that. this way, you're fully clear when applying for new loan.

haven't really thought through this thing, but you'll need to consult with your CPA for tax implications and the banker for their criteria.
 
You'll have to eat up the amount you're upside down and more on the LLC financing part - you'll have tough time finding financing for anywhere near LTV of 1.

Also you will not be able to take the paper losses from the LLC against your active income *, but the tax impact should be minimal, as you can depreciate the property on 29.5yr schedule.


*Unless you're a real estate professional, I hear IRS has been cracking down on that.
 
this scenario MIGHT work...

1. you stay with same lender.
2. since it's a transfer between family member + non-market price, it becomes a non-arm's length transaction, which may eliminate the problem with LTV ratio and upside down value.
3. based on non-arm's length trans, the bank may be able to:
a. offer new loan to your family member(s) at same balance or
b. swap out the borrower entity, effectively releasing you and your wife

this is only based on my previous experience doing SBA lending, and I know it can be done at least with those loans. mortgage loans are quite different and so I can't be sure.
 
Please tell me how a LLC with unknown credit history can get a lower mortgage rate than a real person. Also the name of the bank that will do this transaction, so I can short their stocks. thanks!
 
richardycc said:
Please tell me how a LLC with unknown credit history can get a lower mortgage rate than a real person. Also the name of the bank that will do this transaction, so I can short their stocks. thanks!
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I haven't done real estate in a while, but generally you needed a decent amount of equity and show them a cashflow model / how much your debt coverage ratio works out to etc. The rate won't be lower, that's for sure.
 
I would like to get in on your LLC company. I can contribute $6k/month. You, ya wife and I could get a property each month and rent it out right away. I'll take 40% revenue. Deal?
 
The Boston Dangler said:
"i don't want to buy something cheaper. i want to buy something i can't afford."
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lol
And "I think paying $40 to create a sole proprietor LLC means banks will ignore all my debt."

LLCs are nothing more than a legal barrier for litigation. Banks won't give you more credit just because you have an LLC. It is still based on debt to income ratio.

If you get other people to join your LLC, it would be almost the same as having a family member co-sign on a loan for you. Good luck with that.
 
TangoJuliet said:
I don't want to buy something cheaper. Unfortunately I live in one of the most expensive housing markets in the nation and you pay through the nose for something nice.
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I don't mean to offend, but that's just bad thinking. I also live in one of the most expensive housing markets, but that doesn't excuse you from living within your means.
 
Einz said:
I don't mean to offend, but that's just bad thinking. I also live in one of the most expensive housing markets, but that doesn't excuse you from living within your means.
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The only reason why we can't qualify for a higher loan is because we have to secure both mortgages. The condo is being rented out so that mortgage is being covered however the bank has to assume that in the event a tenant leaves we will still be able to cover both. My mortgage broker said that it would take 2 years of renting it out before we would be able to qualify for a higher loan.

One of the main reasons for wanting to buy now as opposed to waiting is the interest rates are very low as well as we'd like to get out a crappy rental situation we are in now.

If I could get some family members to co-sign on the new loan then would we be able to get a higher amount? And we are living within our means - we make around $175,000 gross income which is around $9000/m net. I think we could afford to hold two mortgages right now of $3500 and $1600 respectively despite what the bank says.
 
waggy said:
sigh. perfect thread on why the world is in the economic mess its in
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Wouldn't the perfect thread be a bank, instead of doing the right thing by not lending out money, mislead the OP into obtaining a mortgage that he can't afford and then creating a CDS to bet against it?
 
TangoJuliet said:
The only reason why we can't qualify for a higher loan is because we have to secure both mortgages. The condo is being rented out so that mortgage is being covered however the bank has to assume that in the event a tenant leaves we will still be able to cover both. My mortgage broker said that it would take 2 years of renting it out before we would be able to qualify for a higher loan.

One of the main reasons for wanting to buy now as opposed to waiting is the interest rates are very low as well as we'd like to get out a crappy rental situation we are in now.

If I could get some family members to co-sign on the new loan then would we be able to get a higher amount? And we are living within our means - we make around $175,000 gross income which is around $9000/m net. I think we could afford to hold two mortgages right now of $3500 and $1600 respectively despite what the bank says.
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Just sign up for a bunch of credit cards and charge it!
 
The LLC would only work if the LLC had enough cash to purchase the home from you. If you form an LLC and ask a bank to lend you money without any cash flow or history. They will ask you to personally gurantee the loan. Which means you are in the same place you are today. Maybe what you should do is go find enough investors to invest in the LLC so it can buy it from you. In return the LLC will pay any rental income among the investors until the point it is sold and then they recieve a share of the proceeds.
 
The only reason why we can't qualify for a higher loan is because we have to secure both mortgages. The condo is being rented out so that mortgage is being covered however the bank has to assume that in the event a tenant leaves we will still be able to cover both. My mortgage broker said that it would take 2 years of renting it out before we would be able to qualify for a higher loan.
Click to expand...
Here's the thing... a bank considered your situation to have a certain amount of risk. And based on their estimates will only lend a certain amount. Now, when this happens, you have some options:

- Creatively structure your asset and liability situation to make yourself appear better on paper, which is what you're trying to do it seems.
- Lie and figure out a way to apply to a lender to obtain favorable terms
- Find another lender who will give you more favorable terms than your current one (such as a credit union)

For the first option, the core issues are assets, income, and liabilities, as well as credit score. The score gets you in the door for a loan tier, and then net worth paints an overall creditworthiness picture, and then monthly carry costs of debt service vs the monthly income forms a ratio of what is acceptable risk to the bank. Banks have different ratios, but generally they are uniform across the industry, unless you go to privately funded options such as private equity, loan sharks, and some credit unions.

If you want to change how you look on paper, you have some options. For example, you can apply in your own name only, if a spouse can carry one debt on his/her own. Or you can apply with a co-applicant and use your joint financial situations for the bank to evaluate creditworthiness. In the latter, banks will often require that person to be on title, which might bring about conveyance issues for transfer, and create a taxable event for the conveyance because you are transferring title.

It seems that you are not aware of all these issues and are sort of groping in the dark for how to structure your financial situation to accomplish what you want. IMHO, if you do not yet know how to do it, keep learning until you figure it out, or talk to a professional who can evaluate your entire situation and structure your affairs for you in a sane way.

Overall, it seems you are trying to buy more than you can afford. The bank will not lend to you for a reason, which is that the transaction creates a situation that exceeds their risk threshold. Figure out some way to reduce the risk threshold (co-sign, for example), lie, or find a lender with a higher tolerance for risk.
 
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