As a real estate investor, you want to protect your personal interests. One way to do so is by doing business through a Limited Liability Company (LLC). Doing so provides a veil of protection for personal assets and shields them from business losses should they occur. If you’re interested in purchasing a property in your LLC’s name, read on to learn more about how this process works.
Getting a mortgage for a property owned by a limited liability company (LLC) is a common question for real estate investors. While LLCs offer liability protection and other benefits, financing a property under an LLC can be more complex than getting a personal mortgage. In this comprehensive guide, we’ll break down everything you need to know about getting a mortgage loan for an LLC-owned rental property.
What is an LLC and Why Use One for Rental Properties?
An LLC is a separate legal entity that provides liability protection for business assets Many real estate investors purchase investment properties under an LLC to shield their personal assets from lawsuits and debts related to the rental.
Here are some key benefits LLCs offer for rental properties
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Limited liability – If a tenant sues, creditors can only go after the assets in the LLC, not your personal assets.
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Tax flexibility – LLCs allow pass-through taxation so you avoid double taxation.
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Smooth ownership transfers – Membership interests can easily be transferred without re-issuing deeds.
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Credibility with lenders – Being properly structured as an LLC can give you more credibility with lenders.
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Isolate properties – Different rentals can be separated into distinct LLCs to isolate liabilities.
While LLCs have clear benefits, you still need to adhere to formalities like keeping personal and business finances totally separate. But overall, LLCs are ideal for holding investment real estate.
Can an LLC Actually Get Loan Financing?
The short answer is yes – you can absolutely get a mortgage loan for a property titled under an LLC. However, there are some important factors to understand when it comes to financing.
Lender Options – Several types of lenders will provide mortgages to LLCs, but under different terms. Main options are conventional loans, portfolio loans, and private money loans.
Rates & Terms – Interest rates and loan terms can vary significantly between lender types. Compare options to find the best fit.
Down Payments – Mortgages for LLC properties often require 20-30% as a down payment. Requirements depend on the lender.
Personal Guarantee – Even under an LLC, lenders usually require personal guarantees from the individual owners to secure the debt.
Documentation – Be ready to provide documentation proving your LLC is properly established before applying for financing.
The bottom line is that with the right planning and preparation, LLCs can absolutely obtain financing – but you need to understand the landscape of lender options available.
Step-by-Step Process for Getting an LLC Loan
Follow these key steps when moving forward with getting a mortgage loan for your LLC-owned investment property:
1. Set Up Your LLC Correctly
Before even applying for financing, ensure your LLC is properly established:
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Register your LLC with your Secretary of State’s office.
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Obtain an EIN from the IRS for your LLC.
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Set up a business checking account under your LLC’s name.
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Have an Operating Agreement listing owners & ownership percentages.
Taking these steps shows lenders that your business is legitimately formed. It lays the groundwork for a smoother financing process.
2. Explore Your Financing Options
Spend time understanding the main lending sources available for LLC loans:
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Conventional loans – Possible but usually capped at a max number of loans per borrower.
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Portfolio loans – Offer more flexibility than conventional loans but may have higher rates.
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Hard/private money – Best for fix-and-flip investments but comes at a higher cost.
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Community banks – Smaller local bank options that may provide attractive rates.
Compare options to find the best fit based on your business plan, experience level, and deal specifics.
3. Prepare Your Documentation
Compile all the paperwork lenders will need to review for underwriting:
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Formal business documents for your LLC
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Personal financial statements
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Tax returns
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Bank statements proving reserves
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Your real estate investment experience
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Information on other LLC properties you own
Having organized records will streamline the application process.
4. Apply with Your Selected Lender(s)
Once you’ve aligned on the lender(s) you want to work with, formally apply for financing. Be ready to provide:
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Completed loan application
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Supporting documentation previously gathered
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Details on the property, business plan, and deal specifics
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Earnest money deposit
Move quickly to secure the property, but don’t be afraid to negotiate the best possible loan terms.
5. Close and Finalize Paperwork
During closing, review all paperwork thoroughly and ensure it is consistent with what you already negotiated. Key items to double check:
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Loan amount and interest rate
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Loan term and amortization
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Fees and closing costs
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Any personal guarantee requirements
Closing formally finalizes your financing, allowing you to take ownership and begin operating your investment!
Common Concerns about LLC Loans
Many prospective real estate investors have lingering questions about obtaining financing under an LLC entity. Here are some common concerns demystified:
Does using an LLC make it harder to qualify? Not necessarily – lenders will mainly focus on your personal creditworthiness and real estate experience vs. the LLC itself. Proper LLC paperwork is important but not an obstacle.
Do I need a big down payment? Often yes – while some lenders may offer financing with less, 20-30% down is commonly required for LLC mortgages. Be prepared to have sufficient reserves.
Can I use a self-directed IRA? Yes, you can use retirement funds from a self-directed IRA to fund either all or part of the down payment on an LLC-owned property. This can provide tax-advantaged investing.
What if the LLC defaults? Even under an LLC, you as the owner often personally guarantee the debt. Defaulting can therefore impact your personal finances and credit despite using an LLC.
Can I transfer a property I already own? You can transfer a property you own personally into an LLC, but it could trigger the “due on sale” clause. Tread carefully.
While these concerns are valid, none are true blockers to obtaining LLC financing with the right planning and preparation.
Final Tips for Getting a Mortgage Loan for Your LLC
Here are a few final tips to recap as you navigate getting a mortgage for your LLC-owned real estate investment:
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Take time to formally establish your LLC before financing applications.
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Vet multiple lender types to find the best loan programs.
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Be ready with all required documentation about your LLC.
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Seek help from a knowledgeable real estate attorney.
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Never commingle personal and LLC funds.
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Understand the risks of defaulting on LLC loans.
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Keep a strong cash reserve for down payments, closing costs, and repairs.
While the process involves some unique considerations, thousands of real estate investors successfully secure financing for properties held by LLC entities. Now that you understand the complete landscape, you can move forward confidently in finding the ideal mortgage loan for your next investment property!
Pros of Using an LLC to Get a Mortgage
Below are the benefits of using an LLC to get a mortgage:
- Member protections: As mentioned above, owners of the LLC will not be held personally liable if the mortgage goes into default unless there’s a personal guarantee.
- Enhanced privacy: The LLC owner’s names will not be disclosed on mortgage documents that are filed with the county in which the property is located. This also means ownership information will not be accessible to the general public. This is particularly beneficial for celebrities or well-known high-net-worth individuals who would prefer to keep their real estate acquisitions through businesses they own out of the public eye.
- Streamlined investing: You have the option to create a multi-member LLC with others to purchase investment properties. Additional members can be added at a later date by buying shares belonging to existing members.
- Separation of assets: If the LLC is used to get a mortgage, it allows the member(s) to separate personal and business assets.
What Do You Typically Need to Get a Mortgage via an LLC?
It varies by lender, but expect to bring a down payment of at least 25 percent to the table. Since these loans are riskier than traditional mortgages, a heftier down payment helps minimize potential losses if the LLC defaults on the loan agreement.
If you don’t have this amount available, you may be eligible for a loan program that lets you use assets or personal and business bank statements to qualify for funding. In addition, some lenders feature loan programs that allow you to use the projected income from the property you’re planning to purchase to qualify for funding.
You should also be prepared to provide the following information and documents to the lender:
- Articles of organization and current status from the Secretary of State
- Operating Agreement (if you have one handy)
- Employer Identification Number (EIN) from the Internal Revenue Service (IRS)
- Company bank statements for the past six to 12 months
- Financial documents (i.e., profit and loss statements) and any documentation related to the company’s rental properties (if applicable)
- Financial data (i.e., earnings, outstanding debt obligations) for each member of the LLC
LLC Mortgage Loan Requirements To Purchase Real Estate
FAQ
What are the pros and cons of buying a house under an LLC?
Is it hard for an LLC to get a loan?
Can I use my LLC to pay my mortgage?
Does having an LLC affect getting a mortgage?
Can an LLC get a mortgage?
If you’re wondering can an LLC get a mortgage, the answer is yes. However, there are limitations in place that may make getting a mortgage in your company’s name a less than ideal solution. Simply put, you can get a mortgage in your LLC’s name. However, you need to evaluate your situation to determine if this is really the best course of action.
Can I get a mortgage under an LLC for a rental property?
You can get a mortgage for a rental property under an LLC, but you’ll need to demonstrate to the lender that you’re running your business like a real business. The lender will require documents and information when you apply for a loan under your LLC.
What is an LLC mortgage lender?
Private lenders are investors who create their own mortgage lending rules and can often customize a loan based on the individual needs of each borrower. To screen an LLC mortgage lender, ask if they are currently working with other real estate investors.
Can a limited liability company get a mortgage?
Obtaining a mortgage for a Limited Liability Company (LLC) is not an option that is available for most businesses. One business owner found this out when he tried to get a loan for his LLC, specifically a loan with a low-interest rate.