Forming A Real Estate LLC To Buy Rental Property

If I want to form an LLC to buy rental property 50-50 with a friend, how do I get the best mortgage loan possible for the LLC?

1 Answer

As with many other things in the mortgage industry, the answer is "it depends."

For starters, different banks have different guidelines about LLC's and other business entities going onto the title of the house. An LLC or Trust is allowed by most banks whereas other forms of organizations such as corporations, s-corps, and non-profits are slightly less welcome by lenders in general.

The good news is that it is not very much harder to get a loan for an LLC than it is to get a loan as if you were each going on the loan as individuals. In fact, at most banks it's identical. Keep in mind that some banks don't even do them, but the one's that do will have a process that's similar to this:

In most cases the credit, income, and assets of all members of the LLC will be used. The loan will be underwritten just as if you and your friend are buying a house together as individuals. Depending on the bank that funds the loan you will either show up as an individual on the loan, or simply as a guarantor. As an individual it will be on your credit, and as a guarantor is USUALLY isn't (keep in mind, different banks have different credit bureau reporting guidelines, you should check with each individual bank you shop, or better yet, get a broker to do it for you).

So depending on what your goal is, the LLC may or may not make sense. You can accomplish the same end result financing it as an individual. If you're goal is simply the most favorable mortgage terms, the LLC won't help you. If you have tax related goals or other goals, it's best to check with an expert in that field such as an accountant or real estate attorney.

In rarer cases, some banks will allow an LLC to use credit that has already been established. My guess is that this doesn't apply here as it seems your LLC is not yet formed. At any rate, if an LLC, Corporation, etc... has credit and assets of it's own, some banks will allow the deal simply based on that.

Keep in mind that any loan done by an LLC will be treated as a " non-owner occupied transaction," (NOO) unless bulletproof documentation is provided that all members of the LLC have lived together in the past and are going to continue to live together in the future. Again, you're just as well off to do it as individuals in that case. At any rate, lenders consider NOO transactions to be more risky (because they are in general), and so all but one investor requires a down payment, and the interest rates are higher.

There is one investor I know of that allows a 100% NOO loan, but it requires full income documentation and thus can be difficult to qualify. Generally speaking rates get bearable when you have 20% down and only get better with lower loan to value (LTV) ratios.

To summarize, forming an LLC for mortgage purposes will only benefit you inasmuch as it has the potential to keep a ton of properties off your personal credit report IF you can find a lender that doesn't report the loan on your personal credit. Other than that, any benefits would be legal or tax related. In that case, you should also ask your attorney or accountant about the comparative benefits of trusts, corporations, and LLPs.