Where to Get LLC Loans for Investment Property

New real estate investors commonly ask the internet and other investors, “can I obtain mortgage LLC loans for an investment property?” The answer to that burning question is “yes”!

Obtaining an LLC mortgage loan for your investment property comes with a slew of unique benefits. If you are new to getting a loan under an LLC can be very challenging if you don’t know where to start or where to look.

No need to worry; we did all of that research for you. In this comprehensive LLC loans for investment property guide, we will go over everything you need to know about getting a rental property under your LLC name and who you can reach out to for more information!

Benefits of LLC Loans for Investment Property

Rental property investors use an LLC to protect their assets for their investment property mortgages. An LLC loan is not an actual loan. Instead, it is a process used to obtain financing for your investment properties under your already established LLC.

If you don’t already have an LLC, you will need to get one before obtaining investment property loans under your LLC. There are three primary benefits of financing your rental property under an LLC instead of using your own name and credit. 

1. Increased Protections and Limited Liabilities

When you use your LLC to obtain an investment property loan, you reduce your own personal exposure to lawsuits and business debts and loans. This type of loan offers protection for your own personal assets. 

2. Establishes Credit History for Your Business

Purchasing rental properties under your LLC establishes your business payments and credit history. Suppose you decide to refinance your investment property or buy more properties in the future. In that case, you will already have a record of purchasing and managing a rental property under your LLC. 

3. Acts as a Liability Insurance

As mentioned above, having your rental investment property under your LLC protects your personal assets. Suppose you face a financial catastrophe with one of your investment properties, such as a personal injury case, bankruptcy, or partnership dispute. In that case, it will only affect your business, not you personally. 

Additional Advantages of LLC Loans for an Investment Property

As you now know, LLC loans for investment and property protect your personal assets. So what does that exactly mean? This means that if your business defaults or faces lawsuits, only your LLC will be affected.

So if someone tries to hold your company liable, they may only be able to take assets tied to your business, not anything you obtained on your own. So your car, home, and other personal assets are not up for debate when someone comes against your business. 

Easy to Set Up and Register

If you don’t already have an LLC, you can easily obtain one. Depending on your state, you can complete the entire process online. There are generally four steps you will need to take to establish your LLC. 

1. Select a Business Name

Before forming your business as an LLC, you must ensure that the name is readily available. You can check in with your state Secretary of State’s office to ensure that someone else doesn’t have the business name you want. 

2. File Your Articles of Organization

Your Articles of Organization are documents that include the name of your business, the address of the company, and the names of those involved in owning the business. You also need to add the personal addresses of those co-owning the business with you. If you are the sole owner of the LLC, you will only need to input your information. 

3. Create an Operating Agreement

Your Operating Agreement is a document that describes the rules and regulations of your company. It also lists the responsibilities of the listed members of the business. The Operating Agreement should also include how your company plans to distribute its losses and profits. 

4. Obtain Your Business License

You may need to obtain different licenses per your local state rules and regulations. You may need to acquire a permit to collect and remit rental tax. Ensure that you do the necessary research required to ensure that you have all the proper licenses and permits before starting your business. 

Pass-Through Taxation

Holding a rental investment property under your LLC can create significant tax benefits for you. The IRS treats an LLC as a pass-through business, which is not subject to corporate income tax. 

This will help eliminate double taxation, where your profits are taxed at the personal and business levels. Instead, rental property investors will report their losses or gains from each LLC on their individual tax returns. 

Establish Business Credit

As mentioned above, using your LLC as a vehicle for your rental investment properties helps establish business credit. Before you can do this, you will need to open a business checking account and credit card accounts.

Even if you don’t have any employees, you will need to obtain an EIN (employee identification number) for your LLC. When you have a separate business account, you create a dividing wall between your personal funds and your business funds.

This also helps to keep track of business-related income and expenses. Creating a solid business credit history is crucial when applying for a mortgage under your LLC. 

Documents Needed to Finance a Mortgage

There are a few documents your lender will need to qualify your business for a mortgage. You will need these documents to prove that you run an honest and legit business to the lender. 

Documents needed:

• Articles of Organization
• Operating Agreement
• Employee Identification Number (EIN)
• LLC bank account information
• Any previous investment rental property information, if applicable

Remember that you may also need to include your own and your business partner’s personal income and debt information. You will need this information if your LLC is relatively new. 

Can Investors Be Liable for LLC Mortgages?

A few property investors do a couple of things that make them liable for the mortgage, even if the loan is in the name of their LLC. For example, some investors sign a personal guaranty for the LLC loan.

When investors do that, they are co-signing for the loan. This means that if the primary borrower, in this case, the LLC, defaults on the loan, the lender may foreclose on the loan.

When this happens, the lender may seek a deficiency judgment against the personal guarantor for any debts the LLC cannot pay. Another way investors may be held liable for the LLC mortgage is if they sign the documents in their personal name instead of the LLC name.

It is easy to sign your name instead of listing your LLC name accidentally, so make sure that you double-check your documents before you submit them. When you use your own personal name, you create a potential personal liability for your business’s debt. 

How to Obtain an LLC Mortgage Loan

When it comes to taking out a mortgage loan for your LLC, you have a few options. When looking through the options below, make sure to consider investment property mortgage rates and the pros and cons of each option before you commit. 

Conventional Mortgage

If you already own a house as your primary residence, you are probably already familiar with conventional funding. A conventional mortgage conforms to guidelines set by Freddie Mac or Fannie Mae. They differ from FHA loans, VA loans, and USDA loans as these are backed by the government. 

Conventional financing typically asks for applicants to have 20% of the home’s purchase price to put as a down payment. You may need to put down 30% of the home’s purchase price as a down payment with rental investment properties.

The lender will most likely need to look into your assets, credit score, and other parts of your financial history to see if you qualify for the loan. They want to make sure that you can handle your own personal mortgage in addition to another mortgage.  

Most conventional lenders do not like to release loans for rental investment properties because conventional loans were not initially created to handle or deal with rental properties. 

Despite the loan being listed under your LLC, these lenders will report this LLC mortgage on your credit report. It is crucial to remember that mortgage lenders usually only allow four mortgages to be reported on your credit report.

After that, they will no longer lend to you. If this is your first time obtaining a rental property under your LLC, a conventional mortgage may be a good idea, but you may want to look into other options after that. 

Hard Money Loans

Hard money loans are a great way to purchase real estate investment properties. These loans are best suited for fix and flip projects. If you want to buy a property to hold, rent, or develop, this loan may not be best for you. 

Many real estate investors prefer to use hard money loans because it is easier to qualify for this loan when compared to a conventional loan.

Lenders who authorize hard money loans may want to look into your credit and income, but they mainly focus on the property’s value in question. If you default on your loan with a hard money lender, they will take the rental property as collateral and sell it to recoup their loss. 

You will need at least 20% down for this loan. You may need more depending on the loan to value ratio. 

Private Money Loans

Private money loans are loans from one person to another individual. The source of this money comes from other investors, friends, and family members. If you do not have any friends or family members who can help you out, a few real estate investor groups may be able to help. 

The loan terms and interest rates on these loans vary significantly. Some of these loans can be favorable, while others can lean more towards being predatory. Private money loans are usually secured by a legal contract that allows the lender to foreclose the property if you default on the loan. 

If you are a new real estate investor, make sure to consider the relationship with the lender carefully. The last thing you want is for the relationship to turn sour if you default on your payments. 

Home Equity Loans

You have the opportunity to draw money from your home equity through a home equity loan or a home equity line of credit. In general, you can borrow up to 80% of your home’s equity value to use for the purchase, repair, or rehabilitation of an investment property. 

If you decide to go through with a home equity line of credit, also known as a HELOC, you can borrow against your home equity just like you would with a credit card. The monthly payments you need to pay are usually only the interest owed. The rate for a HELOC varies, so the interest rate may increase if the rate changes. 

Cash-out refinances, also known as home equity loans, come with a fixed rate. Although the rate is fixed, this loan may extend the life of your existing mortgage. A longer-term could result in paying more interest for your current mortgage. 

Non-recourse and Recourse Loans

Before you sign any contracts, you will want to make sure that you know if your loan is either a recourse loan or a non-recourse loan. Not knowing the difference between the two is a common mistake many real estate investors make. 

Recourse Loans

Recourse loans usually have lower interest rates than non-recourse loans. If you fail to uphold the end of your obligation and you default on your payments, the lender will seize and sell the collateral listed in the loan contract. 

If the collateral is not enough to cover your debts, the lender may go after your other assets, or they can sue you to have your wages garnished. A recourse loan reduces the lender’s risk to clients who aren’t as creditworthy as other borrowers. 

Non-recourse Loans

Most banks do not offer non-recourse loans because it leaves them vulnerable to losses if their borrowers default on their loans and have insufficient collateral. A few banks offer these types of loans, and they cater more to those with excellent credit histories. 

Non-recourse loans put more risk on the lender’s side. This means that if there is a balance due after selling the collateral listed in the contract, they will have to take the loss.

They are unable to claim any other funds, income, or possessions. You still have penalties with this type of loan. If you fail to repay this loan, you can still lose your property and risk hurting your credit score. 

Financing More Than One Property Under Your LLC Mortgage

Under your LLC mortgage, you have the opportunity to invest in more than one property with a portfolio loan. As most conventional lenders do, a portfolio loan is a loan that your lender will keep in-house within their own portfolio instead of selling the loan off on an open market. 

Portfolio loans for LLCs don’t report on your credit, and they do not put any restrictions on the mortgages you can have. As a matter of fact, they actually reward you for having multiple properties. You may receive better rates if you have more properties in your portfolio. 

The more deals you have done, the less of a risk you are to the lender. These lenders are also more flexible than other real estate lending products. Not only do they allow you to fund your LLC mortgage through them, but they also allow different types of entities to use them for rental properties as well. 

Portfolio lenders often allow their borrowers to borrow all or part of the down payment. Conventional lenders do not let you borrow any amount of the down payment. 

Another added perk of going through a portfolio lender is that you close faster on the loan. Conventional loans typically take a couple of months to settle. You can receive an approval for your portfolio loan within a matter of days, if not a couple of weeks. 

Portfolio Lender Challenges

As with all types of loans, there are many advantages and challenges you must consider before making your final decision. One of the biggest challenges with portfolio loans is the loan to value ratio.

Most LLC rental property mortgages rarely have a loan to value ratio that goes above 80%. This means that, on average, you will have to have 20% of the property’s purchase price readily available to put as a down payment. Other than that, these loans are reasonably flexible and allow you to access capital quicker than the other available options. 

Keep Cash Reserves on Hand

It is very easy for new investors to get wrapped up in fixating on the required down payment needed to obtain an investment property. What about the other associated costs with maintaining your property? It is imperative that you keep a cash cushion for any unexpected or expected repairs that the property may need. 

Expenses to look out for:

• Property taxes
• Utility bills
• HOA fees
• Yard maintenance
• Insurance over the property

You will also want to consider the monthly mortgage payments when calculating your overall monthly expenses for the property. There are also closing costs, processing fees, and other fees you will need to consider.

Finding the Best Lender 

Before you sign any contracts with just any lender, you will want to do your research. When you find prospective lenders, you will want to make sure that they have years of experience in the market and have previously served other clients.

It is also best to look into their reviews and their Better Business Bureau reviews so you can have a better idea of how other clients view them. Ensure that you read what the company does well at and where there are challenges. 

How to Get the Best Rate

Before you start shopping for the best lender for you, you will want to make sure that you review your credit. Although specific lenders, like portfolio lenders or hard money lenders, focus more on the collateral instead of your creditworthiness, they may still want to look at your credit history to assess their risk. 

Determine Your Budget

An essential part of finding the right mortgage for your LLC is determining your budget to determine how much house you can afford. A lender may approve you for a loan that extends beyond your budget, leaving you no room to pay for any unexpected expenses. 

Most lenders may look at your outstanding loans, gross income, and your revolving debt, but they do not take your insurance, groceries, business insurance, or other monthly bills into consideration. To have a better idea of what you can afford, you will want to factor in your expenses and other financial goals. Look at your monthly income to calculate how much you should spend on your LLC mortgage. 

Get Your LLC Mortgage Today

Now that you know how to get LLC loans for an investment property, it is time to partner with a reputable lender to make that financial goal come to fruition. LLC mortgage loans are excellent financial tools to help you purchase your next investment property.

Before committing to any lender, make sure that you weigh your options. If you are ready to start the process of obtaining your rental investment mortgage under your LLC name, contact us now!

We here at Aurum & Sharpe have helped hundreds of people get their mortgages under their LLC. We have the proper licenses, expertise, and experience to help you obtain your LLC mortgage. 

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