LLC Mortgage Basics: Financing a Rental in an LLC

An LLC mortgage is a loan on an investment property where title is held by a limited liability company instead of by you personally. Many DSCR and other business-purpose lenders allow LLC vesting, though they usually ask the owners to sign a personal guaranty. You will need the LLC's formation documents, operating agreement and EIN, and you should talk to an attorney or tax professional before choosing a structure.

Why investors hold rentals in an LLC

Investors use LLCs for a few common reasons. An LLC can keep each property's records, bank account and contracts separate from personal finances. It can make it easier to own a property with partners, since the operating agreement spells out who owns what and who can sign. Some investors also like having one entity per property or per group of properties.

Many people form an LLC hoping to limit personal liability. How much protection an LLC actually provides depends on state law, how the company is run and the contracts you sign, including any personal guaranty on the loan. That is a legal question, so talk to a tax professional or attorney before you rely on it.

Why DSCR lenders often allow LLC vesting

DSCR, hard money, bridge, blanket and private money loans on investment property are usually business-purpose loans, often closed in an LLC. These loans qualify mainly on the property, such as rent compared with the monthly housing payment for a DSCR loan, so the lender is comfortable lending to an entity that owns a rental.

Rules and disclosures for business-purpose loans differ from a home loan. Ask the loan officer which rules and disclosures apply to your loan. Business purpose does not mean unregulated, and the lender will still review the people behind the LLC.

Many conventional investment property loans are made to individual borrowers rather than entities. If holding title in an LLC from the start matters to you, ask early whether the loan you are considering allows it.

The personal guaranty

Most lenders that lend to an LLC ask the members, or at least the members who own a meaningful share, to sign a personal guaranty. A guaranty is your personal promise to repay if the LLC does not. That means the lender may be able to look to you, not only to the property and the company, if the loan goes unpaid.

The lender also usually pulls credit on the guarantors and reviews their assets and reserves. Read the guaranty as carefully as the note itself, and ask an attorney to explain what it covers.

Documents a lender commonly asks for

• Articles of organization (sometimes called a certificate of formation), filed with the state where the LLC was formed.
• Operating agreement showing members, ownership shares and who can sign for the company.
• EIN confirmation from the IRS.
• Certificate of good standing or a status certificate from the state.
• A resolution or consent authorizing the LLC to borrow and naming who signs.
• Foreign registration if the LLC was formed in one state and owns property in another, when that state requires it.
• Identification and credit authorization for each guarantor.

Formation steps and filings vary by state. Florida, for example, has you file articles of organization and designate a registered agent with its Division of Corporations, and New York, New Jersey, Pennsylvania, Connecticut and Virginia each have their own filing office and forms. Check the official state site rather than a third-party service, and keep certified copies handy.

The EIN and tax classification

An Employer Identification Number (EIN) is the federal tax ID for the LLC. The IRS issues EINs for free through its own online application, and the IRS notes that if you are forming an LLC you should register with your state first. Lenders often ask for the EIN letter and use it on the loan documents and the LLC's bank account.

For federal income tax, the IRS treats a single-member LLC as disregarded from its owner by default, and an LLC with two or more members as a partnership by default, unless the LLC elects to be treated as a corporation. How your LLC is taxed affects your returns, deductions and paperwork. Talk to a tax professional or attorney before you choose.

Transferring title to an LLC after closing

Some investors buy a rental in their own name with a conventional loan and later want to deed it to an LLC. Before you do that, read your mortgage. Many mortgages include a due-on-sale clause that lets the lender call the loan due if the property is transferred without its consent. Whether a transfer to your own LLC triggers that clause, and whether your lender will consent, is a question to ask your lender in writing and review with an attorney.

A transfer can raise other issues too. Your title insurance policy may not automatically cover the LLC, your property insurance may need to name the LLC, and some states and localities charge transfer taxes or require filings when a deed is recorded. Each of these varies, so get answers before the deed is signed.

Another route is a refinance. Some investors refinance a rental into a DSCR loan made to the LLC, which can move title as part of the refinance. Ask about seasoning (how long you must have owned the property) and whether the lender treats the transfer as a purchase or a refinance.

LLC loans are for investment property

An LLC mortgage on a DSCR or other business-purpose loan is meant for a property held for rent or income, not a home you live in. If you plan to live in the property, even part time, tell the lender, because that changes the loan type. A second home is one you use yourself for part of the time, is not rented full time and is not a timeshare. Misrepresenting occupancy on a loan application is mortgage fraud.

Before you form the LLC

• Ask the lender how the LLC must be set up: single-purpose or multi-property, member-managed or manager-managed, and where it should be formed.
• Confirm who must sign a guaranty and whose credit will be pulled.
• Make sure the LLC name on the operating agreement, EIN letter and state records match exactly.
• Open a bank account in the LLC's name if the lender wants funds to come from it.
• Ask which disclosures you will receive, since business-purpose loans may differ from a home loan.
• Talk to a tax professional or attorney about liability, taxes and the transfer of any property you already own.

Programs vary by borrower, property and investor, and every loan is subject to credit approval. Buildings with five or more units use commercial financing, which is a different category.

Frequently asked questions

Next steps

• DSCR Loans
• Blanket Mortgages
• DSCR Loans in Florida
• DSCR Loans in New York
• DSCR Loans in New Jersey
• DSCR Loans in Pennsylvania
• DSCR Loans in Connecticut
• DSCR Loans in Virginia

Sources

• Limited liability company (LLC) (IRS)
• Get an employer identification number (IRS)
• Florida Limited Liability Company: Articles of Organization (Florida Division of Corporations)
• B2-1.1-01, Occupancy Types (Fannie Mae Selling Guide)