When new investors start looking into buying real estate, one of their most common questions is:
“How do I get a mortgage for an LLC-owned rental property?”
Spoiler alert: it’s easier than you think. In fact, it’s one of the easiest things to learn as a new investor (here are some of the trickier things I wish I’d known when I first started investing).
But getting a loan under an LLC name can still be challenging if you don’t know where to look, so here’s everything new investors need to know about getting a rental property LLC mortgage.
What’s an LLC? Do I Need One?
Many real estate investors buy and own their rental properties under a limited liability company or LLC. The idea is simple: it separates the legal liability between your personal assets and your company’s assets (AKA the property).
So, if your tenant’s pit bull attacks Little Bobby down the street, and Bobby’s parents get lawsuit-happy and sue you, the most you could lose is the rental property, not your own house, car, engagement ring, and firstborn child.
As for whether you need one… this is the point where we tell you to talk to an attorney. But I will make a few firm statements on the subject:
- LLCs (and any other legal entity, such as a Nevada corporation or S-corp) only work if you keep your personal and company finances completely separate. No commingling of funds, ever. If you ever pay for a personal expense from your business account, you open the door for lawyers to “pierce the corporate veil” and get their grubby paws on your personal assets.
- We have a free masterclass all about Asset Protection for Landlords, co-hosted with asset protection attorney Sayge Grubbs, Esq. Watch it for a great overview of what you need to know as a landlord.
- All of our FIRE from Real Estate students get a free 45-minute strategy session with Sayge Grubbs to work out their own personal asset protection plan for their properties. Just sayin’.
Options for a Rental Property LLC Mortgage
You have a few options when taking out a mortgage loan for an LLC. They all come with their own pros and cons of course, so make sure you understand each before applying.
1. Conventional Mortgage Loans for LLCs
Yes, business owners can get a conventional mortgage loan under an LLC name, and often for affordable interest rates. But it comes with some caveats.
First of all, conventional lenders don’t love writing mortgages for LLC rental properties, aren’t designed for it, and often make it difficult for you. That goes doubly if you’re self-employed (see these options for financing rental properties when you’re self-employed.)
Second, they will almost certainly report the mortgage on your credit report, despite the loan being under an LLC. That’s a problem, because conventional lenders typically only allow four mortgages reporting on your credit report. They stop lending to you after that.
Not to mention that having that many mortgages reporting can ruin your credit. But for a first rental property, getting a conventional mortgage for an LLC can work just fine.
As mentioned above, conventional mortgage lenders usually require income documentation. They’ll also pull your credit report, so if your credit isn’t tip-top, start working on building your credit fast.
To get several quotes from conventional lenders for a rental property LLC mortgage, compare personalized rates at Credible.
Transferring Ownership After Taking Out an LLC Mortgage
Some property owners try to get clever with their real estate portfolio. They buy an income property under their personal name, take out a conventional mortgage, then try to get liability protection by transferring the property title to a single-member LLC they own.
It could theoretically work — if the lender never finds out that you transferred ownership. But if they do, they can call the loan (demand you pay the entire balance immediately), because you violated the “due on sale” clause.
Hardly a risk most business owners are willing to take.
2. Portfolio LendersReady to take off the training wheels? Most homeowners are familiar with the process for conventional mortgages, so they call up their mortgage broker as their first and only plan. Instead, start thinking like a real estate investor and explore portfolio loans under your LLC name. A portfolio loan is a loan that the lender keeps in-house, within their own portfolio, rather than selling it off on the open market like conventional lenders.
Pros of Portfolio Loans for LLCsPortfolio loans for LLCs come with a slew of advantages. To begin with, they don’t report on your credit. And, along similar lines, they don’t put any restrictions on the number of existing mortgages you can have. In fact, they reward you for having more properties. Most portfolio lenders offer better rates on rental property LLC mortgages if you have more properties under your belt. They recognize that the more deals you’ve done, the more experienced you are as a real estate investor, and the less risky you are as a borrower. Portfolio lenders are also more flexible. Not only can they fund a mortgage for an LLC rental property, but they also usually allow other types of legal entities as well. And if your deal has any individual quirks, they can often accommodate them. Speaking of flexibility, portfolio lenders often allow you to borrow part or all of the down payment. Conventional lenders don’t allow any part of the down payment to be borrowed. (For some creative down payment ideas, see our breakdown of 15 clever ways to come up with a down payment.) They also tend to be faster than conventional mortgage lenders. Many portfolio lenders can settle in two weeks if need be.
Cons of Portfolio Loans for a Rental Property LLC MortgageIf there’s any downside to portfolio lenders, they are sometimes more expensive than conventional lenders. The loan-to-value ratio for rental property LLC mortgages rarely rises above 80%, which means you can also expect a 20% down payment or higher. Our favorite nearly-nationwide portfolio lenders are Kiavi, Visio, and LendingOne, which all provide attractive mortgages for LLC-owned rental property. You can compare lending terms for them and other lenders on our Rental Property Loans chart.
3. Local Community BanksA third option for long-term rental property LLC mortgage loans is community banks. Many local community or regional banks offer great loan programs for rental properties, which they keep in-house in their own portfolios. The problem is that because they only operate locally, you’re on your own to find them.
Pros of Community Banks for LLC MortgagesIf you strike out with Visio and LendingOne, start calling local community banks in your property’s market. Ask about LTV, income documentation, credit requirements, and of course interest rates, points, and other closing costs. You may find them slightly cheaper than nationwide or regional landlord lenders. In a best case scenario, you could find a local bank willing to lend you a renovation-perm loan or construction-perm loan. These are two-phase loans, that automatically roll over to a permanent 30-year mortgage after you finish construction or renovation. No refinance required, with all the attendant closing costs.
Cons of Community Banks for Rental Property MortgagesThese local banks could charge less — or they could charge more than larger lenders. I’ve also found that some community banks include their own odd rules when issuing a mortgage for an LLC rental property. For example, one bank I used reserved the right to review my loan every five years and call it for any reason, even though it was a 30-year fixed mortgage. Ask about the bank’s rental property LLC mortgage rules before committing to it!
4. Hard Money Lenders & Private LendersFor properties that need rehabbing, you have a few options for financing. First, you can buy the property with a purchase-rehab loan, then refinance it with a long-term rental property LLC mortgage. Options for purchase-rehab loans include hard money lenders, crowdfunding websites like Patch Lending, portfolio lenders like LendingOne, community banks, and private lenders. In a perfect world, the lender would automatically roll your loan over to a permanent mortgage when the you finish the renovations. While these were once more common, today they’re extremely rare, only offered by the occasional community bank. Instead, when you follow the BRRRR method to pull your down payment back out of renovation deals, you have to refinance. Unless you fund your purchase, renovation, and long-term loan for the LLC with private notes. Generally speaking, these are private loans from friends and family members. But you have to establish credibility before raising money from friends and family for your real estate deals. For more ideas on funding rehab deals, check out these options for financing rental property renovations.
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Liability for Defaults on Loans Under LLCs
Here’s a question that too few new real estate investors ask:
“If I default on the rental property LLC mortgage, can the lender come after me personally?”
In most cases, the answer is yes.
When you borrow a mortgage for an LLC-owned rental property, the lender typically requires you to sign a personal guarantee. The document says that even though the LLC is the borrower on the loan, you personally guarantee the payments, and therefore become personally liable for them.
So, if you default, the lender can come after you personally.
In practice, personal liability looks like this: You default on the rental property LLC mortgage, and the lender forecloses. If the property fails to bring enough at foreclosure auction to cover your balance, the lender then files for a judgment against you personally.
That judgment often then attaches to your house and car, and the lender can even garnish your wages if they like. It’s ugly.
The moral of the story? Don’t think you’re off the hook for the loan if you default, just because the loan is under an LLC and not your personal name.
Before Applying for a Rental Property LLC Mortgage
Before calling up a mortgage lender and asking for $200,000, you need to get a few ducks in a row.
First, you create the business entity by registering it with your state’s department of labor and licensing, or department of assessments and taxation. These departments have slightly different names in each state, but a quick Google search should set you straight.
And don’t go blowing $2,000 on an attorney to file this for you. Unlike most bureaucratic processes, this one’s designed to be easy (the better to tax you with, my dear). All you need to do is get a template copy of LLC Articles of Organization for your state, fill in the blanks, and file it with your state’s department. Along with a filing fee, of course!
You should also have an employer ID number (EIN). If you don’t have one yet, you can get an EIN instantly online from the IRS here.
Ideally, you should also have a business checking account set up for your LLC. Local community banks and online banks often offer these for free, hint hint.
The lender may also ask you for a copy of your LLC’s operating agreement when you apply for a rental property LLC mortgage. These don’t have to be complicated — the most important part in the operating agreement is the list of LLC owners and their ownership percentage. You can find operating agreement templates online inexpensively or free.
Beyond that, the lender will of course demand all the usual from you: a loan application, income documentation (if you use a conventional lender rather than a portfolio lender), a list of your existing rental properties (if any), and so on.
Remember to Keep a Cash Cushion
Many new investors fixate on the down payment and forget about the other costs that require cash.
When you borrow a mortgage for an LLC rental property, you better believe you’ll have closing costs. The lender origination fees alone often come to 2-5 points! (A “point” is a fee equal to 1% of the loan amount.)
Which says nothing of the lender’s junk fees like “administrative fees” and “processing fees” and “we’re-screwing-you-because-we-can fees.” And then you’ll have title and settlement fees, insurance premiums, property taxes due up front, and many other closing costs.
Granted, you can (and should) negotiate for a seller concession to reduce your cash needed for closing costs. But brace yourself for a fee-ing frenzy at settlement.
Many lenders also require cash reserves for at least six months’ mortgage payment as well. Even if they don’t require it, you should have a healthy cash cushion set aside for unexpected landlord expenses like vacancies, repairs, maintenance, and so forth.
You never know when the furnace will die and need replacing!
Setting up an LLC and getting a mortgage for an LLC-owned rental property is not as hard as it seems at first. But be prepared to speak with a half-dozen lenders before finding the right fit.
In fact, think of rental property financing options as a range of tools in your toolkit. You don’t just need a hammer; you also need several screwdrivers, a drill, wrenches, and so forth. The same goes for lenders – you need multiple options, especially for different markets or different types of real estate deals.
But as you build your toolkit, you’ll discover that all investor-oriented lenders can accommodate mortgages for LLC rental properties, and possibly even buying rental properties under a self-directed IRA.
As a final thought, keep in mind that investment property lenders focus on your deal, not just you personally. When you find great deals on investment properties, you’ll have no trouble financing them. And the reverse is also true: no lender in the world will touch an unattractive deal.♦
How have you financed your rental properties? What’s your favorite go-to source for rental property LLC mortgages?
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About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.