If you’re looking to up your game by investing in real estate through a legal entity, then you’ll want to begin by learning what your LLC mortgage options are. The fact that you’re here means you’re off to a great start because, in my personal opinion, no rental property should be outside of an LLC. All my rentals sit within limited liability companies, and this grants me the liability protection I need, as well as some welcome tax advantages.
Although buying rental properties within an LLC should be every serious investor’s goal, there’s a lot to consider if you’re just starting out. For example, you might not be familiar with how LLC mortgage financing works, and that’s why I’m creating this article, so you can walk away well-informed on the topic. With that said, let’s dive in…
Understanding Mortgages for Rental Properties Bought Within an LLC
Ok, so if you feel you’re ready to go out and apply for a rental property loan through a limited liability company, you’ll need to put the breaks on until you understand some of the logistics – requirements, roadblocks and workarounds, and what your options are. You see, although utilizing an LLC for an investment property purchase has its advantages, the process is not as simple as when you’re just putting a property and a loan under your personal name. However, it’s well worth the extra steps needed to make it all happen.
Before we go any further, I’d like to encourage you to bookmark the following article I put together – How to Pay Off Your Mortgage in 5 Years. It would be to your benefit to learn strategies for paying your loan off as quickly as possible, and can end up saving you thousands of dollars in interest.
Also, I’m assuming that since you landed here by researching questions such as “Can an LLC get a mortgage?” or “What are the mortgage loan requirements for a property owned by an LLC?” that you already know what a limited liability company is. That said, I’m going to skip straight to the benefits of having a legal entity rental property setup, so you’ll have a full understanding of why it’s so important to have this type of legal structure within your real estate business.
The advantages of buying an Investment property through an LLC
My legal team has always emphasized the importance of owning a rental property within a limited liability company, with the main reasoning being liability protection.
In addition to using an LLC for liability issues, there are other practical reasons as well. This includes tax advantages and the ability to easily partner with others when investing in real estate. For today, I’ll just cover the two advantages that many investors feel are the most important, which are liability and tax benefits:
1. Investing within an LLC Provides Personal Asset Protection
The main advantage that every investor should be aware of is the liability protection that an LLC provides. I know from experience that having a legal entity such as this hold your investment properties is essential if you want to protect your personal assets. By this, I mean your personal home, car, bank accounts, and so on.
When you own a rental property in your name, as compared to a legal entity, then if someone slips and falls on the ice outside the home you’re renting, even though you may not be responsible for shoveling ice and snow, the tenant can still decide to sue. Or, what if there’s hidden mold, and the tenants get sick and take the owner to court? If the landlord loses a big case, their personal assets may be up for grabs.
Regarding liability, you can do some upfront work to ensure your rental is up to par and not a hazard by doing regular property inspections. I wrote an article on the subject that you can dive into – Streamlining Rental Property Inspections by Creating Effective Inspection Checklists.
Having the rental property sit within an LLC takes this risk away. Instead, any legal action will be directed toward and restricted to the limited liability company itself, not the landlord. Because of this, you’ll want to have a lawyer set the legal entity up initially so it’s structured properly and everything is buttoned up for your protection.
Also, when it comes to liability situations, you’ll want to consider getting insurance so all your bases are covered. You can read about this by heading over to my post – Understanding Landlord Insurance Coverage.
2. Having a Rental Property LLC Setup Offers Pass-Through Taxation
Another benefit of using a limited liability company to invest in a rental property is pass-through taxation. What exactly is this? Well, it’s when the income generated by a rental property is not taxed directly at the business level, but instead, profits or losses pass through to the LLC’s owners, who report them on their individual tax returns. When this type of legal setup is in place, the investor avoids the issue of double taxation that a corporation typically deals with, where income is taxed at both the corporate and individual levels.
On top of this, investors who own a rental within an LLC may be able to deduct property-related expenses, which can lower their tax burden even more. If you’re in need of a good accountant, I’ve been working with an exceptional CPA for years; Tom Wheelwright, the personal accountant of real estate tycoon, Robert Kiyosaki – he comes highly recommended. You can reach out to Tom through our Lower Your Taxes page, or grab his book, Tax-Free Wealth for tips that can save you thousands of dollars in taxes.
Mortgages for LLC Owned Rental Properties
Now that you’re aware of the importance and benefits of buying an investment property within a legal entity, let’s discuss mortgage options with the two most common being conventional and non-recourse loans.
1. Conventional Mortgages
A conventional or traditional LLC mortgage is difficult to obtain but possible. What I mean by this is that a traditional bank lender typically won’t feel comfortable backing a loan without a personal guarantee. This is what they are accustomed to doing, making sure the property owner is the one responsible for paying back the loan, not a legal entity. However, you may be able to find a bank, maybe a smaller community institution that will be willing to provide an LLC loan for a rental property, just as long as the limited liability company is in good standing with some credit history. This means that if you’re just starting out, that obtaining a conventional loan may not be possible or the rates will be super high.
Transferring a Rental Property Into a Limited Liability Company
Why would you want a conventional loan anyway? Well, in some cases, it can be a good option because you may find better mortgage rates. Some investors will even buy a rental property under their personal name just to get the better rate, and then transfer it to an LLC after closing. Also, this is a great way to get your foot in the door if you’re just beginning your investing journey.
It’s important to note that you should seek the counsel of an attorney before moving forward with starting with a conventional mortgage and then transferring. The reason for this is that there may be certain rules and regulations that your lender has set up, and you have to make sure you’re playing by the rules before making a move. I’ve personally made the switch with no issues, but you’ll want to double-check if it’s the right move for you first.
Regarding transferring a rental into an LLC, you can dive into the following video for more details:
The bottom line is that a conventional loan is not really the best option if you’re planning on buying a rental property inside an LLC, the mortgage loan requirements are just not set up for this type of investment strategy. Your best bet would be to use a non-recourse loan, which I’ll discuss next.
2. Non-Recourse Loans – Best Choice for LLC Mortgage Funding
If you want to skip to the chase when it comes to the question, “Can an LLC get a mortgage?” then I suggest looking into non-recourse loans. You may be unfamiliar with this loan type, and most investors are. It’s a best-kept secret that seasoned real estate investors use when they want to buy a rental property within a legal entity.
You see, not only will a rental property LLC setup get approved for a non-recourse mortgage when the circumstances are right, but it’s actually required that the property is bought within a limited liability company. So, the two go hand in hand.
What is a non-recourse loan? It’s a mortgage type that bases the approval on the merit of the property, not the individual investor. So, this works out perfectly for someone wanting to place a rental within an LLC. In addition to this, it’s also great for those who have less than stellar credit. Why? Because the investor’s financial standing won’t affect the approval process, and this is because if the payments ever went into default, the mortgage lender would take possession of the home.
Another great aspect of utilizing a non-recourse LLC mortgage is that when you buy a rental property through non-recourse financing, you can be sure it’s in great shape. This is the case because the lender will inspect the rental to make sure it meets their loan approval standards – it’s like a second set of eyes during the inspection process.
Finding a Non-Recource LLC Mortgage Lender
One downside of a non-recourse loan is that not all financial institutions offer them, in fact, most don’t. However, there are non-recourse lenders out there, you just have to find them. You can easily do this by networking with seasoned investors who most likely have a list of lenders who offer this loan type.
Another avenue you can take is to utilize a full-service real estate investment company that already has non-recourse loans built into their property purchases. For example, Morris Invest offers built-to-rent investment properties with non-recourse financing. What does this mean? It means that the loan has already been approved for the property you intend to purchase. This is possible because we build hundreds of high-quality homes in lucrative housing markets and have established relationships with non-recourse lenders in the area. They know our rentals perform well and so they’re eager to finance them.
If you have questions regarding investing with non-recourse financing, feel free to schedule a free 30-minute call with our team – we will be happy to explain the process. In the meantime, you can learn more about the ins and outs of this mortgage type by diving into my article – Non-Recourse Financing for Real Estate Investing – Approval Based on Asset Not the Buyer.
You can also check out my video that covers non-recourse financing in detail:
If you’d like to explore rental property loans in general for reference, you can visit the following articles below:
- Financing 101: Exploring Your Choices for Rental Property Loans
- Using a VA Loan for Rental Real Estate Purchases
Mortgage Loan Requirements for LLC Owned Rental Properties
If you’re going down the path of owning a rental property in a limited liability company, you’ll want to ensure all your ducks are in order when it comes to the LLC setup and having the proper documentation to provide to the lender. Regarding this, when you buy a rental property through Morris Invest using a non-recourse loan, we can take care of all the details for you, and also help you set up your limited liability company.
If you’re buying from someone other than Morris Invest and planning on setting up the LLC on your own, I recommend contacting a lawyer. It’s imperative that the structure is set up perfectly, or you could run into issues while trying to get a mortgage or in the future if you were ever sued.
Below is just a quick rundown of what you may need to present to a lender; you’ll have to communicate with your specific bank to get the full list of their requirements:
- Employee identification number (EIN), this applies even if you don’t have employees.
- Articles of Organization and an Operating Agreement.
- Information from the Secretary of State’s office showing your limited liability company is in good standing, meaning all the proper documents have been filed and all the required fees have been paid.
- Bank account information for the LLC
- If possible, rental property history pertaining to profit and loss, current tenant lease, and payment history to show proof of income. Or, if you’re buying a new construction property, information on the neighborhood rentals may be required.
Power Resources for Real Estate Investors
Before we wrap things up here, make sure to bookmark the following power resources that can help set you on the path to financial independence:
- Freedom Number Cheat Sheet
- 90-Day Financial Empowerment Bootcamp
- The Financial Freedom Academy
- Morris Invest & SDIRA Program Overview
Also, if you’re looking for ways to come up with a down payment for investment property options, you’ll want to head over to my article – Guide to Financing Your Investment Property: Down Payments and Loans. You can also look into saving for a down payment through Connect Invest where you can earn 7.5-9% annual returns on sums of $500 or more with real estate short notes. I invest with them, and so do most of my team members. You can get a $50 wallet credit when you sign up through my link. If you’d like to read up on this, simply visit the Connect Invest website.
Building Wealth by Investing in Rental Properties the Right Way
When it comes down to it, the best way to invest in real estate is through a limited liability company. Not investing through an entity can set you up for financial ruin later down the line. Why? Because it’s not a matter of if you will be sued by a tenant at some point, it’s really a matter of when. This is especially true if you own several investment properties. And don’t worry, this is all part of the game. Every profession has its liabilities, but in the end, rental real estate can make you wealthy and allow you to retire early. If you do your research, you’ll find that it’s the number one way to build wealth.
I know from personal experience that applying for an LLC mortgage is pretty easy, you just have to know what lenders or investment companies to work with. That said, schedule a call with our team to get the ball rolling. This way, you’ll have a cash flowing property in your portfolio that will bring you one step closer to becoming financially independent.
Before you go, take a moment to watch my video on how to open an out-of-state LLC for real estate investing:
