Deni: Hi, everyone, and welcome to Spark Rental Facebook Live and podcast. How is everybody doing today? Hopefully good. Happy Tuesday. Can’t even say it’s hump day yet.
Brian: Yeah. All right. Tuesday. But we have two exciting announcements today.
Deni: Oh, that’s right. That’s right. Well, one is we are going to announce our prop stream winner. So, I’m excited about that. That’ll happen closer to the end. And what else, Brian? What else do we got?
Brian: Well, the other announcement is we have a free webinar tomorrow, a live webinar about seven creative financing ideas to use other people’s money to build your real estate portfolio. So 1:00 p.m. Eastern tomorrow, 10:00 a.m. Pacific, we will share the link. The registration link for that webinar in the comments here and bring your questions. And that’s actually what drove this topic today. We are doing financing themed week, you know, other people’s money all week.
Deni: And ironically, we’re going to be talking about how to get a loan for an LLC owned property. And there are a bazillion questions all the time on social media about this. So, I think it’s going to be a, I know it’s going to be a good topic for us all to discuss. And then, yeah, last week we talked about the rising interest rates and how it’s going to impact real estate investors. And there is a lot going on right now between the stock market going kind of haywire, right, Brian?
Brian: And yeah, it’s been a volatile 2022 in the stock market
Deni: And we’re not even in that far. So, is anybody here, anybody watching have you any of you had trouble actually getting a mortgage for an LLC? Or maybe perhaps don’t even know where to start?
Brian: Well, I’ve had trouble. Do I count?
Deni: Well, yeah, I guess. I guess. Well, hello, Julian. Welcome. Hi, Tara. All right, so nobody. So, you all were able to get out all these just like that, can you let us know how you did this? All right, Brian, go ahead. Why don’t you give us some umm, here we go? Jamaica doesn’t know where to start. And I was told not to. Mm-hmm.
Brian: Well, fair enough. You know, asset protection does matter as a real estate investor, but it’s not the first thing that you should be focusing on when you’re a new real estate investor. You want to focus on the fundamentals in the beginning, you know, things like how to find good deals on properties, how to calculate cash flow on rental properties, how to accurately forecast profits in flips. You know, networking and building a team, you know, people like contractors, realtors, home inspectors, appraisers, you know.
Deni: All that is important, but you do have to balance it out as well with asset protection.
Brian: Yeah. So, you know, let’s just start by talking about why people do want to buy properties under an LLC or under a different legal entity. And the reason is if you get sued as a real estate investor and I say if, but you know, if you’re in this game long enough, it’s really more a matter of when because you’re dealing with assets that are worth so much money because tenants love to suit landlords, because neighbors love this to each other. And, you know, try to score that quick win, especially if it’s an investor and not a homeowner. So, if you are sued as a property owner, if you own the property under your personal name, then all of your personal assets are up for grabs if you lose that lawsuit. So, if someone sues you, they win. They get a money judgment against you, then they can go after not just that property, but they can also go after your car, your home, your retirement accounts theoretically.
Deni: And if the amount is high enough. They can go after any other businesses that they write in your name, right?
Brian: Other businesses can also garnish your wages. You know, again, even unrelated to that property. So, you’re if you have a W-2 job, they can essentially garnish your wages with your employer. So that’s why people don’t want to own investment properties under their own personal name. They want to buy them under a legal entity such as an LLC. So that all makes sense. Now that being said, when you take out a loan under an LLC name, you still have to sign a personal guarantee with the lender. So, if you default on your mortgage loan, even if it’s under an LLC name, the lender can still come after you personally, you sign a personal guarantee of that mortgage loan. So right off the bat, you know, we want to dispel that myth that if you buy a property under an LLC and you take the loan out under the LLC name, you can default on that loan and the lender can’t come up to you, that is not true. The lender can always come after your personal assets if you default, and if the lender loses money after foreclosing on you. So just get that out of the way, you know, right off the bat. Absolutely. But if you do it right, if you buy a property under an LLC name or some other legal entity and you keep all of your business assets completely separate from your personal assets and then someone sues you and names both the LLC and you personally in the lawsuit, you can then go to the judge and say, I have been named personally in the suit, but I should not have been because I own this property under a business entity and I keep all of my finances completely separate. I run this as a business, so my personal name, I should be excluded from this lawsuit. I should be removed.
Deni: And you did hear Brian say that twice, so I just want to. That’s really important is to keep the assets away from your personal assets because if you don’t, that can bring a whole new wave of problems.
Brian: Right. So, it’s called co-mingling if you mix your personal assets in your business assets, and if the judge sees that you have commingled assets, then when you go to the judge and ask to be excluded from the lawsuit, the judge can say no if they see that you have commingled funds. So, some people think that all they have to do is set up the LLC and buy the property in the name again, and then they’re done. That is not true. You actually do have to keep your finances completely separate. All right. Moving on, let’s talk about options for loans when you own properties under an LLC name. Now, technically, conventional mortgage lenders do have a few loan programs that do allow LLC names. They don’t like doing it. They have very strict rules about lending to LLCs. You know, like we talked about, they do still require a personal guarantee, although all lenders do that.
Deni: What do you think? I mean, if they have a personal guarantor, why do you think that it is so tough for them?
Brian: Oh, they’re just not designed for it, so conventional loans, they follow loan guidelines issued by either Fannie Mae or Freddie Mac, and those quasi-government institutions were expressly designed to create homeowner mortgage programs and the entire system by which lenders, conventional lenders package and sell loans. It’s designed around those Freddie Mac and Fannie Mae who were themselves designed around homeowner loans. So, the whole system is just designed for homeowners. It’s not designed for investors. So, you can find, you know, some of these programs occasionally, but they’re really not designed for investors. The whole system is not really designed for investors. They’re slow, they’re clunky. You know, it can take 60 days to close a conventional loan for the average investor, that’s way too slow. And here’s the big problem is that conventional lenders always report to the credit bureaus, even if you take out the loan in your personal name. And, you know, as we’re going to discuss in the webinar tomorrow, the big speed bump or the big gate blocking your progress with conventional loans is that most loan programs only allow you to have four mortgages reporting on your credit report.
Brian: So, the fact that even when you take out a loan as an LLC, a conventional mortgage and they still report to the credit bureaus that still counts towards your cap of four mortgages and your personal residence is also included in that cap of four. So now what some people do is they buy a property under their personal name. These are investors we’re talking about here. They buy a property in their personal name. They take out the mortgage loan in their personal name, a conventional mortgage loan because that is easier than taking it out as an LLC. And then what they do is they transfer the ownership of the property to an LLC like they quit claim deed, the ownership of the property from their personal name to an LLC name. Now the risk when you do that is that the lender if they find out that you transferred ownership of the property, they can call your loans and require that you pay back all $300000 or whatever of it within the next 30 days. So that’s a risk.
Deni: Have you seen that happen or have you heard of that happen?
Brian: Of lenders calling the loan because of that?
Brian: It hasn’t happened to me, you know, in the early, I did this with one property back very early on in my real estate investing career, I transferred ownership of the property. Actually, did I don’t even remember it was so long ago, you know, I don’t think I ever actually legally moved ownership. I haven’t heard of a lot of investors complaining of this. It does happen occasionally. It is a risk. And yeah, and you have to then go in and quit claim deed the property over. And yeah, it’s a risk. And keep in mind that the more digitized legal records become, the easier it is for lenders to discover that you’ve done this, you know, back in the day when this was all just happening in paper records, in the courthouse. You know, lenders weren’t likely to discover this stuff, but you know.
Deni: Especially if you were paying, you know, you’re paying your mortgage on time and there were no issues. They had no reason to even look into that. But you’re right now, everybody knows everything. So exactly it’s not like you can.
Brian: Yeah. And these public ownership records, they’re all online now. So, lenders in an instant can discover that. So, all right, let’s move on from away from conventional mortgage lenders because they’re really not a great fit for this. You can technically do it, but it’s not a great fit. So, community banks and credit unions also a possibility. But again, these are small lenders, so it’s case by case. You’re going to have to pick up the phone 30 times and call up every regional bank or community bank in your market, every local credit union. You don’t have to talk to 30 different banks. Now these can be good lenders with good loan programs. They usually keep these loans on their own books, so they’re typically more flexible.
Deni: Credit unions tend to have lower interest rates.
Brian: Yeah, yeah. So, you know, they are an option. It requires a little more doing on your part. You know, you have to actually call up all these different local banks, but they are a viable option for this. Some of them do lend to LLC.
Deni: Christina has made an interesting comment. And it’s true that you do have to be careful with insurance if you do the transfer in your own name or whatnot. So yes. Good point, Christina.
Brian: Yeah, absolutely, because you theoretically should take out a different insurance policy if you change the ownership. But if you take out a different insurance policy, you have to notify your lender because the lender has to appear as the mortgage or on the insurance policy. So that’s a great point, Christina, that is a pitfall and it’s a way that some investors get found out by their lender. Now, Julian, who, by the way, Julian is a partner with us on a co-investing deal in case you guys didn’t know. So, we know Julian well, he says that’s the extent I have gotten in in this thought exercise lender will lend to an LLC with a guarantee or cosigner by me. There’s a lot of what I’ve seen or read with asset protection is keeping your name out of public records. So, you know one thing, Julian, that my old boss used to do. He was a little bit of a shady character. But he would open an LLC under there was just named after him personally. So, it was like, you know, John M. Smith LLC in the hopes that the lender would just not notice, even if they did look it up in the public records that it would still kind of look like his name, even though it had an LLC at the end. Anyway, so he says if the deed and the note or in the name of the LLC, what your name is, guarantor show up in public records. Yeah, so when you sign the mortgage note or the deed of trust, there’s a clause in there that you are signing personally as well and that that note or do you have trust those do, or I guess if the note or more, anyway, those documents are public records.
Deni: Right, and to be honest with you, what he what you were saying is we’ll keep your name out of public records. Well, obviously the trust name will be in the public records, but if somebody is suing you, it is very easy to find out who owns an LLC and even easier for an attorney. So, it’s not really going to help there.
Brian: Yeah, because someone’s name has to appear as the owner of the LLC. And you need to have a resident agent and you know, you can pay someone else to be a resident agent, but it’s not going to prevent you from being sued. It’s all public record, so you can’t hide your identity behind that, I guess, is the point.
Deni: So, what about portfolio lenders?
Brian: Portfolio lenders keep mortgage loans on their own books. They don’t bundle and sell them the way that conventional mortgage lenders do. So, there’s they are more than happy to lend to LLCs. There is a whole crop of online portfolio lenders nowadays, and we are partnered with a bunch of those lenders. They’re great. They actually not only are they just as happy to lend to LLCs as they are to individuals but the more experience you have as an investor, the lower your interest rate, the lower your points. So, they prefer working with experienced real estate investors. They are very familiar with lending to LLCs. They tend to close pretty quickly, usually between two weeks in a month and they don’t report to the credit bureaus, either. They do pull your credit. So, you know you do need to have good credit, but they don’t report your monthly payments to the credit bureaus. So, these loans don’t count toward your fore conventional loan limit, right? Hard money lenders same deal. In fact, many hard money lenders are also long-term portfolio lenders. And you know, we’ll talk more about the difference between them tomorrow, but they’re often two sides of the same coin.
Deni: I also put a link all about investment, property loans and the chat. So, if you want to learn more, you can always check that out as well.
Brian: Yeah, and they have on that page, there are comparison charts for a bunch of different portfolio lenders, hard money lenders, you know, interest rates that they charge, the points that they charge, the minimum credit score that they require. It’s a great resource. And Julian says some people out there try to sell the idea that you can hide your identity. It’s hard to do. I mean, you know, there’s a reason the mob can. You know they do that, and they still get found out eventually, right? Like, it’s really hard to hard your identity.
Deni: Especially nowadays. I mean, maybe back in the day, it was a little bit easier. But nowadays, yeah. Oh, my goodness.
Brian: And mom and pop real estate investors don’t have access to, you know, overseas shell corporations and the kind of stuff that billionaires can do like that stuff just kind of out of reach for. For us, the better way of going about this is just keeping your personal finances completely separate from your business finances, not commingling funds, so that when someone does sue you and maim you personally in the lawsuit, you just walk up to the judge and say, I should not be listed in this lawsuit personally. You know, here are my bank records for my personal bank accounts, and here are my bank records from my business bank accounts. They’re completely separate. Please exclude me from this lawsuit.
Deni: You’re begging, please.
Brian: Right? Yeah. So, is there anything? Oh, oh, we got to draw the winner for the.
Deni: Yeah, but I do want to remind everybody I’m going to put a link for the webinar. So, if you haven’t joined up come on. And it’s going to be interactive. You’ll get to ask questions. It’s going to be great. So, the link is in the chat. And yes, Tara is going to let me know who the winner is? Whoa.
Brian: Tim Dooley is the winner. Yay, Tim, you did it. So, Tim Dooley is a regular around here. We’ve worked with Tim. He’s done like usability test for us before. Great guy. And he has entered in a lot of these.
Deni: Everyone, I think.
Brian: A lot of these sweepstakes, though, these giveaways do we do, particularly for prop streams, so I’m really glad that Tim won this one.
Deni: Drum roll.
Brian: Yeah. So, Tim, congratulations. Super excited to have you be the winner for this one.
Deni: So, we have another one of those that were.
Brian: We are going to be drawing another six-month sweepstake in what next month? Is that what we’re doing? I don’t remember.
Deni: It’s just part of that.
Brian: Yeah. Tara keeps track of these giveaways for us. So yeah, we do have a second six-month subscription to prop stream. We will be giving it away soon. In the meantime, Tim gets a free six-month account with prop stream. It’s an awesome platform. We use it ourselves. It’s our favorite platform for finding distressed properties. You know, foreclosures, tax liens, divorces, you know, people distressed sellers who really need to sell quickly and are going to potentially be open to a lowball offer. So right, Christina says, the next one is mine.
Deni: Well, put that out there, Christina, to get that to you.
Brian: And Christina is another regular around here. So, we hope, we hope that she comes away with one of these soon as well. All right. On that note, we’ll see you guys’ tomorrow at 1:00 p.m. Eastern, 10:00 a.m. Pacific for the live webinar. Seven creative financing ideas to fund your next deal with other people’s money. We’ll see you guys’ tomorrow. It’s going to be a really fun webinar. It’s going to be a faster webinar than usual. This one, I’ll probably be forty-five minutes an hour total. There was no sales pitch at all in this webinar. It’s just nothing but informative content, so Julian says, Thanks. Thank you, guys. We will. We’ll see you guys’ tomorrow at 1:00 p.m. Eastern.
Deni: Absolutely. Have a great rest of your Tuesday. Bye bye.