Author: Scott Bialek, Co-Founder of Hurst Lending
Date: January 15, 2024
Investing in real estate is like dancing on a financial tightrope – thrilling, but fraught with risks. As an investor, your top priority is to maximize your gains while minimizing potential liabilities. Enter the siren call of the LLC Investor Loan Program, promising legal protection and peace of mind for your real estate ventures. However, before you dive headfirst into the deep end of LLC loans, let’s take a closer look at a more cost-effective and flexible alternative – traditional loans in your name.
Buckle up, folks, because we’re about to make a persuasive case for why you should consider traditional loans for your real estate investments, sprinkled with a dash of entertainment along the way.
The Drama of Real Estate Investing
Investing in real estate is not for the faint-hearted. It’s a thrilling rollercoaster ride where fortunes can be made and lost in the blink of an eye. Picture yourself standing at the precipice of a real estate venture, the wind in your hair, the possibilities endless. But before you take that leap, you need to make a crucial decision: how to protect yourself from potential liabilities.
The Allure of LLC Loans
Enter the LLC Investor Loan Program, the superhero of real estate investors. It promises the legal armor of an LLC, allowing you to focus on your investment strategy without losing sleep over liability concerns. It’s like having your very own guardian angel for your real estate endeavors.
But here’s the twist in the tale – LLC loans are more like the “commercial” loans of the real estate world. They come with higher interest rates, hefty down payments, and a price tag that could make even Scrooge McDuck wince. The catch? These loans can’t be sold to Freddie Mac or Fannie Mae, which means you’re stuck with those high interest rates instead of getting lower-rate long-term fixed-rate mortgage. LLC loan lenders also require investors to personally guarantee these loans, so your personal assets are still at risk.
The Illusion of Invincibility
In addition to the higher rates, LLC’s don’t always provide the ironclad legal protection that some real estate investors assume. When considering forming an LLC for your real estate investments, it seems like a stroke of genius. The legal protection, the peace of mind – it’s an investor’s dream come true. But here’s the plot twist: while an LLC can indeed provide a shield against certain liabilities, it’s not a one-size-fits-all solution. Your protection might crumble if you neglect the intricate web of legal requirements that come with it.
The Price of Protection: Legal Compliance
Owning an LLC is akin to having a powerful amulet, but only if you wear it correctly. Picture this: a long list of tasks, each one crucial to maintaining the mystical barrier of liability protection. These include filing annual reports, keeping meticulous corporate records, documenting board minutes, and, lest we forget, paying those annual corporate or franchise taxes. The devil, as they say, is in the details.
The Perils of Neglect
Now, imagine you’re juggling the myriad responsibilities of real estate investment – managing properties, finding tenants, and dealing with the occasional maintenance emergency. Amid this whirlwind, it’s alarmingly easy to forget or overlook the intricate requirements that come with your LLC.
The consequences of such forgetfulness can be dire. Failure to follow these rules and regulations could cause your LLC’s protective cloak to unravel, leaving your personal assets exposed. It’s like having the perfect suit of armor but leaving the visor open during battle – you’re not as protected as you think.
The Silver Lining: A Lesson in Strategy
So, what’s the takeaway from this cautionary tale? While the LLC can offer significant benefits, it’s not a magical panacea. To maintain its protective powers, you must be diligent, organized, and committed to complying with the intricate rules of corporate governance and you also must be willing to accept a higher rate commercial purpose loan.
Here’s where the twist in the story comes in – by opting for a traditional loan in your name with alternate legal protections, you can bypass this intricate dance of compliance all while obtaining lower-rate financing. You’re not burdened with the annual reports, corporate records, and tax payments. Instead, you can focus your energy on what truly matters – your real estate investments.
The Plot Thickens – Traditional Loans in Your Name
Now, before you resign yourself to the fate of expensive LLC loans and the complexity of maintaining a LLC, consider this: there are alternative methods that offer you lower interest rates while still providing adequate protection. Allow us to introduce you to four captivating options:
- Conventional Loan + Insurance: Purchase the property in your name and bolster your defense with a comprehensive umbrella insurance policy. It’s like having a trusty sidekick by your side, ready to swoop in and save the day when needed.
- Conventional Loan + Transfer to LLC in Future: Take the plunge with a conventional loan in your name and, down the road, transfer the property to your LLC. It’s a bit like a magician’s sleight of hand – legal and seamless. See the addendum to this blog post below with details on how to transfer a property into an LLC while not triggering the due on sale clause in your traditional mortgage.
- Conventional Loan + Trust: Step into the world of living trusts, where you can buy and finance your property with a low-rate conventional loan. Our legal wizards will help you navigate this enchanting realm at no extra cost.
Unveiling the Real Magic – Combining Options
The true magic lies in combining these options to create layers of protection. Imagine a scenario where you have a low-rate conventional loan in your name, the right legal entity (perhaps a trust), extended liability coverage from your primary residence, and an umbrella policy for that extra cushion of protection. It’s like having a star-studded ensemble cast in your real estate protection movie.
The Hurst Lending Advantage
Let’s take a page from the Hurst Lending playbook. The owners of Hurst Lending, the real estate aficionados themselves, understand the importance of layered protection. They sprinkle a bit of this, a bit of that – a low-rate conventional loan, the correct legal entity, an extended liability component from the primary residence, and the pièce de résistance, an umbrella policy. If it’s good enough for the pros, it’s worth considering for your own real estate investments.
The Final Act: A Persuasive Plea
Now, dear investor, as the curtains draw to a close on this theatrical performance, we implore you to consider traditional loans in your personal name before leaping into the LLC loan arena. The allure of legal protection is strong, but to obtain lower rate loans with alterative types of legal protection can provide as much or even more protection than an LLC.
Choose the path of traditional loans, craftily combined with other protective layers, to navigate the intricate dance of real estate investing.
Remember, the world of real estate is a stage, and you’re the star of your own show. Don’t let the fear of liability hold you back. Be the hero of your investment dreams, armed with knowledge and a solid financial strategy.
So, what will it be – a traditional loan with a touch of magic, or the more expensive full recourse LLC loan? The choice is yours, and the stage is set for your real estate success.
Consider the path of traditional loans, combined with layers of protection like insurance, trusts, and umbrella policies. It’s a strategy that allows you to navigate the complexities of real estate investing without the burdensome weight of LLC compliance.
In the end, the choice is yours. Will you be the master of your LLC’s fate, diligently following each rule, or will you opt for a more streamlined approach, where the focus is on your investments and not on the intricacies of corporate governance? Contact Hurst Lending if you would like more information about how we can help you with a low downpayment conventional or LLC loan.
For more details on our LLC Loans please visit us at: https://hurstlending.com/investor-loans/llc-loans/
Addendum: How to Transfer Property to Your LLC After Closing
What if we told you there’s a way to enjoy the benefits of a traditional loan in your name and still move your property into an LLC without triggering the dreaded due-on-sale clause? In 2016, Fannie Mae and Freddie Mac changed their underwriting guidelines, and it is now possible to purchase a property using a conventional loan (closing in your personal name) and after closing to transfer the property into your LLC. This might be the golden key to safeguarding your assets if you feel the need to have an LLC for your investment property.
The Plot Twist: Transferring Property to an LLC
Here is the twist in the tale: while our competitive rates are available for loans in your personal name, you are not locked into that arrangement forever. As of 2016, you have the flexibility to move your property into a single-purpose LLC after the closing, all while maintaining the terms of your traditional loan. It is like having your cake and eating it too!
But how can this be possible? Enter Fannie Mae’s/Freddie Mac’s guidance on allowable exemptions to the due-on-sale clause. You can find the detailed information you need in this treasure trove of knowledge: Fannie Mae’s Allowable Exemptions Due to the Type of Transfer and Freddy Mac’s Exceptions Due to the Type of Transfer.
The LLC and the Due-On-Sale Clause
Now, let’s delve into the magic of this exemption. The due-on-sale clause is a provision in most mortgage agreements that allows the lender to demand full repayment of the loan if the property is transferred to a new owner. It is like a guardian dragon guarding the treasure chest of your loan agreement.
However, Fannie Mae and Freddy Mac provide a loophole – certain limited transfers into an LLC after closing can be exempted from this clause. This means that you can move your property into an LLC without triggering a demand for immediate repayment from your lender.
The Freedom to Choose
This newfound knowledge gives you the freedom to choose the path that best suits your real estate ambitions. You can start with a traditional loan in your name, enjoying the lower interest rates and flexible terms. Then, when the time is right, you can seamlessly transfer your property into an LLC for added protection.
It is like having the best of both worlds – the financial advantage of a traditional loan and the asset protection of an LLC. You no longer need to be torn between the two; you can now craft your real estate strategy with finesse.
The Thrilling Conclusion
In the thrilling world of real estate investing, where every decision can make or break your success, knowledge is your greatest ally. Armed with the understanding of allowable exemptions to the due-on-sale clause, you can confidently navigate the complex terrain of property ownership and protection.
So, dear investor, the stage is set for your real estate triumph. With the guidance of Fannie Mae and the flexibility of a traditional loan, you can script your own adventure – one that combines the advantages of personal ownership with the protection of an LLC. Contact Hurst Lending if you would like more information about how we can help you with a low downpayment conventional or LLC loan.
For more details on our LLC Loans please visit us at: https://hurstlending.com/investor-loans/llc-loans/
About Scott Bialek
In addition to being one of the founders of Hurst Lending, I am also an attorney and real estate investor. I have a portfolio of residential and commercial properties. I have been helping our customers buy, sell, and refinance their homes since 2000. Our suite of industry-leading offers helps solve many common situations faced by homeowners and real estate investors. Have you ever experienced the frustration of trying to buy before you sell; Losing your dream home in a bidding war; Trying to obtain a No-Seasoning Cash-out loan; Being unable to get a mortgage because your new or old house needs modest repairs; or simply because you prefer using our funds to close quickly without having to liquidate other investments? Our Industry-leading suite of short-term loans solves these issues. We also offer a suite of real estate investor loan products and a full suite of conventional, VA, FHA, construction and traditional home loans.
Please feel free to contact me directly if I can help provide a loan for your next purchase or refinance, or even if you just want advice on how to get started or expand your real estate investing activities.
Scott E. Bialek
Co-Founder, Hurst Lending
*Disclaimer: This article is intended for informational purposes only and does not constitute legal, financial, or professional advice. Consult with a licensed professional before making any financial or real estate decisions.