How To Finance Real Estate Investment Property: An Interview with Senior Loan Officer Joseph Scorese
Many investors have questions about what kind of financing to use when investing in property. Should they form an LLC? Can the LLC borrow money? What happens when they use personal financing but want to move the property into an LLC?
Many people don't know that the kind of financing they choose has a big impact on these issues. It's important to be careful about the choice of financing.
Here's a snippet of what to do if you want to finance a property and put it in an LLC:
Sarah Holmes: Okay. So we get a lot of questions from people about the loans and when people come to me often they've already built up a portfolio of properties, maybe got five or six properties, and they have them all in their own name, and usually they do that because they've gotten one of those low interest rates that they qualified for, based on their personal credit. But from the liability side, on my end, I don't like to see that, because now they're exposed, their name's on the deed, so they always come in asking, "Well, how can I put in an LLC?" And most of the time I can't move that property into an LLC because it's going to violate their mortgage clause. So they try to think of a way, going forward, as to what kind of financing they're going to use.
Sarah Holmes: So if someone wants to put the property in an LLC, is that a different kind of financing than they've probably been using with the low interest in their own name.
Joe Scorese: Well, good question, because if the borrower has stabilized rents, they have decent credit scores, maybe around 680 or plus, like 700 score. We can typically just refinance their property out of their name into an LLC. Now, the catch would be, there's a couple of catches. One would be that there's transfer tax, depending on what county you're in. So that you're going through a full refinance to take it out the personal name, and put it in the name of the LLC. It also has to make sense bank-ability wise because you don't want to put someone in a bad debt income circumstance. So you've got to evaluate that.
Joe Scorese: But what one good thing is, they can treat that property now as a business, and issue tax returns and issue a K1 where that property and that mortgage is not reporting to their credit personally. Okay? So you could eliminate a lot of debt to income in the personal name, after you built up a decent portfolio in your name, and start moving them over into the portfolio loan, because, under your personal name, you're only allowed to have a personal home mortgage plus nine other mortgages. One can be a secondary, and then eight investment properties. So you kind of gets them back to ground zero to start over again if they want to buy more properties in their personal name.
Joe Scorese: So it gives a lot of leeway to an investor. They have options at that point.
Sarah Holmes: Okay. But what if they have multiple properties and we talk about the liability, and we decide that, for best protection purposes, they might need multiple LLCs. How complicated does that get on the financing side?
Joe Scorese: It would get more complicated on their side with a CPA, if they don't understand how to issue K1s, and personal returns. I mean business returns. I'm fine with it if they want to use a special purpose LLC for each property.
For more information on Joe, you can find him on Linkedin as Joseph E. Scorese. On Facebook, Joseph Scorese. And Firstrust.com you could look up loan officers, under the Firstrust.com and it's one 'T' in the middle, FirsTrust.com.
For help in setting up your investment properties as a business, reach out to our office anytime or call.
Sarah E. Holmes is a Philadelphia business attorney and strategist that helps start ups and established businesses looking to expand, protect their assets and increase their profits in an approachable, down-to-earth way. When you're looking for a business lawyer in Philadelphia, the Main Line or New Jersey, we can help.