Which are better investments, Single Family Homes or Multifamily Apartments? Also, if I take out a mortgage in the name of my new LLC, how will they determine credit history without any on the LLC? In today’s Ask Bill episode, Bill answers these listener questions.
Firstly, thank you so much for your podcast. I listen to it twice a week every.
Question: I believe that it is wise to use a LLCs or S-Corps for assets protection when it comes to Real estate. But, how do I get the bank to finance this Real estate for a new business that has no track record, no credit and no record of income etc?
I am stumped.
Thank you for listening to our podcast and for your question.
To answer you, I’ll really have to break this down into two main questions:
First, regarding LLCs or S-Corps as being wise for your loan?
Now, first let me state very clearly up front, “I am not an attorney and that whatever I say should not be taken in any way, shape or form as legal advice. You really should speak to an attorney experienced in asset protection to get a legal opinion.” I will only share my own “non-legal” opinion.
First off, it’s ALWAYS better to put your properties in the name of an LLC instead of your personal name. This will protect your personal assets.
LLCs are more about asset protection. Asset protection is really more about protecting and separating you personally finances from your real estate holdings. If you own any real estate in your name and not an LLC, you are at risk.
I think what you may be referencing here is that if you get a loan under the name of a brand new corporate entity (such as an LLC or S-Corp), how does the bank lend to an entity that has no business track record, no credit history and no income?
Banks do this all the time — especially with commercial properties. In fact, my bank would not allow my personal name on the deed for my 22-unit in Indianapolis and told me I had to get an LLC. But believe me, the banks would not do that if it would have been a problem in the underwriting. Most banks don’t look so much at this as a “business line of credit loan” where your past history is critical.
Yes, this is a type of business loan (of sorts) in that it is a commercial real estate loan. They look at the real estate as a business. They will look at the managing members of the LLC or corporation, loan sponsors and will do their underwriting based on the business plan for the property.
They will look at the business plan to see if it is sound and it makes sense and that the funds necessary to cover mortgage payments will be. If it looks a little weak they may increase the down.
Even with a non-recourse loan, which will not use your personal assets to repay the loan if you default, they still will check your personal credit.
But they will also look at the signors of the loan! The person or persons who sign the loan documents must meets the net worth and liquidity requirements of the financial institution, which generally are that the signor or signors have net worth more than the price of the property and enough liquid funds to over 3-6-9 months of expenses, if necessary.
What matters is who signs the loan documents and that the signors meet the lending institution’s requirements.
Question: Which is the better real estate investment – buying many single family homes or a just few larger multifamily properties?
The only way to answer this is by saying, “what is ‘better’?” depends entirely on your personal financial goals and available resources.”
Multifamily is the way to generate much more cash faster!
Single family properties are good if you don’t have a slow and steady approach, don’t have a lot to spend up front and may, for example, have a goal of buying one rental home a year for the next 10 or 20 years.
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