If you own a limited liability corporation, you can use it to secure a loan that will allow you to buy a commercial property or rental investment. However, the lending process differs from that of a traditional mortgage loan. If you’re interested in applying for an LLC mortgage loan, you must first understand what these loans are and how you can be approved for one.
What Are LLC Mortgage Loans?
An LLC Mortgage Loan is a type of business loan that can give you the funds you need to purchase a property. These loans may not be offered by traditional lenders. They’re also different from personal loans. A personal loan is something that you would apply for with your own name. When you apply for an LLC mortgage loan, you must do so with your company’s name.
What Is an LLC?
A limited liability company is a commonly used business structure that can be started by one or multiple individuals. Many investors choose to create LLCs for their rental properties to limit personal liability and qualify for additional tax benefits. LLCs are considered pass-through entities, which means that any losses or profits are applied to each LLC member instead of the business. In this scenario, the individual’s tax rate determines how much they pay.
Pass-through Entity Benefits
As touched upon previously, any of the income or losses from your property will be passed through to the owners. You’ll pay taxes based on whatever individual tax bracket you’re in. In comparison, C corporations pay taxes through the business itself. The primary advantage of pass-through taxation is that double taxation can’t apply to your LLC. Without this structure, you would need to pay taxes at the personal and corporate levels.
Partnership Investing Opportunities
One of the more effective ways to invest in real estate is to split the costs with other investors. Partnership investing is made considerably easier with an LLC. You can allot different ownership percentages to each member based on the amount they invest or their overall responsibilities.
More Privacy
If you buy rental properties in your own name, vendors and tenants will likely know who you are. Investing in rental real estate through an LLC gives you a semblance of anonymity. If you hire a property management firm to manage the rental, you’ll be able to keep your privacy.
More Privacy
If you buy rental properties in your own name, vendors and tenants will likely know who you are. Investing in rental real estate through an LLC gives you a semblance of anonymity. If you hire a property management firm to manage the rental, you’ll be able to keep your privacy.
Keep Properties and Expenses Separate
Using an LLC mortgage loan to invest in rental real estate also allows you to keep your properties and expenses separate. For example, every property you place in an LLC is viewed as an individual business asset. A lawsuit that affects one property won’t impact the others.
You should be able to more effectively keep your personal and business expenses separate with an LLC. If the IRS ever audits your business, your personal expenses shouldn’t be looked at. LLCs have their own credit cards, debit accounts, and banks.
Qualifying for an LLC Loan
Before you apply for an LLC mortgage loan, take the following steps to bolster your approval chances.
Meet the Necessary Requirements
The guidelines for an LLC mortgage loan differ with each lender. The terms you receive from a traditional lender might not be the same as those of a private one. You may need to be in business for at least six months before you’re approved for a loan.
Lenders might also have minimum revenue requirements, which could be anywhere from $50,000 to $300,000. However, the type of LLC you operate can determine what revenue requirements you need to meet. It’s also a good idea to have a 670 or higher credit score. You may need to provide two to three years of bank statements and other financial documents when you apply.
In most cases, traditional banks have stricter requirements than private lenders. However, you could benefit from lower interest rates with a traditional lender.
Build Your Business Credit
If you don’t have a business credit score, lenders may only consider your personal credit history. However, your odds of approval could increase if you also maintain a high business credit score. If you discover that this score is too low, take steps to improve it. You can build business credit by:
- Making sure your business is registered in your state
- Obtaining an Employer Identification Number (EIN) from the IRS website
- Opening a business savings or checking account to make sure your personal and business finances are kept separate
- Applying for a business credit card to start making purchases that you can manage
Have a Comprehensive Business Plan
Lenders may ask you to provide a plan that shows your LLC can succeed and that you can repay the loan. If you’ve done calculations that tell you how the rental properties will perform, include them with your application. Keep in mind that not all lenders have this requirement.
When you own or manage an LLC, you can use an LLC mortgage loan to buy investment properties. While this type of loan comes with different requirements than traditional mortgages, you should be able to qualify if your LLC is in good standing. Before you apply for an LLC mortgage loan, compare interest rates and terms to ensure you make the right decision. Contact LoanPathLoans if you want to learn more about this real estate loan product.
