What Is An Investment Property Loan
An investment loan is for a single-family, townhome, condo, or multi-unit property that has been purchased with the intention of earning a return on the investment, either through rental income, future resale or both.
For those interested in buying an investment property, PennyMac offers loans to fit unique investor needs. As an option, you may be able to use your current home equity to finance buying an additional property. Give us a call to see what your options are or apply online.
Can I Buy A House Under An Llc And Then Rent It To Myself
You can buy the home under an LLC and rent it back to yourself. However, you may end up with a larger tax problem than if you just purchased the home as a sole individual. You will create ghost income for your LLC which will need to be offset by expenses. Over time, the benefit will be negated.
In addition, if you are taking business related tax deductions against your primary residence, you will likely reduce the amount of tax free capital gains on the property.
Owners Have More Protection In The Event Of A Lawsuit
If you own your residence in your name , someone whos injured on your property can sue you directly.
While homeowners insurance will cover the payments on a successful lawsuit up to a certain point, your other assetsincluding your savings, investments, and home equitycould be garnished to pay the rest of the damages.
However, if you own your home in an LLC, then the lawsuit can only name the LLC, and the only assets that can be used to pay off the suit are those assets held in the LLC
In addition, investors commonly use an LLC to purchase properties they intend to rent to tenants because of the liability protection offered by the structure. When you own your property as an LLC you pay your property taxes through the LLC and can even funnel other costs of homeownership through the LLC.
Keep in mind that establishing an LLC will impact your property taxes and future capital gains taxes. The impact varies from state to state, but in most states youll need to pay an annual-report filing fee in addition to your property taxes. Youll also need to pay legal fees to set up an LLC, which can be expensive depending on the structure of your LLC.
If youre considering buying a home with an LLC, its important to consult an attorney and a tax advisor with experience in your state. You need expert advice to understand the implications of buying property under this type of ownership.
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What Is An Llc
A limited liability company refers to a specific business structure. The main reason a business owner chooses to organize their business as an LLC involves avoiding personal liability as a result of the businesss activities.
Members, which can include individuals, corporations, other LLCs and foreign entities, can own an LLC. Most states also permit single owners to own an LLC. Take a look at the laws in the state where your property is located to understand your state’s specific LLC laws.
Liability For Defaults On Loans Under Llcs
Heres a question that too few new real estate investors ask:
If I default on the rental property LLC mortgage, can the lender come after me personally?
In most cases, the answer is yes.
When you borrow a mortgage for an LLC-owned rental property, the lender typically requires you to sign a personal guarantee. The document says that even though the LLC is the borrower on the loan, you personally guarantee the payments, and therefore become personally liable for them.
So, if you default, the lender can come after you personally.
In practice, personal liability looks like this: You default on the rental property LLC mortgage, and the lender forecloses. If the property fails to bring enough at foreclosure auction to cover your balance, the lender then files for a judgment against you personally.
That judgment often then attaches to your house and car, and the lender can even garnish your wages if they like. Its ugly.
The moral of the story? Dont think youre off the hook for the loan if you default, just because the loan is under an LLC and not your personal name.
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How To Obtain Real Estate Investment Financing
One of the biggest misconceptions of real estate investing is that you need to have a lot of money to get started, which isnt true. However, the secret that many professionals dont understand is that many different real estate financing options are available to fund every investment. Understanding the financing aspect is imperative because the method in which a specific deal is funded can greatly impact its outcome.
As an investor, there are a few different ways to go about financing real estate investments. Each one will have its own set of pros and cons, and your financing approach will depend on the property and the situation. Beginner investors need to remember that not all real estate investment financing options are created equal. What works for someone else may not necessarily work for you, but the trick is understanding which real estate financing option will compliment your business strategy. By taking the time to research the various real estate financing options out there, new investors are sure to realize how accessible investing can be. Broadening ones toolkit of real estate investment financing options is simply a matter of being knowledgeable about what strategies exist, as well as proper ways to leverage them. Keep in mind that all investors have faced the financing hurdle at some point in their career when in doubt, there is nothing wrong with tapping into your investor network and ask for advice.
Best Conventional Financing: Wells Fargo Bank
Wells Fargo Bank
Headquartered in San Francisco, California, with locations throughout the U.S., Wells Fargo Bank has been in business since 1852 and is a well-known national bank that offers a full suite of banking products, including investment property loans.
We chose Wells Fargo for best conventional financing because youll pay a competitive rate, with the APRs on Wells Fargos top mortgage loan products ranging from just 2% to 3.125% as of this writing, and you can evaluate its lending terms online without providing personal information. Note that what youll pay will depend on various factors, such as your creditworthiness, loan terms, property type, location, etc.
If you choose Wells Fargo, be aware that it is not rated by the BBB and has a low 1.08-star customer review average with that organization. Additionally, Wells Fargo has a low 1.3-star average with Trustpilot. However, the bank has been in business for a long time.
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Commercial Real Estate Interest Rates & Fees
Differing from residential loans, the interest rates on commercial real estate loans are generally higher. Several fees attribute to the overall cost of commercial real estate loans, including appraisal, legal, application, origination, and survey fees. While some of these fees apply annually, others must be paid upfront even before the loan is approved. For example, a commercial loan for a rental property may have a one-time loan origination fee of 1% and a 0.25% annual fee up until the loan is fully paid. This means if you have a loan for $1 million, it might require a loan origination fee of $10,000 paid upfront and an annual fee of $2,500 with additional interest. Be sure to check interest rates regularly as they will fluctuate and vary.
Llcs Allow Owners To Use Llc Debt To Reduce Taxes
Most real estate investments are highly leveraged. Real estate investors tend to use the other peoples money principle to maximize returns on their own investments. Although a small minority of real estate investors may finance deals with cash, most real estate investors look to banks, investment partners, or private lenders to finance their deals.
When an LLC borrows moneyfor example, to finance development coststhe owners basis in her LLC interest is increased by the owners share of the debt.12 This basis increase for entity-level debt has two important benefits to the owner:
- Higher Basis Allows Loss Deduction. An LLC member cannot deduct LLC losses in excess of his or her basis in the LLC.13 Having a higher basis in the LLC gives the owner the ability to use the LLCs losses to offset taxable income.
- Higher Basis Lowers Taxable Income. If an owner receives a distribution of cash from the LLC in excess of the owners basis in the LLC, the owner must recognize taxable gain on the distribution.14 Having a higher basis in the LLC allows the owner to reduce the taxable gain on a distribution.
The ability to increase an owners basis for entity-level debt gives LLCs an advantage over S corporations, which cannot include entity-level debt in the owners bases. This advantage allows LLC owners to reduce taxable income in ways that owners of S corporations cannot.
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How Much Do Investment Property Loans Cost
If you get a conventional investment property loan for a long-term rental property, the costs will often be slightly higher than primary residence mortgage rates. This is because there is more risk associated with rental properties since the loan repayment is based on the income generated from the property rather than your personal income. In addition to an APR, you might also pay an origination fee and be required to pay a prepayment penalty.
Investment property loans cost even more if you use a hard money lender since loan repayment is heavily dependent on the property. In the current low-interest-rate environment, starting rates above 4% to 5% for a 30-year conventional loan and 7% to 8% for a hard money loan are starting to get expensive. The Federal Reserve Bank of St. Louis keeps track of the average 30-year fixed-rate mortgage cost, which is a great place to go to see if your rate is competitive. Remember, the rate will depend on your qualifications and the propertys characteristics. This means borrowers with the best qualifications and most desirable properties will pay the lowest rates.
John Kilpatrick, Ph.D. and MAI with Greenfield Advisors, shared this additional information with us about the short-term cost of investment property loans:
Lenders Who Can Finance A House Under An Llc
This is a list of just a few lenders who are able to finance your home under an LLC. There other options in addition to these lenders and the guidelines are constantly changing. Each will have different credit score and down payment requirements. They may not be licensed in every state and you may also find that there are loan amount minimums.
Let us help you to figure out which lender is the best match based upon your personal scenario.
*These are just a few examples and the lenders who offer loans for purchasing a house under an LLC and they often change guidelines and offerings. We have a full list of lenders who can help.
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Commercial Real Estate Loan Prepayment
Often, a commercial real estate loan may also have prepayment restrictions. These restrictions are designed to preserve the lenders anticipated yield. Investors can settle the debt even before the commercial property investment loans maturity date. If they do so, there will likely be prepayment penalties. If you pay off a loan early, there are four primary types of exit penalties:
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Prepayment Penalty: This is the most common and basic prepayment penalty. This is calculated by multiplying the specified prepayment penalty by the current outstanding balance.
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Interest Guarantee: Even if the loan is paid off early, a specified amount of interest is entitled to the lender. As an example, a loan can have an interest rate of 10% guaranteed for 60 months and a 5% exit fee after that.
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Lockout: A borrower is unable to pay off a loan before a specified period of time.
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Defeasance: This is considered a substitution for collateral. The borrower exchanges new collateral, such as U.S. Treasure securities, for the original loan collateral instead of paying cash to the lender. While this can reduce fees, high penalties can be attached to this type of loan payment.
Can I Buy A House Under An Llc
You can buy a house under an LLC and finance it using mortgages offered by portfolio or investment focused mortgage lenders. The LLC will provide you with personal liability protections while also allowing you to enjoy some tax benefits as a business entity. You should seek advice from legal and accounting professionals to understand the pros and cons of buying a house under an LLC before making a final decision.
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How Is An Investment Llc Taxed
An LLC is called apass-through entity for taxation purposes. Limited liability companies are exempt from federal taxes, so any profits or losses earned by the company pass through the business and on to the members. Every year, each member is responsible for reporting their portion of gains or losses on their own federal tax return.
Generally, an investment LLC would have capital gains, losses, and dividends. Depending on how many members are in the LLC and their percentage of ownership, the gains, losses, and dividends will be distributed to each member. Each member is required to report these amounts on their tax return.
Common Ways To Invest Through Llcs
Many people use an LLC to invest in real estate. Operating an LLC protects them from potential liability, and it provides a framework for dividing the ownership in the property. Investing through an LLC this way works well when you have multiple investors in a single property or if you want to own multiple properties.
Another good use for investing through an LLC is for families who wish to pool together their money to invest alongside family members. The terms in the operating agreement outline how family members can benefit, and they may use the LLC to invest in any of the following:
- Real estate
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What Types Of Loan Options Are Available To Me
PennyMac offers a number of different loans for investment properties, from fixed rate loans to adjustable with a variety of term lengths. It is a good idea to first decide on a plan for your investment property. Do you want to renovate and sell quickly? Rent it for a passive income source? Something else?
What you do with the property will help determine what type of loan product may be suited to your needs. If your plan is to buy and rent the property, it may be best to choose a conventional mortgage.
If the intent is to use your property as a rental, you can calculate your expected income and then choose what term works best for you, from a 10-year to a 30-year. Just be sure that you can cover the payment if your property is vacant for a period of time. Talk to a loan officer to see what options are available for you.
Why Use An Investment Property Loan
The first and most important reason to seek financing is because you dont have enough cash for the full purchase price however, there can be other benefits to taking out a loan.
Borrowingor leverage, as the financial experts call itallows you to make a bigger investment with a smaller initial outlay. That means that any returns would be magnified, whether they come from rental income or rising real estate prices. A 10% increase in your propertys value becomes a 20% increase if youve only put half down. Thats the power of leverage.
Borrowing also increases risk, though. A drop in the value of your property will hit you harder if youve borrowed to buy it. If the economy slows down and vacancies rise, youll still be on the hook for loan payments and interest, as well as operating expenses, even though less money is coming in.
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Types Of Investment Properties
Residential: Rental homes are a popular way for investors to supplement their income. An investor who purchases a residential property and rents it out to tenants can collect monthly rents. These can be single-family homes, condominiums, apartments, townhomes, or other types of residential structures.
Commercial: Income-generating properties don’t always have to be residential. Some investorsespecially corporationspurchase commercial properties that are used specifically for business purposes. Maintenance and improvements to these properties can be higher, but these costs can be offset by bigger returns. That’s because the leases for these properties often command higher rents. These buildings may be commercially-owned apartment buildings or retail store locations.
Mixed-Use: A mixed-use property can be used simultaneously for both commercial and residential purposes. For instance, a building may have a retail storefront on the main floor such as a convenience store, bar, or restaurant, while the upper portion of the structure houses residential units.
How Long Does It Take To Get A Commercial Real Estate Loan
It typically takes three to six weeks for banks to approve a commercial real estate loan, although some claim that they can close it in as fast as one week, says Anton Konopliov, CEO and Founder of Palma Violets Loans. Banks will spend this time evaluating multiple aspects of your business before deciding whether to approve your loan or not. According to Konopliov, however, most commercial lenders will expect at least 30 percent downpayment before considering or approving a loan application. Therefore, its fair to assume loan times will vary.
You can obtain a bridge or hard money loan in a week or less, as long as you are willing to accept higher interest fees that are typically attached to these loans. Regardless of the loan you choose to pursue, be sure to research all aspects of your business and the loan terms you agree to before committing.
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