How to Finance a Newly Formed Limited Liability Corporation in Real Estate
It's one thing to set up a limited liability company to establish a real estate business. It's quite another to fund the business. You do have options, but not as many as you might think. For example, banks won't finance investment real estate with less than 20 percent down, and sometimes they want 25 percent down. If you think you're going to start small by buying a low-cost property that is less than $50,000 so that you can come up with the down-payment, the high-cost loan law will get in your way. Banks no longer want to make mortgages under $50,000, so you'll have to pay cash.
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Instructions
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Set up a checking account for your LLC, but be aware that because your company is new, a lender may prefer to lend the money to you, not to the company. You can then put the deed in the name of your LLC, make regular deposits to the account and pay business-related bills out of the account. This will help establish credit for your business so that you will be able to get more money when your business needs it.
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Discuss your plans with a loan officer. Bank underwriting rules change all the time, so a discussion about down payments, loans for your business and business checking accounts will prove fruitful when you seek out a business loan.
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Come up with cash. Minimally, you'll need a 20 percent down payment and closing costs for each property, unless you pay all cash. The mortgage bank may also require that you have banked cash reserves to cover expenses for several months. If you don't have cash, you can borrow from friends and relatives to cover a down payment, closing costs and reserves. Bank it so that you can get a mortgage. A private investor may also lend you cash; ask your accountant for a referral. Be aware that the bank will probably require seasoning; that is, the money must have been sitting in your account for 30 to 90 days.
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If necessary, use a home equity line of credit. If you have equity in your house (or another business), a bank may give you a line of credit based upon your equity. You will probably be able to borrow only up to 80 percent of the value of your house, less what you owe on it. So if the house is worth $200,000, but you owe $100,000 on it, the line of credit will be $60,000 because your mortgage debt plus $60,000 equals 80 percent of the value. The lender will give you a checkbook. You can write out a check for a low-priced property and skip the mortgage and most of the closing costs, but you are tying up valuable capital. Or you can use less of your equity and take out a mortgage. The bank that gives you the home equity line of credit will have a lien on your house.
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If all else fails, use a hard-money lender. These are private lenders who will lend you enough to cover your start-up costs with each property. Their interest rates are extremely high. First, get pre-approved by a regular mortgage bank even though you don't have a down payment. Buy the property with hard money, make repairs or rehab the property so that it is worth more than you paid for it, including at least 20 percent equity, then refinance with a bank. Many hard money lenders want you to "have some skin in the game"; that is, cash of your own. Hard-money lenders will foreclose on you if you can't make the payments. They are also unregulated, so buyer beware. Hard money is a last resort.
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Tips & Warnings
Talk to more than one loan officer to find out what you need to do to borrow. Always check again with your chosen lender if you are negotiating a deal; if there are underwriting changes, you may need more or less cash than you thought.
Be careful about listening to real estate gurus. They make real estate investing sound easy. It's not. Mostly, they are trying to sell you their books or their tapes or their systems. Instead, get a real estate buyer's agent who knows your market and knows real-world real estate investing techniques.
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