How Real Estate Investors Can Refinance Rental Property Held in an LLC
I'm going to tell you how real estate investors can refinance their rental properties with a competitive rate and term while holding title in an LLC.
Today I'm going to share a resource not many people in the real estate investment community are talking about.
But before we dig in, I want to be clear about who this video is and isn't for because I don't want to waste your time:
WHO THIS VIDEO IS FOR
This video is for the people that are struggling to refinance a rental property that's either already owned in an LLC or ready to be transferred into an LLC upon refinance. Furthermore, this is also only for investors that own a specific type of property. We're talking about: single-family residences, condos, townhomes, 2-4 unit multifamily properties, and planned unit developments.
WHO THIS VIDEO IS NOT FOR
This video is NOT for you if you are trying to refinance a property in a rural area, a piece of land, anything sitting on more than 10 acres, mixed-use buildings, or anything 5 units or more.
If you're anything like me, you've watched a bunch of videos, read plenty of books, and listened to hours and hours of podcasts that talk about the BRRRR strategy when it comes to real estate investing.
The concept is simple in theory: buy a property below market value, renovate it to force equity, rent it out to a 5-star tenant, refinance into long-term fixed-rate debt, and then repeat the process as many times as possible!
But simple in theory doesn't necessarily translate to simple in practice.
Based on what I'm seeing on forums like Reddit and BiggerPockets, one of the biggest hurdles people have before even buying a property is deciding between buying a property in their personal name or in an LLC.
For what it's worth, I buy all my investment properties in an LLC. I don't want to get into all of the reasons why in this video because that's not why we're here today. But if you're curious, I made another video detailing why I choose the LLC route. You can click the card above to watch that video.
Once you buy the property, renovations are pretty straight forward assuming you're doing the work yourself or have a really good contractor.
The biggest hurdle for me came when I tried to refinance my first investment property. Finding a decent lender took just as long as renovating the property itself.
? I was like Goldilocks interviewing a different lender every single week.
Hard Money Lenders
Most of the hard money lenders I spoke with were offering rates that were just too high.
They all advertise competitive rates in the high 4's or mid 5's on their websites, but their term sheets came in with interest rates in the 6's or 7s after I applied. Classic bait and switch. Don't get me wrong - hard money lenders are great for acquiring property, but not so great when it comes to refinancing property.
The regional banks I spoke with had documentation requirements that were practically impossible to meet.
They wanted 2 years of tax returns. After I provided that, they wanted to see K-1's from all of the LLCs I'm a part of. After that, they wanted to see my paystubs, even though I was self-employed and took 1099 distribution checks. Even after meeting all of their requests they dragged their feet and ultimately decided they couldn't lend to me.
Credit unions are probably the most competitive lenders when it comes to interest rates on investment property. However, they typically offer loans with just 5-year payment terms and amortization schedules of 20 - 25 years. 5-year payment terms force you to payoff the loan, refinance, or sell the property within 5 years. But you have to wait until year 4 is complete to do anything without incurring costs because of the step-down prepayment penalties associated with these types of commercial loans. And obviously shortening the amortization schedule makes the monthly payment much higher than 30 year loans.
For example, a $100,000 loan at 4.5% over 30 years has a monthly principal and interest payment of $507. That same loan amortized over 20 years has a monthly payment of $633. That 25% increase in principal and interest payments can crush your cashflow.
Finally, the popular consumer retail banks like Chase, BofA, and Capital One don't even offer a loan product for smaller investment properties held in an LLC. These banks fully transitioned their focus into serving opposite ends of the spectrum. On one end, you have the individual needs as a consumer with high-margin products like credit cards and investment advisory services. On the other end, you have commercial loans being made in the 10s or 100s of millions of dollars to class A office space or large multifamily. They aren't really interested in serving the mom-and-pop investor.
After months of searching, I was at the end of my rope. I even considered selling my investment property out of frustration. My private money loan was coming due and I wasn't happy with any of my refinance options.
Until I found this DSCR lender that offered a loan product that was just right for my business.
To be clear, DSCR stands for Debt Service Coverage Ratio.
The DSCR lender I use puts more emphasis on the asset's ability to repay the loan than the individual borrower.
Here are a few things I really like about this loan program:
COMPETITIVE INTEREST RATES
First, their interest rates are great for borrowers with strong credit scores.
Based on your credit score and the LTV you are seeking, you can start with the minimum interest rate of 3.99%.
For borrowers with lower credit scores or looking for higher LTVs, your rate might start a bit higher.
Check out this loan commitment I received at 4% fixed for 30 years a few weeks ago. Image below
Unfortunately, my partners convinced me to sell this property so we won't be taking advantage of this amazing financing on this deal, but it's nice to know a lender that can provide terms like this on an investment property held in an LLC.
Second, the lender offers three ways for you to reduce your interest rate.
The first way to reduce your interest rate by a quarter-point is if your property meets a debt service coverage ratio of 1.5 or higher. They calculate DSCR as Rental Income / PITIA (principal, interest, taxes, insurance, and homeowner's association fees, if any).
The second way to reduce your interest rate is by electing a longer pre-payment penalty. Their standard prepayment penalty is 3 years, but choosing a 4-year prepayment penalty will save you another quarter-point.
Lastly, the third way to reduce your interest rate is by simply buying the rate down. Every 1 point paid to the lender will buy the interest rate down by half of a percent until you hit the minimum rate of 3.99%.
The third best part of this loan program is their low documentation requirement.
After running your credit score, they won't ask you for a single personal document. No tax returns, no paystubs, no letter from your company for proof of employment. Like I said before, instead of underwriting your ability to repay the loan as an individual, they are mainly concerned with the property's ability to pay back the loan. They will analyze market rents and order an appraisal to ensure there's enough equity in case of default.
Now, let's cover the downsides of this loan program.
First, they don't lend in the following 7 states: AK, ME, NY, ND, RI, SD, VT, and WV. I'm not sure why this is. If I had to guess, the lending laws in those states probably have more hoops to jump through for a DSCR lender.
10 LOANS UP TO $4M
Second, they have an upper limit on how much and how many times a person can borrow from them. They're only willing to make up to 10 loans or $4,000,000 in total loan amount per borrower. They don't care if you already own 10 properties or owe $4M to someone else, they're just not willing to lend out that much or that many times to any single borrower.
6 MO SEASONING REQUIREMENT
Third, they require 6 months of seasoning. So if you bought a property less than 6 months ago, be prepared to wait until the 6-month mark to actually close on a refi. This is a pretty standard requirement so it's not the end of the world.
Aside from these three limits, I have yet to find anything bad about this lender.
If you made it to the end of this video, you are probably in need of a DSCR lender that can refinance a property held in an LLC. But you're not willing to go with just anybody. You want competitive rates and terms as well as a low-documentation process that evaluates and prioritizes the strength of the asset over the strength of the individual borrower. You also want transparency of fees and control over your loan cost.
Click this link and fill out the form so we understand your specific needs. Someone from my team will reach out to help you refinance the property so you can move on to the last R: Repeat!