Buying Real Estate in a LLC – What you need to know in order to close

Buying real estate in a llc

Would you like to purchase your next single-family rental in a Limited Liability Company?  The ability to close in an LLC will depend on how you are putting the deal together.   Closing in an LLC comes down to how are you paying for the property.  If cash it should be easy provided everything is set up properly; however if you are using financing then you need to know your lender i.e.,, what type of loan are you receiving.  Here are some general guidelines for purchasing single-family homes in an LLC.

Buying for cash

When buying for cash you can set the terms for closing as to how the title will be taken.  Typically, you will set up an LLC in the state where the property is located and fund the purchase either individually or through the LLC.  Keep in mind some title companies may require a certificate of good standing for your LLC, so care should be taken to inquire well before closing as this certificate may take several weeks to obtain from the secretary of state of organization.

Using financing with a traditional lender (Freddie and Fannie Loans)

Working with a traditional lender will always limit closing to your personal name.  These types of loans must conform to certain standards (hence the death by toothpicks with all of the document requests) which is why you can not close in an LLC.  These loans require an individual be the purchaser because the property is less than 5 units thus, making it a residential loan.  After you close, then consider transferring the real estate into a land trust or LLC for asset protection.  Keep in mind there is “due on sale” clause language in your loan documents and before transferring you should discuss the ramifications with an attorney.

Financing the home purchase with a community lender (portfolio loan)

Community lenders are great to establish a working relationship with because many do not write Freddie/Fannie loans, so their lending standards are different.  A community is a local bank that works primarily with the community it serves.  These lenders typically hold and service the loan (referred to as a portfolio loan) rather than securitize it and sell it off to wall street like the traditional lender.  When working with a community lender you can typically purchase your single-family home directly in an LLC.  Just like buying for cash make sure your LLC is set up several weeks in advance of closing (ideally you should make your offer in the name of the LLC) with an LLC bank account (typically this will be with the lender), and a certificate of good standing.

Financing with a private or hard money lender

Just like the community lender or buying for cash, these lenders will allow you to take title directly in the LLC.  You will still most likely need to sign a personal guarantee, but it is far better to take the title in the LLC than your own name.  Taking title in an LLC can provide you anonymity of ownership.  For example, if you are purchasing a home in Oregon you could set up a Wyoming LLC then establish an Oregon LLC wholly owned by the Wyoming LLC.  This type of structure will keep your name off of the Oregon Secretary of State’s website and is part of my privacy shield strategy I encourage real estate investors to adopt when setting up entities.

Institutional financing (asset-based loans)

When you move up into this arena you are now playing with the big boys.  Here you are typically buying a group of homes and you are working with a lender to provide a blanket loan over the entire acquisition. Many times, with this type of loan the lender will require you to set up a Delaware LLC then foreign file it in the state where the properties are located.    You will be able to close directly in the LLC and like the scenario where you are buying for cash be sure to obtain a certificate of good standing from Delaware when you create your LLC.  You will need this certificate to foreign file your LLC in another state and for the lender.  You should also set up a bank account for the LLC as soon as possible because many lenders will want a copy of a cancelled check.

As you can see there are different options when it comes to purchasing real estate with an LLC.  The best advice I can give is to speak to your lender sooner rather than later and find out their guidelines and what is required so you can be ready to execute at closing.

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