LLC Mortgage Guide

By PropertyClub Team
Feb 13th 2023
You may be thinking that only big-name real estate developers can use business entities to buy a property. But the reality is that anyone can do it. Here's what you need to know about getting a mortgage for an investment or LLC rental property, from setting the company up to getting approved.

Using Limited Liability Companies (or LLCs) is a common practice for real estate investors. Setting up a corporate entity like an LLC has tax benefits, and they also shield the owner from personal responsibility in the event of a lawsuit. You may be surprised to learn that you can set up separate LLCs for individual properties that you can use to accept rent payments and even get a mortgage. 

hash-markCan an LLC Get a Mortgage?

Yes, an LLC can get a mortgage, and the process is relatively simple. The registration process is straightforward in most states, but the exact steps and fees for an LLC to get a mortgage vary from state to state. In most cases, you can get a mortgage for an LLC in a few days.

Real estate investors use LLCs when conducting business because there are certain legal and tax advantages to doing so. Creating an LLC shields the company owner from personal liability if something happens on a property they own. Say, for example, you own a property someone is injured while doing some construction. Using an LLC to own the property and get a mortgage will protect any of your assets if the court rules in the plaintiff’s favor. Any assets owned by the company may be impacted (for example, the property itself). But any personal assets like your own home or vehicle can’t be touched.

There are also tax benefits to filing an LLC. LLCs are not subject to federal income tax. LLCs are considered a “pass-through” business by the IRS, and therefore you will only be taxed once on your tax return for owning an LLC – opposed to being taxed twice, once at a corporate level and once at a personal level.

hash-markHow To Get a Mortgage For an LLC Investment Property

Although getting a mortgage for an LLC rental property or investment property is not rocket science, it still requires diligence and a fair amount of paperwork if you want to be approved. There are no credit or income requirements necessary to register an LLC, so the lender will still need to verify your financial information before approving the loan.

Each lender and state will have unique requirements when it comes to getting a mortgage using an LLC, but most will require you to provide the articles of incorporation, operating agreement, and EIN number in addition to both business and personal financial information and documents. 

hash-markWhat Do You Need to Get a Mortgage for an LLC Property?

  • Articles of Incorporation
  • Operating Agreement
  • Employee Identification Number
  • Business Financial Information
  • Personal Financial Information

1. Articles of Incorporation

First of all, you need proof that you’ve correctly registered a business entity with the state and paid the appropriate fees. This can be proven by providing your articles of incorporation, a document you will be given by the state department when you file your business.

2. Operating Agreement

An operating agreement is a document that outlines a business’s operating procedure, including rules, regulations, and provisions. Templates of a proper operating agreement for small businesses can be found online.  

3. Employee Identification Number

Before you can apply for a mortgage, you must file with the IRS and receive an EIN number. Even if you don’t have employees, it’s crucial to prove that you’ve taken the proper steps to set up your business correctly.

4. Business Financial Information

A mortgage lender will likely require you to provide financial information about your business, including past year tax returns if you have any and your business bank account information. They may also ask you to provide profit and loss statements and information about other assets owned by the business.

5. Personal Financial Information

Even though you are applying for the mortgage for your LLC and not in your name, you will still be required to provide personal financial documents, like bank statements and tax returns. Especially if it’s a new company and hasn’t established solid business credit. Your finances won’t be impacted if your company is subject to a lawsuit. But the bank still needs to verify that you have the proper financial credentials to take out a loan.

hash-markLLC Mortgage Pros

There are many benefits to using an LLC to apply for a mortgage. LLCs are perfect for a business like real estate investing because they are not complex to set up, but they provide benefits that are important to investors. Here are the significant benefits of setting up an LLC to apply for a mortgage.

1. Build Your Business Credit

Having an LLC allows you to build business credit that is separate from your personal credit. To get a business credit card or bank account, you’ll need an EIN, which requires you to establish a business entity. If you’re serious about your real estate business, it’s vital to establish business credit so you can separate your business activity from personal finances and get access to more funding opportunities.

2. Protect Your Assets

Setting up an LLC not only protects your assets in the event of a lawsuit but also insulates your properties from one another. If you own more than one property, you can always set up separate LLCs for each house so that they are all protected from one another. So, if an incident occurs at one rental property, no one can put a lien on your other properties or force you to liquidate them.

3. Tax Advantages

LLCs allow the owner the benefit of pass-through taxation, which means profit and losses are reported on their personal tax return, not on a corporate tax return, saving you from being taxed twice. Having an LLC also allows you to separate your business and personal finances. It also makes it easier to deduct certain expenses related to your property from your taxes at the end of the year. 

Setting up an LLC for your rental property is a smart move if you’re looking to create a business and not just collect a bit of passive income. The benefits far outweigh the work necessary to do so, and any investor looking to build a solid portfolio should consider it.  

hash-markLLC Mortgage Cons

1. Stricter Requirements

One of the biggest disadvantages of using an LLC to get a mortgage is that loan requirements are much stricter. Most lenders will require a higher down payment to approve your mortgage. You'll also have to submit a lot more paperwork compared to applying for a traditional mortgage. 

2. Higher Expenses

There are also numerous additional expenses you'll have to pay to get a mortgage for an LLC. To start, it will cost you between $1,000 - $3,000 to set up an LLC in most states. On top of that, you'll LLC mortgages typically have higher interest rates than traditional loans. This can add thousands of dollars in annual expenses. 

hash-markLLC Mortgage Bottom Line

Getting a mortgage as an LLC can be a great idea if you want the added protection an LLC offers, but it's important to remember that it will take time and money. LLC mortgage loan requirements are stricter than traditional mortgages, meaning it will be harder to qualify and you'll need to submit more paperwork. However, if you use an LLC for your rental property you'll be able to better protect your investment and enjoy numerous tax benefits.