The Guide To Getting a Mortgage for an LLC Property

The PropertyClub Team
Oct 14th 2020
You may be thinking that only the 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 with for an LLC owned 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. 

Can You Get a Mortgage for an LLC Property?

The answer is yes, it’s a relatively simple process to get a mortgage for an LLC property. The registration process is straightforward in most states. The exact process and associate fees vary from state to state, but in most cases, you can get it done in an afternoon.

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. LLC’s are not subject to federal income tax. LLC’s 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.

How Do I Get an LLC?

If you’re a complete newbie you may want to consult an attorney or another seasoned real estate professional who understands the process and can guide you in the right direction. But be wary of overpriced attorneys who will charge you thousands of dollars just to file a document. If you don’t have someone in your direct network who can help you, search the internet for your state guidelines for filing an LLC and go from there. In most states, all you have to do is choose a unique business name, fill out some paperwork, and file it with the state department of licensing along with a fee.

You should also make sure to get an EIN from the IRS. An EIN is an employer identification number the IRS uses to tax companies. Even if you don’t have any employees or revenue yet, you should still make sure to register with the IRS. You will need it if you’re looking to get a mortgage, and registering with the IRS right away will help you avoid unnecessary delays or fines later on. Once you’ve created an LLC for your rental property, it’s time to compile the appropriate documents.

What Do You Need to Get a Mortgage for an LLC Property?

Although getting a mortgage for an LLC 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. Here are all the things you need to gather when applying for a mortgage using an LLC.

  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. An Operating Agreement: An operating agreement is a document that outlines a businesses’ 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. 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 if you are not applying for the mortgage 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.

Each lender and state will have unique requirements when it comes to getting a mortgage using an LLC. But these are the items most lenders will require.  

Benefits of Getting an LLC for a Mortgage Property

There are many benefits to using an LLC to apply for a mortgage. LLC’s 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 it 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: LLC’s 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.