Our no-income investment-property loans bring many benefits, including the chance to close a mortgage loan under an LLC. And as you’ll see, this can bring many benefits after the loan is delivered.
What is an LLC?
To give a perspective on this topic, let’s take a step back and review what an LLC is, and what it isn’t. An LLC, for “Limited Liability Corporation,” is a way to structure your business (in this case, a rental-property business) that protects your personal assets if your business is sued.
While your personal assets can still be at risk in certain situations, the ability to shield personal items like your car, home, or investment accounts is a major motivation for creating an LLC. It protects your personal assets from parties who hold a debt against your company, and provides a few different tax benefits related to the status of the company owners.
To create an LLC, owners have to file specific documents in their state, and they will likely need to pay filing fees, as well as comply with other regulations. Certain states also require franchise fees in some situations.
Advantages of Using an LLC When Closing a Loan
Note: San Diego Purchase Loans is not a legal expert nor a tax service. Always seek advice from qualified experts before making any decision related to the legal status of your company, your personal property, or your taxes.
Protects Your Personal Assets From Lawsuit
The #1 advantage, in fact the main reason that people use LLCs at all, is the fact that it protects your personal assets from lawsuits related to your business, and protects your business assets from lawsuits related to your personal life.
Say you own a rental property that is legally owned by you personally, not an LLC. What if one day a tenant trips on the front-porch steps and breaks his wrist, resulting in prolonged medical fees, surgeries, and equipment, as well as “emotional trauma” according to the tenant. If your rental property is under your own finances, the tenant could, if they win the lawsuit, go after your personal assets to recover enough to compensate for the medical bills. Likewise, if you were to hit someone with your personal car, resulting in a similar situation, they could possibly go after your rental property as part of financial compensation.
On the other hand, if the property is under an LLC, lawsuit complainants can only go after the assets that are in the LLC. So let’s go back to the tenant who broke his wrist; if the court determines that the property was, for whatever reason, the cause of the injury, the tenant could go after your rental property as part of compensation. However, they can’t go after your personal vehicle, primary residence, or personal financial accounts. Only property owned by the LLC would be eligible for seizure. Likewise, if you were to hit someone with your personal vehicle, the injured could not go after your LLC-owned rental property.
Pass-Through Taxation Benefit
Another benefit, although less common than asset protection, is the fact that you can use an LLC for a pass-through tax benefit. This simply means that the company (the LLC) avoids the double-taxation that is experienced by many corporations. The IRS treats LLCs as a sole proprietorship or a partnership, depending on the specifics of your business. If it is a sole proprietorship, it will be treated as a “disregarded entity,” which means the profits and losses “pass through” to the owner. Owners of a pass-through entity pay taxes on the income brought by the rental property, but the LLC itself does not have to pay taxes. Multi-member LLCs can enjoy pass-through status as well, but each member is required to file a specific IRS form when they complete income taxes.
By providing asset protection as well as pass-through status, LLCs are ideal for property owners. If you manage your properties through an LLC, the appreciation in value and the income from renters is not vulnerable to double-taxation.
A key benefit that comes from closing the loan under an LLC is financial privacy. In many situations, it’s best to keep information on your business finances as private as possible, and many property owners would prefer that people don’t know how much was paid for a specific property. If you purchase the home and file the loan under your own name, it’s very easy for someone to access public records to learn the purchase price. However, buying the home under a business makes it almost impossible for someone to find out where you live, or find out how much you paid.
People in LA know this is a common way for celebrities to keep the pubic from knowing their address. We might not have people knocking on the door for autographs, but it can be comforting to know that family and friends can’t access public records that display the sale price of your investment property. If you would prefer that friends, families, employees, bosses, and colleagues don’t know the price of your home, filing everything under an LLC is a good choice.
Moment of Truth: Using LLC Doesn’t Make Approval Easier
Before we finish, we should discuss one final issue related to LLCs and mortgage applications: using an LLC will not increase your chances of mortgage approval. Yes, it brings benefits after mortgage approval, but it will not bring advantages during the approval process.
In fact, using an LLC can make the process more difficult, as some lender prefer to not work with LLC entities. There could be additional fees and interest rates, and loan terms could be different, depending on the details of the loan and the lender.
For this reason, we can’t recommend using an LLC strictly for increasing the chances of approval. But this doesn’t take away the fact that you can still benefit from using an LLC when closing a loan.
Learn More About Closing Your Mortgage Loan on an LLC
Using your LLC can be a great way to structure your rental-property business. We are proud to work with property owners working through LLCs, so contact us today for more information on available investment-property financing.
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