Great point. The commercial sector has non-recourse loans where the property is the only thing that matters when it comes to security for the loan.
If we think about this for a second the logic goes as follows.
The property is larger. It has a clear track record for producing income or for some reason can be assumed that it will produce income (new construction in a high demand area). The lender knows the individual behind the transaction does not have the ability to make the loan out of their own pocket.
So, if the income from the property is really secure then the lender is going to be pretty confident that the property can cover the debt up to some limit. The Debt to Income and other coverage rations are what will matter mostly.
The above is a high level description and not meant to be completely correct in all situations. Just a way to highlight that when an asset or a business entity (LLC or corporation) has income that is very steady it can obtain financing.
Many have heard that it takes a while before a lender will lend in the name of the LLC when buying RE. Commonly ‘a while’ is defined a two years.
If it takes 2 years we all better get started as we need time on our side. You do not want to still need 2 years in 2 years.
I have been doing some reading on the topic. Nothing that I have not read before so maybe the facts are pretty clear.
You need to establish the entity. No good needing two years if you do not have the clock ticking.
You need the entity to have its own tax ID. Not a single member LLC where you are using your SSN. That will cause the entity to be reported on your SSN so no business credit being established.
You likely need a property address and a business phone line that is listed in the business’ name. Some of the commercial credit scoring is based on this.
You will need to produce 2 years of tax returns. Maybe you can substitute 2 years of financial statements from the business’ CPA. Hence you might need more or less than 2 calendar years to get over this hurdle.
You should look for vendors who will offer credit to a newer business. Office Depot, Home Depot, gasoline companies, etc are all business entities that will work with newer companies.
Personally guaranteeing the accounts can be OK if the account is reporting under the tax ID of the entity and not your SSN.
Understand that when building credit late or slow pays is like going in reverse. If you can not pay on time ALL THE TIME do not start the process. Get a buffer built up first.
Consider a small loan at the local bank secured by a CD or similar. Such things help to build history. Not as good as unsecured but you have to start somewhere.
Get a DUNS number from Duns and Bradstreet (http://www.dnb.com/us/) You can have a number issued for no charge. Getting some trade accounts set up (lenders who report) will help more than just having a number with little in the file.
Think seriously about the Lenders Workshop as there is a lot of things Ed and Terry can teach you about building credit. Most applies to a business as well as an individual. When you are coached by Ed on obtaining lines of credit he can highlight what matters when the borrower is an individual vs. when they are an legal entity.
As a mortgage broker we have arranged for loans to LLC’s for both residential transactions and commercial transactions, in fact, I’m doing a few right now.
This is how we see it work:
For a residential transaction:
the borrower or co-borrowers credit and financials are used.
LTV’s are typically capped at 70%.
Property is assigned to the LLC name and title vests in the name of the entity.
For a commercial transaction:
Usually the credit strength of the property is looked to first. A property with stand alone credit strength can normally vest in an LLC.
Because of its credit strength it call itself whatever it wants:) So LLC use is common.
There is a hybred version used, which is common today, because many properties do not have credit strength on their own at the time of the transaction.
The hybred adds the financials of the borrower to the non-stand alone financials of the property to create strength.
So the borrower and the property are “teaming up” to apply for the loan.
Under these circumstances many lenders, but not all, will allow the title to vest in the name of the LLC.
LTV’s are limited by the general program the lender applies and it can be higher than the residential LLC LTV.
We started getting loans in the names of our S-corp and LLC as soon as we opened them. We work with local commercial lenders. Each entity has it’s own tax ID, and we personally guarantee the loans.
I found that the lenders were more concerned with our track record and how we conducted our business than how long our entity had been set up.
Everyone should note that lenders look more to the income and less to the equity. The ability to service the loan vs. the ability to recover what is owed after a default.
I’ve seen where an LLC would get a loan in its own name right after being set up, and no personal guarantees. This could be on an apartment building or office building or something like that.