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The Pros and Cons of an LLC Mortgage for Buying an Apartment

How to Secure an LLC Mortgage Rental Home Financing

LLC Mortgage for Buying an Apartment Building

Owning an apartment building is one of the smartest investments you can make. Among other things, it offers the numerous benefits of owning a rental property without the same exposure to vacancies. As long as you keep a certain number of apartments occupied, you’ll always enjoy a healthy cash flow.

Nonetheless, to enjoy the full potential of purchasing your own apartment building, it matters just as much how you finance your purchase.

For many experienced investors, the right decision is an LLC mortgage.


What Is an LLC Mortgage?

An LLC mortgage doesn’t actually refer to a specific type of loan. Instead, it refers to a popular practice that investors use to protect their assets.

First, the investor starts a limited liability company. Then, they acquire the financing they need to purchase an apartment and then transfer the mortgage to that LLC.

By doing so, the limited liability company (LLC) holds the mortgage and not the individual.

The 3 Benefits of an LLC Mortgage

While an LLC mortgage isn’t for your average homeowner, these arrangements have become quite popular among seasoned investors for three main reasons.

1. Better Protection for Your Investment

Owning an apartment is a significant investment. While it could easily become your sole source of income, it can also open you up to a certain amount of risk. One of your tenants might hurt themselves through no fault of your own and decide to sue. The actions of someone you hire to maintain the property could put you at risk, even if you didn’t know anything about them.

As the term “limited liability” suggests, one of the main benefits of an LLC is that it offers investors reduced exposure to these kinds of lawsuits.

So, while it’s still important that you take every opportunity to make your property as safe as possible, apartment buildings are simply too valuable to take the risk of losing it over a lawsuit.

2. An LLC Rivals Liability Insurance

Of course, most property investors understand that there are a certain amount of risks involved with this kind of investment.

They simply believe that landlord liability insurance will provide sufficient coverage if the worst-case scenario ever occurs.

Unfortunately, that might not be the case. Most liability policies are created to defend against commonplace claims, not the kind of lawsuit that could actually put an entire building’s ownership in limbo. Investors have actually lost their buildings before or suffered other major financial losses defending them because their coverage wasn’t enough when they needed it.

Given the affordability of forming an LLC weighed against the potential outcomes of a costly lawsuit, forming your own corporation would seem prudent.

3. An LLC Mortgage Offers Tax Protection

Finally, an LLC mortgage will do more than protect your apartment building in the event that you face a lawsuit.

Another reason they have become so popular is that these arrangements are ideal for protecting your income, as well.

That’s because of the pass-through tax protection offered by LLCs. In short, your income is said to “pass-through” the LLC and right to you. As a result, the IRS only requires you to pay taxes once on that income, instead of twice as you’d have to do with a traditional company (once for the business and once for your personal income). This is despite the fact that you enjoy all the protections of a traditional limited liability company.

The 3 Drawbacks of an LLC Mortgage

At this point, it may seem fairly obvious that an LLC is a perfect complement to your apartment building’s mortgage.

Still, there are three potential drawbacks you should know about before transferring your apartment’s mortgage to an LLC.

1. LLCs Come with Extra Costs

As we just covered, it’s relatively cheap to form a limited liability corporation. In most states, you should have no trouble doing so for under $200. However, it will cost more to have a lawyer help you put it together, which is recommended.

Then, there are the ongoing costs of maintaining an LLC. It depends on the state and your unique corporation, but that can easily be another thousand dollars or more every year to keep your protection in place.

Finally, it will most likely cost a little more to have an accountant handle your LLC’s taxes every year. Again, it’s recommended that you hire a professional for this.

2. Conducting Your Due Diligence

Another reason to pay for a lawyer’s help with setting up your LLC is that these entities aren’t all the same. Just like with traditional corporations, their structures and capabilities largely depend on how they were formed.

So, it’s absolutely necessary that you find and budget for a professional with experience creating LLCs specifically for investors who are interested in using them for apartment buildings.

3. Working with Lenders

Even though protecting your apartment building’s mortgages with an LLC might seem like an extremely judicious thing to do, you may find that lenders are hesitant to give you financing because of it.

Most lenders are overly cautious about financing a loan if someone isn’t personally responsible for it. Just as your LLC provides you with protection, it may also be considered a way to keep you safe in the event you default.

Enjoy All of the Advantages of Using an LLC Mortgage for Your Apartment-Building Investment

For the vast majority of investors, the advantages of leveraging an LLC mortgage far outweigh the aforementioned drawbacks.

As long as you do your due diligence, the extra costs involved are negligible relative to the peace of mind you’ll enjoy knowing your investment is safe. Those costs may also be completely offset thanks to your pass-through taxes.

Furthermore, while traditional banks may not be interested in providing you with a loan, we certainly will. At Rental Home Financing, our entire business is based on helping seasoned investors just like you purchase multifamily homes. Our portfolio of investment services even includes blanket loans for LLCs.

Best of all, you can apply online right now to ensure you receive the financing you need to purchase an apartment building right away.

Read 3170 times Last modified on Tuesday, 30 August 2022 19:29

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