Hard Money Lenders Love LLCs. Here is Why You Should Too.

Hard money lenders like us come across many types of real estate investors. Some of them are doing it full time. They are heavy hitters that juggle multiple properties at the same time and need additional leverage. Others like the security of day-time jobs and flip houses on the side to supplement their income. Both can be very successful. However, regardless of the activity level, one thing is clear: those serious about running an efficient operation, building wealth and protecting themselves from risk are doing business as an LLC (Limited Liability Company).

We recently had a client who didn’t file his taxes on time. Stuff happens when you are running a hundred miles an hour. The only problem was that his IRS tax lien showed up five days before the sale of the property he just rehabbed. Talk about a closing being dead in the water. Almost.

There is a happy ending though. That particular client had the foresight to buy his property in an LLC’s name. Personal tax liens don’t attach to LLC’s, so we managed to close the sale on time. Such a happy ending would not have happened if the property title were in his own name.

IRS requires its tax liens to be paid before any significant transaction such as a sale or refinances takes place. Our client would have to pay his lien literally within days for the buyers not to walk away. Of course, he could have also chosen to negotiate with IRS and settle with them for less. Doing that would have required him taking his property off the market. He would have to continue to pay his loan interest, taxes, insurance, and utilities. His property would sit vacant during the time incurring the risk of vandalism and theft.

Need more convincing?

Here is a list of reasons why hard money lenders love LLCs and why you should too:

Limit your personal liability.

Let’s imagine you own a property where someone got injured. Or you had a dispute with your contractor and he is threatening to slap a mechanic lien. Or you had a disagreement with your real estate investing partner. If your property’s title is held in the name of an LLC, it’s an LLC who is responsible for meeting any obligations. Your creditors and any third party having a claim against an LLC, can go after that LLC’s bank accounts, properties and any other assets. However, the assets held in your personal name are protected against such claims.

Protect your property from liens and judgments placed on you or your partners.

Similarly, any obligations that you are personally responsible for will not apply to your LLC. For example, let’s imagine that you own a property in your personal name. There is another owner: your buddy John who is helping with the renovations and expenses. If John gets sued personally or owns taxes, anything you own together with John can be affected – including the property you co-own. In contrast, if the property is owned by an LLC that you and John are members of, you will be protected from John’s personal obligations or creditors.

The flexibility of ownership.

You have complete control by having a single-member LLC. However, you can also add your business partners or members of the family as members of that LLC. It’s relatively easy to change their ownership and income allocation percentages. Such information is outlined in the document called operating agreement.

An LLC operating agreement states the company’s ownership, defines member duties and lays out other structural features of the business. It includes basic information about the LLC and its owners, the company’s elected tax treatment and guidelines for how certain key procedures will be handled.

Privacy.

The ownership of any asset purchased or transferred to LLC is difficult to track – a major plus if you want to maintain a low profile.

Easier approval with hard money lenders.

Hard money lenders strongly prefer borrowers who buy in an LLC’s name. Your property and its clear title is a key element of the transaction. Another consideration is that hard money lenders do not issue consumer loans. A property purchased in an LLCs name is another confirmation that it’s a business transaction.

Don’t have an LLCs? Good news is that they are easy and cheap to form. In Maryland, registering costs run less than $200. You will need to comply with a couple of other requirements, but none of them are too complicated. For step-by-step instructions on how to form your LLC in Maryland, Virginia or Washington, DC, click here.

Please remember that we are not lawyers and consult them for the specific information about LLC’s and their formation. What we are experts in is local and flexible finacing for real estate investors looking to purchase distressed real estate in Maryland, Washington, DC and Virginia. You can get pre-approved with us by calling us at 240-436-2340.