Registering 2 rental properties under an LLC to get a collateral on the LLC

[ffarouqi]

If you need money, you can try to get a personal loan using your rental properties as collateral. If you don’t pay on your loan, however, you risk losing your properties.

If you are having financial problems, have you thought of selling one of your properties, or is there not enough equity in either of the properties to make a sale worthwhile?

What is your end goal?

I want a collateral to invest in another property

 

[ffarouqi]

If you currently have mortgages on your rental properties, and depending on facts, getting an equity loan might be possible.

Again, though, you need to be able to show a lender that you can repay the loan.

It is paid off.

 

[ffarouqi]

Not necessarily. Non-recourse loans are done all the time.

What is a non-recourse loan? I never heard about them. Can you explain a bit.

 

[quincy]

I want a collateral to invest in another property

I see no reason for an LLC. You can tap into the equity on one of your properties to purchase a third property.

Do you have a good rental history on your two properties?

Why did you mention bankruptcy? What is it about your financial situation that worries you?

 

[Taxing Matters]

Basically, is there any benefit of going with an LLC thing then? Thanks for your quick response

There are potential advantages to using a LLC for rental properties. I advise most of my clients who want to do rental properties to hold them in a LLC, LLP, or corporation. It can in some instances protect you from personal liability for debts of the rental business. But it does not help you for LLC loans that you personally guarantee, and many lenders will insist on that personal guarantee, especially before making large loans to the LLC.

What is a non-recourse loan? I never heard about them. Can you explain a bit.

A nonrecourse loan is a loan in which the lender agrees that it will not have any recourse (claim) against you personally if the loan defaults, leaving its only remedy to be the foreclosure of the property itself. In my experience lenders are only willing to do such loans if the equity in the property from the start is sufficiently large that the lender is pretty much guaranteed to get back the whole loan amount if it has to foreclose on the property.

 

[quincy]

ffarouqi, you might want to discuss your plans with an attorney in your area. The attorney can go over with you your current financial situation and detail for you the pros and cons of setting up a formal business - and what business structure best suits your wants and needs.

https://www.isba.org/public/illinoislawyerfinder

Good luck.

 

[ffarouqi]

There are potential advantages to using a LLC for rental properties. I advise most of my clients who want to do rental properties to hold them in a LLC, LLP, or corporation. It can in some instances protect you from personal liability for debts of the rental business. But it does not help you for LLC loans that you personally guarantee, and many lenders will insist on that personal guarantee, especially before making large loans to the LLC.


A nonrecourse loan is a loan in which the lender agrees that it will not have any recourse (claim) against you personally if the loan defaults, leaving its only remedy to be the foreclosure of the property itself. In my experience lenders are only willing to do such loans if the equity in the property from the start is sufficiently large that the lender is pretty much guaranteed to get back the whole loan amount if it has to foreclose on the property.

In the event of a foreclosure the load recovery should happen for the property that I took with the loan and not my existing rental properties...right?

 

[quincy]

In the event of a foreclosure the load recovery should happen for the property that I took with the loan and not my existing rental properties...right?

It depends on which property you use as collateral for the loan.

 

[LdiJ]

Not necessarily. Non-recourse loans are done all the time.

While they do happen, the odds of a mortgage company giving such a loan without a personal guarantee, to a brand new LLC, are pretty slim.

 

[quincy]

Forming an LLC might not even be a necessary or best course of action.