The first rule you learn when deciding to buy investment real estate is to protect your assets. No real estate investor will recommend that you operate your business as a sole proprietor. If you are a sole proprietor then your personal assets like your home, car and retirement accounts could be lost in a lawsuit. The best advice is to incorporate to limit your personal liability. The most common form of incorporation used by real estate investors is a Limited Liability Company or LLC. Some investors that flip properties will form a corporation. Now that you have your corporation, you decide to get financing to purchase properties and you find that banks will not let you get financing in the name of your corporation.

When banks lend you money, they want to make sure that you will be able to pay them back or that they can sue you to get their money back. When banks provide financing to individuals, the home is collateral for the loan. If you fail to make payments on the loan, the bank can foreclose on the property. In addition you provide a personal guarantee that the loan will be repaid. If the bank forecloses and sells the property at a loss, they can come after you for the difference because of the personal guarantee.

A corporation or LLC provides limited liability to you. If banks provided financing to the LLC, they would not be able to get you to sign a personal guarantee because of the limited liability afforded by the company. This puts the banks in a weaker position that could potentially limit their ability to get their money back. For this reason most major banks will not lend to someone who has the property titled in an LLC.

The good news is that this is not the policy for the every bank. Some smaller banks and credit unions will allow you to get financing in the name of a corporation. You will need to do extensive research to find lenders in your area that will do loans in the name of a corporation. Banks that specialize in commercial financing are more likely to do loans in the name of a corporation. The tradeoff for getting financing in the name of your corporation is that the bank will typically require a much larger down payment. The lower loan to value ratio provided by the larger down payment is the extra protection the bank needs in order to provide the financing.

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Filed under: Financing • Real Estate • Real Estate Investing

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