Can An LLC Purchase An Apartment With A Mortgage If It Generates No Income?

Question

The LLC owner has flawless credit and other sources of income. The apartment is in NYC; the LLC is in MD.

The LLC generates no income...the apartment will be resided in by the LLC owner.

The apartment has enormous growth potential, hence the decision to aquire it. But regardless...purchases made by LLCs provide a certain level of protection that individuals, otherwise, forfeit unknowingly. This is an important factor to consider especially it the apartment should ever be leased in the future. My question was, would the bank loan a significant amount of money to a newly established LLC? Does it matter, that the LLC owner, is well established financially?

Answer 1

You are thinking very smart for such a young person and rightfully so with frivolous lawsuits at an all time high. Making purchases through LLCs, separates your assets from each other and furthermore from your person. Such protective measures prevent said claimant parties from tapping into your entire personal worth; or moreover, falsely trying you in criminal court. Imagine being charged for the death of John Smith’s suicide because the window he jumped from, in your apartment, was not up to code.

Getting back to your question, purchasing real estate in the name of an LLC is either very easy or very difficult. If you pay cash, it’s easy. Give your attorney (or the title company) a copy of the Articles or Organization, along with clear instructions that your name is to appear only in their office files and not on any public database.

Now if you finance your home, this is where it becomes difficult or actually impossible. The mortgage company is going to demand that you do it in your own name—especially if you are purchasing a $500,000 & up apartment with a front LLC. You know you’re an honest person, but think about it from the lender’s side. LLC owner or not, your financial stability means nothing unless the title is in your name.

For your sake, it is best to leave the LLC out of the picture unless you can avoid financing. Otherwise, you are just complicating the process with no added layer of privacy or protection to yourself. Sorry, I could not offer you the answer you would have preferred.

Answer 2

Yes, however the owner of the LLC will need to personally guarantee the loan, but the LLC will be the only entity on title.

The bank will underwrite the loan based on the income of the guarantor.

Many, many business set up LLC's known as single member, single investment LLC's owned wholly by the corporation or individual in order to protect the personal liability of the investor.

Investors need not worry about signing a personal guarantee in Single-Action states, where the law prevents the banks from going after the property AND the guarantor. The banks can go after one or the other, but not both. 99% of the time, the banks will go after the real estate because there is usually more value there and it is easier and cheaper for the bank.

States that are not Single-Action are a different story. You have to check the laws for each states. Most states are Single-Action, but not all.

Answer 3

An LLC can make such a purchase, but LLC's have member managers and I would wonder
why they would wish to purchase a property that generates no income?

Answer 4

No the LLC need to show income. The best thing to do is to have the MD buy the house then quick clam it ot the LLC

Answer 5

Observation on comment below: get the loan as an individual. Avoid involving the LLC. A Letter of Trust that the building is held on behalf of the LLC filed with Articles of Association and minute accordingly (M&A) would suffice.

Marcus: To save administrative cost and time, the largest money holder, LLC or MD, is sought to recover potential value or real cash on hand; protection clauses are designed for a purpose and not an umbrella for all weathers.
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"Do banks willingly loan significant sums to newly established LLCs generating no income ?" In practise, usually denied.

Non-income generation must be supported by other assets as collateral or through funds of another income generating parent, sister or associate LLC. Alternatively, the individual may act as guarantor for the LLC in the event of default: a deposit and interest installments may be required of the guarantor.

Track record of income of LLC required, however, may be irrelevant given the explanation below:

Banks usually demand pledges of assets from the Directors (often also owners of new setups) of the company as collateral, liens and restrictive covenants. This is in addition to the LLC's income and assets. This pretty much renders useless the limited liability protection of LLCs.

In other words, banks circumvent the LLC protection of limited liability clause by placing small companies in a position as if the company had always operated financially as a partnership or sole proprietorship. When it comes to getting their share of the meat in event of a loan under default, they can push for bankruptcy and lay claim to all the owners' possessions.
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Young Small and Medium LLCs usually encounter biase on lack of track record ( seven years, the more the better ):
- A mortgage given based on ability to repay per schedule against available cash funds, future revenue less expenses and other purchases.
- Lack of track record ( annual and financial reports ) of several years; Bank's confidence in the reports improve significantly if audited by a "Big Four" public accounting firm. Call them brand conscious or fashion victims;
- Loan quantum at best based on real cash collected annually, net of operating expenses. Computation varies from lending institution to the next;
- Repute and standing of the managers within the industry;
- Ability to repay loan based on company's ability to generate cash (monthly and yearly cash position), collateral assets (cars, and other chattels that can be seized in the even of failure to repay) and so on.
- Track record of non-overdue repayment to suppliers; ability to collect from clients and customers; nature of collection and payment (e.g. cash, credit, TT);

Financial strength and ability is based on the business and credit risk assessment made by the bank's assessors.
- Often assumes inexperienced management; (Ops, Bus, Fin)
- Often assumes lack of suitable expertise in management;
- Often assumes larger cash requirements in future years for initial startup expenses and loses, expansion and further phases of change;
- Even large companies have found that leasing is preferable to owning the building if the tenure is limited by legislature or business requirements like relocation of staff from one country to the next.
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"Being established financially influence the bank's decision?"
In practise, subject to:
- Financial strength and ability is based on the business risk assessment made by the bank's assessors against loan quantum.
- Significant repute amongst industry leaders and financial houses.
- Preferred, Privileged or Private banker status held with bank.
- Prior track record on repayment for a similar loan amount.

Loan considerations:

- Bank loan amount is based on bank assessors assessment of the initial incumbent. Example:

A developer of repute with high value and volume of transactions with the bank can obtain favourable loan terms. This assists in making selling property to their prospective buyers easier based on the developer's standing with the bank; loan rates are lower.

Without the same financial clout as the developer, the buyer, assessed on their own credit terms, are less likely to obtain equally favourable borrowing terms.

- In 2006 and 2007, over $2 trillion of loans will adjust in the US. Most cannot refinance, forced to sell, driving down prices.
- Financing 100% is prevalent. This is for companies and big boys, not small institutions and individuals. Unfortunately, eager to own, most fall into the trap without clear cut time tested real plans.
- Avoid vicious buying cycles. E.g. loan history of cash-out refinancing, tacking second lines of credit to being put on list of foreclosures with months behind on payments.
- Caveat Emptor: Interest rate change on adjustable rate mortgage (ARM). Be aware that one may be in competition with many other sellers in the next few years. Mortgages will adjust upwards as they find difficulty to make the higher payments and be forced into foreclosure or having to sell.
ARMs were initially designed for cash rich banking clients to facilitate down payment and initial purchase. The loan amount is more often than not paid almost in full ( say 80% to 95% ) within the same month or so of using the loan. Subsequently, this facility was made available to the man on the street. En face, the interest rate is exceptionally low that builds momentum with time that money is not repaid. If ARMS are not used correctly in the right hands, the closest analogy alludes to borrowing from a loan shark where the incremental rate of interest literally jumps and quickly spirals beyond the means of the individual to repay.
- Observation of loan interest on the average household accumulates between two to four times, or more, on principal over time. ( Say $500,000 principal owed to bank. Not uncommon is the full repayment to the banks of anywhere between $1.5 million and $2.5 million over say, ten to thirty years. ) That is how banks earn their keeps. Compare this expenditure with money coming in from high bank interest rates on deposits and inflation: what the banks give out compared to what they earn is significantly different.
- When renting is cheaper than paying a mortgage, the housing market is overvalued. All excesses in asset prices revert to the mean over time. The difference being profit or loss.
- If median prices are up, yet sales are down, property unsold all around, prices are not going up but maintained artificially by general property holders. Lower end buyers are usually first to be squeezed out by rising interest rates that gradually moves upwards.
- Cash is King. Pay cash, no money given to the banks. Smaller the loan, the less cash devoted to the bank and more to the LLC. However, large borrowings, say x million, on revolving loan facilities attract lower loan interest charges but maintenance fees to maintain this borrowing facility provided by the bank. A revolving facility does not require all the money the bank allots to be borrowed in one go.
- Consider economic concessions by the government over 0% interest loans, or both. “Free” conditional money is sometimes preferable to 0% loans that may expire too soon.
- Sleep soundly. Know with certainty that money coming in and profession prospects secure to ride out any recession, divorce, basically any unforeseen financial impact and so on.
- Trading on property margins requires familiarity, sound knowledge and reliable tips.
- Privileged customer banking as opposed to Private banking will derive its own benefits and the nature of bank transactions. There are instances where a 0% commission fee loan may be obtained at Interbank Offered Rates, the Federal Funds Rate sans fees. (1)

Waffle:
- Try sounding out general ideas to Suze Orman on CNBC who gives financial advice.
- Try emailing, no guarantees of getting through if still unsure, though a bank advisor will quickly clarify most issues.