need general idea -

[illfittingshirt]

Hi folks, I am brainstorming and have a question about what to expect in the following situation. I have a newly formed LLC and cash on hand to make a downpayment for one or more properties. I have a dayjob and good credit. How many properties will the bank give me loans for and is my own credit soley used to gaurantee the loans? How many props will the bank let me buy? I don't expect anyone to "know" the answer but can someone tell me what rule set they are operating on so I can maximize the scope of my purchases?

 

[bearkeley]

Are you looking at rental/investment properties? If so, here are some thoughts:

- banks will lend you money based on your ability to pay and the loan to value ratio (% of money you're borrowing over the value of the property)

- if you have income on the property you're buying, it counts towards your total income, so if you are lucky enough to get a property that has positive cash flow that is more than the mortgage, the you can easily borrow more for your next property. The trick is to buy one at a time so your ratio doesn't get impacted...we bought 3 properties this way one year. Also, if you buy one at a time, you can definitely use more leverage by getting home equity loans, etc. so it's just not guarranteed by your personal income. Check out the Weekend Millionaire's Guide to Real Estate Investing if you haven't read it yet. Focus is mostly rental homes and it has a great financing section on it....it's the book that got us on our way to being FIRE (it's also the book we ignored after our first 4 rentals, so we had to push off our RE for a year!)

- make sure your mortgage company knows you plan to use an llc for the loan before you do all the paperwork. if you plan to get the loan on your own name (easier to secure), then make sure your mortgage company (or if you're using a 3rd party lender, the one they plan to sell it to) allows an llc transfer. Fannie and a lot of banks who offer great rate won't let you transfer to an llc

- AND, last but not least, brainstorming is great, but definitely spend A LOT of time researching before you get into borrowing a lot of money. Real estate is great, but it really could be very risky....folks on this board have helped us out a lot, so be sure to continue to ask questions here.

 

[Tracy42]

As far as I know there is no limit to the number of properties you can hold under an LLC. We have 2 commercial properties under a single LLC and are looking to purchase a 3rd this year. That's just how it worked out for us that we have purchased 1 per year. We secured the loans with a mortgage on the properties and personal guarantees. Both properties have positive cashflow and were fully rented which helped. We were able to get loans with 15% down and were comfortable doing that because we have an adequate cash cushion for making payments should we lose a tenant or two.

Are you considering residential or commercial? We did residential many years ago but found we were not suited to it--it really is a second job in my experience. The commercial buildings (so far) have been a piece of cake, but, we have not had any tenant turn over yet or anyone fail to pay their rent. Tracy

 

[macdaddy]

First of all - why did you start an LLC versus try to buy the properties in your own name?

 

[illfittingshirt]

Mac daddy: picked an LLC to pass passive loss of the property's basis to my personal income taxes, which should be substantial given the downpayment and loan amount.

Tracey42: considering beach propert(ies)Would you consider this residential or commercial?

Bearkerley: thanks for that great response. I will certainly get that book.
Tell me please, how does the bank know ahead of time what the added
income will be, if the property is a beach house for example that has variable or seasonal rental patterns?

Thanks
IFS

 

[macdaddy]

Mac daddy: picked an LLC to pass passive loss of the property's basis to my personal income taxes, which should be substantial given the downpayment and loan amount.

OK, it may make sense in your case, but in the majority of cases, it doesn't seem to make sense for a first time investor to buy with an LLC. I read "pass passive loss of the property's basis" to mean that you will take a loss every month on the cash flow of the properties, while you wait for them to appreciate. If that's the case, I have to ask, where are you in the country that you think property will continue to appreciate rapidly? There seems to be a consensus that prices have peaked and even in the most desirable areas will remain pretty flat in the years ahead.

 

[illfittingshirt]

The LLC in question will have the property transferred to it at time of sale. I plan to put 50k in cash down at time of closing. I can then subtract the basis (50k in cash + loan amount) from my adjusted gross income from my day job (as a loss), assuming that the income from the last few months of the year is comparatively negligible and I don't sell any properties for this year that can be added to the profit side. Even if no cash were put down, the loan amount can qualify as the basis.

 

[macdaddy]

The LLC in question will have the property transferred to it at time of sale. I plan to put 50k in cash down at time of closing. I can then subtract the basis (50k in cash + loan amount) from my adjusted gross income from my day job (as a loss), assuming that the income from the last few months of the year is comparatively negligible and I don't sell any properties for this year that can be added to the profit side. Even if no cash were put down, the loan amount can qualify as the basis.

Have you run this by an accountant or a lawyer? I don't think what you want to do is possible, the way you have described it.

 

[Tracy42]

The LLC in question will have the property transferred to it at time of sale. I plan to put 50k in cash down at time of closing. I can then subtract the basis (50k in cash + loan amount) from my adjusted gross income from my day job (as a loss), assuming that the income from the last few months of the year is comparatively negligible and I don't sell any properties for this year that can be added to the profit side. Even if no cash were put down, the loan amount can qualify as the basis.

You sure about this? What I've found is our losses are limited to the amount of our passive income (we are subject to alternative minimum tax though). Even without the AMT issue, I don't think you get to deduct your down payment or your loan amount against your W2 income. At least from what my accountant tells me, it is part of the basis for your property and you get the deduction for your interest payment on the loan which offsets your passive income from the rentals.

Regarding the beach property, not sure what I would classify that...been there, done that myself, with mixed results. We made some money on the sale, but we got lucky and got out before we lost all of our gain. My sister though has had great luck with her beach rentals. She sold out of Panama City just before the 2005 hurricane season and bought a replacement condo in Port Aransas, Texas when they were cheap. She cashflows positively on this one, but only because she bought it outright with the proceeds from the 1st sale.

Banks are starting to crack down on loans on beach homes as well. When we bought our condo, we were able to get it financed as a second home with a 5% 30 year mortgage. Our buyer was forced to finance it as a commercial property, at 10% (credit challenged apparently). Even at 5%, we never had a positive cashflow on the rentals, and because we had no passive income, we couldn't recognize any of the losses--which was really hard to swallow when it was costing us 30k a year out of pocket after hurricane Ivan. I much prefer the 2 strip centers we own now. I can drive by them within 10 minutes, they cashflow every month and my equity increases substantially each month too. Good luck to you! Tracy

 

[Peaceful_Warrior]

The LLC in question will have the property transferred to it at time of sale. I plan to put 50k in cash down at time of closing. I can then subtract the basis (50k in cash + loan amount) from my adjusted gross income from my day job (as a loss), assuming that the income from the last few months of the year is comparatively negligible and I don't sell any properties for this year that can be added to the profit side. Even if no cash were put down, the loan amount can qualify as the basis.

I recommend reading 'The ABC's of Real Estate Investing' as well as visiting the Rich Dad forums. Real estate is their specialty.

As for the LLC, you get no special tax treatment for LLC vs. personal income. The primary purpose of an LLC at this point would be to protect your personal assets from any lawsuits relating to the properties.

Regarding your tax deductions, you need to research this much more. I've spent a lot of time in the last few weeks researching this exact topic.

If your MAGI (roughly speaking it is all your income from all non-passive sources without any deductions) is under $100k, you can deduct up to $25,000 of losses from your personal income taxes.

If your MAGI is over $150k then you cannot deduct any of your losses from personal income taxes -- you may only deduct expenses up to the amount of income that you had.

If your MAGI is between $100k and $150k, then you can deduct up to 1/2 of the difference between $150k and your MAGI. For example, suppose you make $120k total (not including rental income because that is passive and does not count towards MAGI) Then the difference between that and $150k is $30k. Half of that is $15k, and this is the max amount of losses you could deduct from your personal income taxes.

Note that if you are married, then MAGI applies to both of you and the limits don't change. This is one area where the marriage penalty is still very prevalent.

Also, you can carry-forward your losses that are not deductible until you have a profit. For example, suppose you had $10,000 of losses that you could not deduct. Then the next year you had another $10,000 you could not deduct. Now you have $20,000 of carry-forward losses. Then in year 3 you make $30,000 net profit. You could deduct the $20,000 of carry-forward losses and therefore only pay tax on $10,000 of profit in Year 3.

 

[Martha]

The LLC in question will have the property transferred to it at time of sale. I plan to put 50k in cash down at time of closing. I can then subtract the basis (50k in cash + loan amount) from my adjusted gross income from my day job (as a loss), assuming that the income from the last few months of the year is comparatively negligible and I don't sell any properties for this year that can be added to the profit side. Even if no cash were put down, the loan amount can qualify as the basis.

Huh?

If you have a single member LLC it is ignored for tax purposes. Your basis generally is your purchase price, with some possible additions. It doesn't matter how you pay the purchase price, whether cash or loan. You depreciate the amount of the cost not attributable to land. You deduct expenses, such as mortgage interest, utitlies, repairs, and property taxes. All on your personal income tax return.

If you have a multimember LLC it can be treated as a partnership or a corporation for tax purposes. But in any event, you do not deduct the cost of the property from your taxes. You can only depreciate the property.

Other posters described limits on the amount of losses you can deduct, if the property shows a tax loss.

If you get a bank loan, and use an LLC, the bank most likely will require you to personally guaranty the loan.

 

[illfittingshirt]

Still, if my LLC net income or loss is passed to me at the end of every tax year, then 50K + loan without any significant LLC income for the year would pass significant loss to my personal income taxes. The question boils down to what qualifies as LLC loss and how much LLC loss can one deduct from his/her personal income taxes. Paid CPA advice would probably be desirable.

 

[Peaceful_Warrior]

Reread my comment. The LLC doesn't give you any tax advantages in the case of passive real estate.

Still, if my LLC net income or loss is passed to me at the end of every tax year, then 50K + loan without any significant LLC income for the year would pass significant loss to my personal income taxes. The question boils down to what qualifies as LLC loss and how much LLC loss can one deduct from his/her personal income taxes. Paid CPA advice would probably be desirable.

 

[Niko]

Still, if my LLC net income or loss is passed to me at the end of every tax year, then 50K + loan without any significant LLC income for the year would pass significant loss to my personal income taxes. The question boils down to what qualifies as LLC loss and how much LLC loss can one deduct from his/her personal income taxes. Paid CPA advice would probably be desirable.

Read the earlier posts on taxes and LLCs, particularly Martha's. She seems to know what she's talking about. I'm not a tax person. I know only enough to get myself in a lot of trouble. But I know enough to know that you should sit down with a good CPA before diving in.

The primary reason people put investment property in an LLC is to shield their personal assets (usually their residence) from liability incurred on account of the investments.

 

[illfittingshirt]

Ok. that's a plan.

Thanks to everyone who responded a contributed to my ongoing education.

IFS