Every now and then a real estate investor not wanting to miss out on a profitable real estate deal will apply for a hard money loan, only to hear of the requirement that the applicant have an existing US business entity (LLC, Corporations, Partnerships, Trusts, etc.).
So the question is often asked: Why don’t rehab money lenders Philadelphia extend loans to individual borrowers?
After all, it can seem like a hassle… and that paperwork seems like an extra step or even a hindrance to doing the deal.
There’s a good answer to that question…
A hard money loan is a loan from a private lender for the purpose of investing in a real estate property. These loans are more flexible and speedier to obtain that most bank loan products. The property is the “hard” asset backing the loan.
Lending for real estate changed as a result of the 2009 mortgage crisis and the Great Recession. More stringent regulations around the mortgage qualification process were established by the Dodd-Frank, Truth in Lending (TILA) Act and Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act).
Rehab money lenders Philadelphia, including Legacy Capital, do not extend loans to individual borrowers as they wish to avoid the risk of such loans looking like traditional mortgages. The line that cannot be crossed is lending money to a property owner who intends to occupy the property. This would be considered a consumer mortgage and it would come under the rules and regulations of the acts. To stay clear of this, rehab money lenders Philadelphia usually ask borrowers to an affidavit stating the property is for investment purposes only.
Real estate investing coaches and mentors recommend incorporating your real estate investing business to protect yourself from personal liability. There are different opinions about how you should do this. We’d recommend consulting with a business coach, real estate attorney or accountant to determine what the best structure is for your business. Many real estate investors choose to set up an LLC.
An LLC or limited liability company is “a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership” (United States Small Business Administration). There are three benefits holding real estate property in an LLC.
Limited Liability: Your liability (should something go wrong) is limited to the assets within the LLC, not everything else you own.
Tax Efficiency: An LLC is a “pass-through entity,” meaning that the income and expenses pass through the LLC and can be declared by you on your personal income statement.
Easy to Operate: It’s not nearly as complicated as a corporation. An LLC is quick and easy to set up and relatively inexpensive.
Indication of serious intent: This one may not be immediately obvious but it will make sense in a moment: having an LLC is an indication that you’re serious about treating your investing as a business. At Legacy Capital, we don’t work with people who only invest on occasional weekends when they feel like it, and only because they think it will make them rich. We want to know that you’re as serious about your success as we are.
So, in short, this is why setting up an LLC (or other business entity) is an important step before applying for a hard money loan from rehab money lenders Philadelphia, including Legacy Capital. And, if you want to make sure that you’re always ready to pounce on any deal that comes up, it’s best to set up your LLC right away so you’re prepared.