If you’re a business owner, you’re probably aware of the benefits of having an LLC when it comes to reducing your personal liability, keeping your personal and business assets separate, protecting your personal assets, and much more.
However, you might be wondering if you can go one step further and buy a house with your LLC.
The short answer is yes – but there are lots of nuances you will want to explore before you decide to make this purchase. So, can an LLC get a mortgage?
Here are all the details!
What is an LLC, or Limited Liability Company?
Before we go into detail about the ins and outs of buying a house with an LLC, it’s important to explain what an LLC actually is.
An LLC, or limited liability company, is a specific type of business structure that helps a business owner limit personal liability as a result of the activities of the business.
In this LLC structure, your personal assets are separate from those of the business entity, making it easier for you to avoid financial troubles should the business be sued or suffer from any kind of financial pressure.
Members of an LLC can include corporations, individuals, other LLCs, and even foreign entities. You can also be a single-member LLC. The laws for who can own an LLC vary depending on the state, so it’s important to check in on these before you file for that status where you live.
Can an LLC Get a Mortgage? Advantages to Think About
If you’re thinking about applying for a mortgage as an LLC, know that there are a few benefits to doing so – but there is no personal guarantee that it will be right for our situation.
Below are some benefits of buying a house with your LLC.
Limited Liability
The first and most obvious benefit of buying a house with your LLC is that there is limited liability.
As the owner, you will not be personally liable for any of the company’s liabilities or debts.
If you are a real estate investor and you are worried about any lawsuits affecting your investment property, then buying the rental properties with your LLC is the way to go.
That said, buying with an LLC isn’t totally foolproof. If you decide to live in a home that is owned by the LLC, something can happen that is known as “piercing the corporate veil.” This means that the owners, members, and shareholders can still be held personally liable for damages in some cases.
Privacy and Discretion
Another benefit of buying a house with an LLC is a certain level of privacy. When you get an LLC mortgage, it is the LLC’s name and not your won’t that will appear on public documents and notices.
Again, this can help keep your business and personal assets (and lives!) separate.
Tax Advantages
There are also some tax benefits associated with buying a house with an LLC. It eliminates the process of double taxation, which is when you have to pay taxes at the business level and then again at the personal level.
LLCs have a pass-through tax structure in which the LLC pays taxes on any profit, but the owners do not. You only have to pay taxes on your allocated profit share.
Easier to Do With Multiple Business Partners or Real Estate Investors
The final benefit of buying a house with an LLC is that it makes it easier for multiple partners or real estate investors to get in on the action. You can apply for an LLC mortgage as a single business entity rather than having to put multiple names on the deed.
Things to Consider When Buying a House Under an LLC
While there are countless benefits to applying for an LLC mortgage, it’s certainly not the best choice for everyone. Below are some other factors to consider.
Expense
One of the biggest downsides of applying for an LLC mortgage is the cost.
If you don’t already have the LLC, you’re going to pay a lot more money just to get this kind of operating agreement set up. Limited liability companies cost a lot of money to establish – more money than just about any other type of business.
You will have to pay for the filing of your articles of organization, permit fees, and business licensing. Once you’re set-up, you’ll also need to pay for minimum taxes, report fees, agent fees, and business license renewal fees.
Can Be Tough to Get a Mortgage
If you don’t have established business credit, it can be tough to get a mortgage, even if you’ve applied for other types of loans with private lenders in the past.
Because LLC shareholders and members can’t be held personally liable for the business debts due to the innate liability protection that an LLC affords, conventional mortgage lenders are often hesitant to lend to LLCs.
Often, they’ll extend a loan to an LLC only if the business owner volunteers some of their personal income and assets as collateral – which negates one of the biggest benefits of buying a house as an LLC, to begin with.
Higher Interest Rates
For all the reasons listed above, LLC mortgage holders often end up paying more.
Most people buy a house with an LLC solely as a method of investment. Rental property investors are almost always going to pay more on these sorts of real estate investors since they’re buying as an investment and not to finance a primary residence.
Lenders know that primary residences will always come first in a financial crisis – you’ll pay those expenses first. Therefore, they typically charge higher interest rates on these loans in return.
Real Estate Loan Options Are Limited
You won’t have quite as many loan options available to you, either. You can’t get an FHA loan or a conventional loan sold to Fannie Mae and Freddie Mac with an LLC.
No Preferential Capital Gains Treatment
When you buy a house with an LLC, you can’t get capital gains tax exemptions. This treatment applies when you sell your house for more money than what you paid for it.
If you buy a property for investment purposes, which is likely what you are doing if you are buying it with the LLC, you do not get this exemption.
Can You Put a House With a Mortgage in an LLC?
If you already have an LLC, you might want to know if you can buy a property in your own name and then transfer it to the LLC later on.
This can be tricky. If you own your house or rental property free and clear – meaning the mortgage loan is totally paid off – you can transfer it relatively easily.
However, if you still have an outstanding mortgage loan for your property, it can be tough to transfer it to the LLC.
That’s because just about every mortgage lender includes a clause in the agreement known as a mortgage acceleration clause, as well as a due-on-sale clause.
The due-on-sale clause indicates that the mortgage must be repaid in full when you sell or transfer the property. The mortgage acceleration clause means you have to pay the entire loan back at once, including any interest that has accrued.
So while transferring the property to the LLC is certainly possible, you’ll likely have to take out an additional loan to pay for the cost of the mortgage, which can end up costing you more money than it’s worth.
Is an LLC Mortgage Right For You?
So can an LLC get a mortgage? Yes. But is it right for you? You’ll have to think it through.
Although an LLC mortgage can be a smart choice for many types of businesses, like rental properties or a real estate investing business, it isn’t the best choice for all business owners. There are plenty of other alternatives you can explore, such as accessing asset-based loans or simply buying the house in your own name.
Consider which of these is right for you – and weigh each option carefully!
