An investor may want to pursue a hard money loan for a property addition to his portfolio. Hard money lending is typically used as a tool for completing real estate transactions. You are most likely to receive a hard money loan from an LLC. Understanding the role of the LLC in dealing with hard money loans is important for all prospective investors.
Preparing to pursue hard money loans
It is best to pursue lending through an LLC for a hard money loan. Hard money loans are usually handled through an LLC or other corporate entity. The reason why people transact through LLCs is because they are viewed as much more credible. Consulting with an expert when creating an LLC to determine the ideal structure for your business is important. A business adviser or attorney can be helpful with this process. Any property that will be considered in a hard money loan arrangement will have to be unoccupied. Any loan taken out will be treated as a short-term loan, meaning that the term may be for 10 to 15 years.
How many LLCs do you need?
There are many options for using an LLC in hard money transactions. One option is to set up an LLC for a property. The other option is to set up one LLC to handle all hard money transactions across multiple properties. The most common approach is to set up an LLC for each property where hard money is used. This is because most lenders issue loans for a property. Lending money to an LLC for a single property is more desirable in the eyes of the lender. In using one LLC for all hard money transactions, each property has to be set up as a separate entity within the structure. An attorney with expertise in corporate structures is necessary to bypass any potential losses. It’s important to note that the way the corporation is structured internally affects the impact one property at risk has on the entire portfolio of properties.
What are the benefits of an LLC?
It is beneficial to handle all loans through an LLC. The corporate structure offers a few protections. An LLC can prevent potential foreclosures. Although foreclosure is not a major risk for most investment scenarios. The LLC will likely issue shares, which will then serve as a form of collateral. If the structure of the LLC separates the various properties, then a property at risk of foreclosure or with a claim against it won’t destroy the entire company itself or affect the profitability of any other property. The chances of getting a larger loan amount is greater when you are working through an LLC. Lenders prefer to issue hard money loans to a corporate entity of some sort. The structure of the LLC can be changed at a later time to set up partners and distribute assets. Privacy is another advantage of setting up an LLC. The LLC will protect assets, which makes them difficult to track and monitor. If the property and title are held in the name of a corporate entity, a claim made against the individual won’t affect the property. The opposite is true. If a person brings a claim against the property owner, the person’s assets will never be affected.
If a loan is issued to the LLC, the property owner won’t be able to recover assets as easily using the foreclosure option. An LLC actually ties up assets, so it will be some time before funds become accessible. If the group has entered into some sort of legal entity, all members of the group have to agree on how proceeds and other major financial decisions are handled. If you are putting together a contract for a property, it is imperative that the property be assigned to an entity. If the loan was taken out under an LLC, the person acting on behalf of the entity must be designated in a resolution.
There are specific advantages to taking the LLC route to pursue hard money loans. The LLC can cover one hard money loan or multiple hard money loans. One LLC would have multiple properties isolated within the structure in order to protect each property from claims stemming from one property. Another setup involving multiple LLCs would create an entity for each project or property. The purpose of an LLC is to separate personal risks from business risks.
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