A common misconception is that you buy your personal residence in your personal name but that you should buy investment properties using a limited liability company (LLC). Ideally the property owned by the LLC is separate from the rest of your assets or investments. If a tenant decided to sue the property owner, the only asset at risk is the property in the LLC. However, the strength of the LLC, namely the separation it provides, is also why lenders think of these loans as riskier.
If the borrower doesn’t pay the loan for a property in the LLC, the bank can only go after that single property and nothing else that the borrower owns. Foreclosure can take many months, if not years. By the time the bank gets the property back, it may be in disrepair and worth less than is owed. Due to these risks, most banks only provide commercial financing for properties owned in LLCs. For commercial loans, the interest rate is higher, the loan term is shorter (i.e. the loan has to be paid back faster), closing costs are higher, and variable interest rates are likelier (more risk for the borrower if rate fluctuates) compared to conventional loans obtained in one’s personal name. For most people using a conventional loan to buy property is the simplest and most cost-effective option for holding real estate long-term. Reach out to your local bank and ask them about a conventional loan for an investment property.
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