3-4 Unit Rental Properties Under Trump Tax Plan

Pokemon Master's picture
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Is there anyway you can take out a residential mortgage for a business that owns 3-4 unit rental properties? If not, it seems like buying 3-4 unit rental properties no longer makes as much sense with the new tax code. You either need to choose between being a business that can write off interest and property taxes or getting an 80% LTV loan at the residential rate. You can still get the best of both worlds if you only intend to own one property but that limits you to a $700k mortgage and you aren't getting the full tax benefit if you already pay a lot in state income tax.

Anyone have any experience in how this side hustle has changed since the new tax laws went into effect?

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Comments (16)

Aug 26, 2018

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Oct 3, 2018

Why would you not want to be the business? You'll be putting more equity in at the beginning vs residential mortgage, but more structuring options for the commercial loan. Aside from reducing some liability, that's the point of a corporation--a legal entity that exists for tax planning.

Jan 12, 2019

Sorry for the very late reply here. But I would prefer to do a residential loan, where else are you going to get an 80% LTV loan that cheap? An 80% LTV loan at 4.5% can really juice your returns vs. 65% LTV at 5.0%.

Jan 12, 2019

How did this change under Trump? LLC/commercial financing has been a point or so higher with lower LTV

Oct 3, 2018

Why can't you buy a 4-Unit Deal via Pass Through Entity? Can still write off interest and Property Taxes.

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Jan 12, 2019

Also sorry for the very late reply. Can a pass through entity get a residential mortgage? I thought those had to be made to an individual.

Oct 3, 2018

They cannot

    • 1
Jan 12, 2019

Back in the S&L days you could get resi loans to an entity, but no more. When I did residential in the late 90's we had clients sign two grant deeds at closing. One taking out of the trust for the loan file and a second one putting it back in the trust or entity.

I would just get the loan in your name, put the property in an LLC and take the deduction.

    • 1
Jan 22, 2019

When you deed the property the second time into the trust or entity, doesn't that trigger some kind of acceleration clause with the lender? Like you've mentioned, I've heard people talk bout how they did it in the 90's but I have yet to actually meet people who have been able to transfer to an entity without completely cancelling out the favorable financing they got as an individual or just being told they would have to completely refinance.

Jan 12, 2019

No...that's not how resi works.

Most Helpful
Jan 13, 2019
Pokemon Master:

Is there anyway you can take out a residential mortgage for a business that owns 3-4 unit rental properties?

Hi Pokemon. I assume when you say residential you're referring to favorable >80% LTV loans for first time homebuyers with MIP and price limits. None of that changed under the tax act to my knowledge. Also, a business can't take out a residential loan.

Pokemon Master:

If not, it seems like buying 3-4 unit rental properties no longer makes as much sense with the new tax code.

See above. In my experience small multifamilies are often owner-occupied, hence the incentive to purchase with a residential loan. The idea is you pay your mortgage with the tenant upstairs. Always had to be owner-occupied.

Pokemon Master:

You either need to choose between being a business that can write off interest and property taxes or getting an 80% LTV loan at the residential rate.

In my experience, real estate, or any operating business, should be owned through an LLC/partnership for tax purposes and definitely for liabilities.

Pokemon Master:

You can still get the best of both worlds if you only intend to own one property but that limits you to a $700k mortgage and you aren't getting the full tax benefit if you already pay a lot in state income tax.

The tax law impacts wealthy individuals' primary residence interest deductions, not going to impact an investment to my knowledge. In my opinion Trump's tax law is good for the real estate business: first year bonus depreciation is big, capital gains tax is down, and Opportunity Zones are also going to have an impact.

EDIT: There could be potentially negative impacts to investors from the new tax law but it is a deal by deal analysis. The 163(j) real property or trade election impacts losses by changing depreciation from 27.5 to 40 years if you make the election, but limiting total interest deductions if you don't make the election. I heard the actual text is over 500 pages so I'd recommend doing some research yourself if interested.

Hope this helps. I've never owned a rental property myself but plan to buy one soon. I've worked in real estate finance/asset management, mostly multifamily, for a few years.

    • 3
Jan 24, 2019

Spot on, best bet if its non-owner occupied rental properties you can get a term loan (multi asset cross collateralized loan) from a loan originator outside the regular banks, put them in an SPE under an LLC for tax purposes and legality of equity/mortgage deed/first lien for the orginator. As long as its non owner occupied then you should be good to operate under regulations. Problem is your LTV will probably be between 65 and 75, interest rate between 5 to 8, and will probably need recourse if these are your first assets. Debt has to cover usually at least at 1.2x DSCR.

Happy to help as well

    • 1
Jan 24, 2019

I'm not an expert on the intricacies of the tax law, but a sole proprietorship is the most common form of business. Take out a residential loan for a 4-unit property, live in one unit, and then segregate assets, revenue and expenses. LLCs and corporations are first and foremost methods for individuals to achieve limited liability. Just because you operate as a sole proprietor without a superstructure legal entity does not mean you are not a business.