Looking to get into multifamily properties for rental income. Has any one done this and what is the best way to approach it? LLC, personal investment property, etc.?
Looking to start with a dated/old 2-3 multifamily home, renovate it and rent it out and then scale from there. Any advice on how you’ve been successful in the past would be much appreciated.
Using an LLC will give you complete liability protection, as all liabilities against the property are contained within the LLC and you never have more than the equity within the property at risk. The downside is you have to use commercial financing which will likely have worse terms than a traditional mortgage and make it harder to win deals if you're bidding against other buyers using them. Agency debt has great terms for commercial multifamily loans, but you'll need to target 5+ unit properties and ~$1mm minimum deal size to meet their requirements (look up fannie/freddie small balance loans for more info).
You could also just buy in your own name using traditional financing, get a lot of umbrella insurance coverage, and hope for the best, but its not as safe as using an LLC. Although major claims are obviously quite rare, there are plenty of horror stories out there i.e. a tenants friend comes over, slips and falls and dies, and the family sues the property owner for eight figures. If you own a $1mm property with 80% LTV in an LLC and get this claim, the worst case is you lose $200k, but if its in your name you could be on the hook for the full amount, or at least the excess amount over the umbrella coverage, which would still end up ruining your financial future.
Thanks this is helpful and in-line with what I expected. Out of curiosity, if you wanted to purchase a 3 family home instead of 5+ family, is it still possible with a commercial/agency loan? Also, if you wanted to do flips, would that fall under the same boat?
You could and would need to get a commercial loan when using an entity like an LLC to purchase. Fannie/freddie has some requirements you should look up, the biggest ones being 5+ unit minimum size and I think the minimum loan size is around $750k with 1.25ish DSCR. For a 3 unit I would call around and get quotes from other commercial lenders, but be prepared to be disappointed with the terms relative to traditional mortgages. For example most community banks I've talked to have quoted me about +50bps higher than traditional rates and on 25 year amo instead of 30.
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