Real estate investors throughout the country including California, the San Francisco Bay Area and Contra Costa County now have an additional challenge when there is a need to refinance their real estate investment properties held in an LLC for liability protection...
Changes in Freddie Mac lending policy: Freddie Mac will not refinance a property that has been held in an LLC at any time in the previous 6 months. Fannie Mae is expected to follow suit. And of course, this may require your lender to do the same.
For some of you this is a ho-hum announcement - another change in policy to be dealt with. If you have never been through this sort of change before, you may be uneasy, even angry. Here is another government backed organization making a decision that will have a major impact on a large part of the investing population - people who invest in real estate in an orderly, responsible fashion and who in no way caused the current mortgage debacle. But all investors are being painted with the same brush.
Changes in government and IRS policy occur all the time. Unless you are in the middle of refinancing your property and you have been stopped cold in your tracks by a Freddie Mac backed lender, there are things you can do and time in which to make an informed decision.
- Firstly, if you are not planning to refinance your property in the next year, you can leave the property where it is. The LLC will continue to give you the benefits you expected when you set it up. Unless you have an ARM that really needs to be refinanced, you can stay with the same mortgage until you sell the property.
- Secondly, you can pull the property out of the LLC seven months before you set out to refinance it, and put the property back in after the refinance is complete. Yes, you will have liability exposure during those seven months, so make sure your insurance is paid up and get an umbrella policy.
- Thirdly, you can find a lender who is willing to refinance the property inside an LLC and pay the higher interest rate.
- Or fourthly, you can move the property from your LLC to a trust, with the beneficial interest in the trust held by your LLC.
Please note that real property held in trusts do not have court proven liability protection in the event of litigation and there is a risk of personal liability exposure to the real estate investor with this fourth option.
In my humble opinion as a real estate broker, investor and consultant, these recent changes in lending practices are discriminatory and are just another shining example of the feeble and misguided attempts by government backed agencies to discourage real estate investors to assist in turning around our housing crisis.
In fact, these changes are likely to inspire real estate investors to walk away from their rental properties due to the lack of available and affordable financing. Write your local congressman to voice your concerns.
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Pete, this is one great post. I learned a lot. At BofA, we cannot finance a property held by an LLC. AJ