Who Should Borrow Money to Purchase Real Estate – Me or My LLC?

Question:  I intend to borrow money to purchase investment real estate.  Should I borrow the money or should my LLC be the borrower?

Answer:  If it is ok with the lender, it is best for the LLC to be the borrower.

I’ve been a real estate and business lawyer since 1980.  Based on my knowledge and experience the type of entity to form to hold  real estate is an  LLC.  When I represent buyers of multi-million dollar properties the lenders always require that the borrower form a single purpose LLC to own the real estate.  Over two thirds of the 4,200+ LLCs I have formed have been to hold investment real estate.

Your other choices are the corporation and the limited partnership.  Both of these types of entities have been replaced by the LLC as the entity of choice to own investment real estate.  A general rule is never own investment real estate in a corporation because of adverse tax consequences.  That’s why the limited partnership, not the corporation, was the entity commonly used to own investment real estate before the invention of the LLC.

When you have an LLC, you want the LLC to be the borrower that signs the promissory note and becomes obligated to repay the loan.  The general rule is that if the LLC is the borrower, the owner(s) of the LLC are not liable to the lender to repay the loan if the LLC defaults.

A sophisticated commercial lender will require you to form an LLC and have the LLC be the borrower and take title at closing and require you to guaranty the loan.  Single family home lenders and lenders that do not understand the legal reasons for having the LLC be the borrower will require a person or people to be the borrower.  If your lender will not let the LLC be the borrower then you must be the borrower and take title in your name and then transfer the real estate to the LLC after closing.

If you are an owner of an LLC that will borrow money, the best structure for you is for the LLC to borrow the money and sign the promissory note without you signing a guaranty by which you promise to repay the lender if the LLC defaults.  If you can do this, then if the LLC were to default on the loan and did not have sufficient assets to repay the loan, the lender would not be able to pursue you for the unpaid amount due to the lender.