BUSINESS FUNDAMENTALS
HARD MONEY
est. These savings in 10 years will amount to over $180,000. Brad will never get there with an LLC taxed as an S-corporation because the very same pass-through benefit extolled by the CPA for saving Brad $6,000 in employment taxes will give a tradi- tional lender heart burn. When Brad attempts to take out a loan, the activities of his LLC taxed as a S-corporation will appear on his personal tax return via a K-1. Brad’s lender will notice the K-1 then ask for the LLC’s tax return, recent profit and loss, balance sheet, business purpose, and quite possibly recent bank statements. Brad will provide all of this infor- mation and ultimately find himself back at square one — working with private and hard money lenders. Brad is making his tax return com- plicated and not masking the fact he is
involved in real estate flipping — heart- burn for lenders. A C-corporation is the antacid because the corporation’s busi- ness activity does not appear on Brad’s personal tax return. A C-corporation is a separate tax-paying entity. Thus, to create a business-friendly structure, we need to recognize underwriters are paper pushers. They like to check the boxes and do straightforward lending. A complicated tax return means a com- plicated loan. With Brad, we made it easy for the bankers. We separated him from his business. We created a C-cor- poration — let's call it F&F Enterprises — for his real estate flipping, named him president, and let the corporation pay him a big salary so he could show his lenders a nice, fat W-2. Yes, Brad will pay more in employment taxes, but wouldn't you rather pay $6,000 more in taxes to save $18,000 in financing costs every year? Brad did.
Creating entities for your real estate investing should begin with the understanding you are build- ing a business and there are other concerns beyond just asset protec- tion or tax planning. Issues such as borrowing, title, banking, and future selling are just some of the problems that plague real estate investors who fail to look at their structuring with a business mindset. • *A disregarded LLC does not have to file a tax return, all income/loss is car- ried on the member’s personal 1040.
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Hard Money: The Problem-Solver Loan
As a founding partner at Anderson Busi- ness Advisors & Law Group, Clint Coons is a real estate asset protection expert and an avid real estate investor. He
wants to help every investor create a well-balanced plan so they can continue to grow their portfolio and have their capital and investments protected.
by Blake Yarborough
T
he term “hard money loan” evokes negative emotions in
IRA Funds. With permission, this may accomplish a short-term solution until such time the debt is refinanced with a portfolio or securitized product. SECOND SET OF EYES Many times investors do not have access to reliable MLS comps or reasonable repair estimates. HM Lenders can act as a resource to help reduce the chance of over- estimating the ARV or getting gouged by the contractor. Conversely, using low quality materials and rehab, expecting the highest possible value. Each of these scenarios can be overcome with a hard money loan. These loans are great when used in combination with other types of loans and can accelerate your wealth building! Wealth through Real Estate is nothing but a financing game! •
Lenders would not have any restric- tions if it was a non cash-out. The solution is to cash-out with the hard money loan and then refinance into a traditional loan product. VOLUME LIMITATIONS The more properties that an investor buys, the more potential financing issues that they will encounter. Conventional loan programs limit an investor to ten financed properties. Solution is to buy multiple properties then refinance into a blanket/portfolio loan that is large enough for a commercial lender. LIABILITY In order to qualify for any additional loans, and to meet the limit requirements, liability for a hard money loan may be trans- ferred from an individual to a company. On other loan products this is very difficult. NON-RECOURSE There are sources of funds, that may be allocated that do not have any negative recourse towards the investor, for example
the real estate investment com- munity. Some say the loans are too expensive, are for investors with less-than-stellar credit or do not meet financing requirements. By definition, a Hard Money Loan (HML), is simply an asset-based loan secured by Real Property, typically needing significant repairs. HML’s are loans that maximize an investor’s leverage to acquire a property at a discount by providing a quick closing. These loans are very valuable for many real estate investors. HML’s are typically risk-based on the pricing models, therefore they have many underwriting require- ments to control the risk. This caus- es roadblocks for investors to be able to continue to fund their deals. A few potential roadblocks that an investor may encounter include: INABILITY TO CASH OUT This is one of the most common uses for a HML as many Lenders have limitations on how many properties you may own and still be eligible for a cash out. These same
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Visit www.foacommercial.com/thinkrealty05 or call (877) 899-8026 ©2019 Finance of America Commercial LLC is not licensed in Utah and is licensed or exempt from licensing in all other states | | NMLS ID #1133465 | 6230 Fairview Rd, Suite 300, Charlotte, NC 28210 | (800) 227-8107 | AZ Mortgage Banker License BK #0926974 | Licensed by the Department of Business Oversight under the California Finance Lenders Law | Finance of America Commercial LLC only makes mortgage loans for business purposes.
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