LLC & Entity Borrowing

Why investors use LLCs

Many real estate investors hold properties in LLCs or other business entities for liability protection, estate planning, and organizational purposes. An LLC creates a legal separation between the investor's personal assets and the investment property — if a tenant sues, the lawsuit is against the LLC, not the individual.

Tennessee is a favorable state for LLC formation, with relatively low fees and straightforward operating requirements. Many Tennessee investors structure each property in a separate LLC or use a series LLC structure.

The conventional loan problem

Conventional loans (Fannie Mae and Freddie Mac) require the borrower to be an individual — not an LLC or corporation. If you want to hold a property in an LLC and use conventional financing, you have two options:

• Finance in your personal name and transfer the property to the LLC after closing (this may trigger the due-on-sale clause in your mortgage)
• Use non-conventional financing that allows entity borrowing

The due-on-sale clause issue is real — technically, transferring title to an LLC after closing could allow the lender to call the loan due. In practice, lenders rarely enforce this for single-property transfers to a wholly-owned LLC, but it's a risk to understand.

DSCR loans in an LLC

Many DSCR lenders specifically allow — and even prefer — loans made to LLCs. The loan is made to the entity, with the individual members providing personal guarantees. This structure provides the liability protection investors want while still allowing financing.

Requirements for LLC DSCR loans typically include: operating agreement, articles of organization, EIN, and personal guarantees from all members with significant ownership (usually 20%+).

Portfolio lenders and commercial loans

Portfolio lenders and commercial lenders routinely make loans to LLCs and other entities. For larger portfolios or commercial properties, commercial financing through a business entity is standard. Rates and terms vary significantly from residential financing.