Overcoming Underwriting Hurdles for Investment Property Loans for LLC Startups

Why New LLCs Struggle to Get Approved for Real Estate Funding

If you’ve recently established a limited liability company for your real estate investment business, securing financing through traditional means can be challenging.

Many banks want a minimum of two years of business operating history, an established business credit profile, and require supporting documentation to get approved. For example, several years of business tax returns and financial statements showing your cash flow.

You might not meet these eligibility requirements, making it a struggle to get approved for real estate funding. Banks may prioritize low-risk, well-documented borrowers when lending to prospective borrowers.

Though some options may be out of reach, real estate LLCs can look into other avenues for financing. Specialized lenders offering asset-based loans (ABL) evaluate different underwriting criteria, which may make the loans more accessible.

How Asset-Based Loans Can Help

Asset-based loans are a type of lending product that is backed by an asset, which is used as collateral to secure the loan. In the case of investment property loans for LLCs, the asset would be the property.

So, if you’re looking for financing, asset-backed loans may be a viable option. Lenders that offer this type of loan generally use different underwriting criteria to assess eligibility.

What Asset-Based Lenders Typically Consider

Instead of looking primarily at your time in business, business cash flow, or debt-to-income ratio (DTI), asset-backed lenders typically focus on:

• The value of the property
• Property cash flow
• Your real estate experience
• Income-generating potential
• Market rent analysis
• Investment strategy
• Local market
• Debt Service Coverage Ratio (DSCR)
• Loan-to-value ratio
• Borrower liquidity/cash reserves
• Down payment
• Exit strategy

Asset-based loans can be a helpful vehicle to get real estate funding because lenders don’t necessarily focus on your time in business or cash flow but instead focus more on your assets.

While many asset-based lenders put emphasis on the property value or income potential, they still may review your FICO credit score and have minimums in place for you to qualify.

Types of Investment Property Loans for LLCs

If you’re looking into asset-based lending to get investment property loans for your LLC, you have several options to consider.

1. Debt Service Coverage Ratio Loans

Debt Service Coverage Ratio Loans, or DSCR loans, are a financing tool that can act as investment property loans for LLCs.

Generally, lenders evaluate a property’s income-generating potential so that it’s enough to cover the existing debt obligations. Debt Service Coverage Ratio is calculated by taking the Net Operating Income (NOI) of the property and dividing it by its total debt service. Lenders may require a minimum DSCR of 1.25 or more.

Instead of focusing heavily on your personal income, credit score, and operating history, lenders consider the debt service coverage ratio for the property to assess eligibility.

2. Hard Money Loans

Hard money loans are a short-term asset-based lending option available to real estate investors. These loans typically have a faster approval timeline, making them ideal for fix-and-flip opportunities.

Lenders typically review the property’s value as well as the estimated after-repair value (ARV), instead of your time in business or financial history. While these can serve as investment property loans for LLCs, they typically have higher interest rates along with shorter repayment terms, which can affect the size of monthly payments and the total cost of borrowing.

3. Commercial Portfolio Loans

Commercial portfolio loans help real estate investors access flexible financing and may help purchase multiple investment properties. Lenders that originate these loans keep them in-house and maintain control, instead of selling them to third-party investors. Because of that, these loans may have different underwriting criteria and be personalized to your needs.

Be aware that this type of commercial real estate loan generally has higher interest rates due to the increased risk.

How to Strengthen Your Application for a Commercial Mortgage

Starting an LLC for a real estate investing business can be an exciting next step. But when you’re just starting out, it may not be as easy to qualify for real estate funding through traditional banks or financial institutions.

Asset-based loans that use alternative underwriting criteria may provide a pathway to secure financing. Even so, you want to strengthen your application for a commercial mortgage to improve your chances of approval. Here are some top steps to take:

1. Maintain a Strong Credit Profile

Asset-based lenders may not focus only on your credit score, but creditworthiness is still a factor they consider. For example, some may have minimum credit score requirements. Positive, on-time payment history, low credit utilization, a lengthy credit history, and managing different types of credit may help.

2. Increase the Down Payment Amount

Investment property loans for LLCs work differently from conventional loans for a primary residence. Instead of buying a single-family home or condo for you to live in, you’re purchasing property with the express purpose of earning rental income.

As a result, lenders typically view commercial mortgages as higher risk and require higher down payments. In general, down payment amounts could be 20% to 30%.

Increasing your down payment could make you an attractive borrower and could help your application.

3. Provide Detailed Financial Projections for Property

When applying for investment property loans for LLCs, lenders want to know that the property is an actual investment. In other words, it will lead to returns that outpace the overall costs.

Including financial projections that highlight the property’s earning potential can strengthen your application. Include:

• Estimated rental income
• Property taxes
• Insurance costs
• Potential operating expenses
• Renovation costs
• Vacancy rates

Providing any local or official data to support your application can show lenders you’ve done your homework and know what you’re getting into.

4. Prepare Business Documentation

Make sure to have all of your business documentation ready before applying for investment property loans for LLCs. That may include:

• Articles of Organization
• Operating agreement
• Employer Identification Number (EIN)
• Separate business bank account
• Business plan
• Three months of the most recent financial statements
• Financial projections
• Bank statements showing cash reserves

Having solid documentation can help your case and show lenders that you’re a professional ready for this next step.

Why Flexible Financing is Key for Real Estate Investors

Real estate investors with newly formed LLCs may face difficulties or denials in accessing traditional financing. Without a proven track record and several years of business history, it can be hard to meet the eligibility requirements set by banks or certain lenders.

Getting investment property loans for LLCs from an asset-based lender may be more accessible. Instead of placing so much weight on your time in business, many of these specialized lenders review the investment and income potential. Often, they look at the market value of the property, projected cash flow, loan-to-value ratio, and your financial and credit profiles.

Asset-based loans are a form of flexible financing that can open up more opportunities even if you don’t have years under your belt or business tax returns or revenue to show.

Real estate businesses looking to purchase rental property or expand an existing portfolio can utilize the advantages of asset-based lending.

Final Thoughts

Starting an LLC for your real estate investing business is a solid first step. It helps separate you and your business and provides legal separation and legitimacy as a business entity. But you might still face barriers with traditional financing that rely heavily on your business’s operating and revenue history, credit score, and tax returns.

Asset-based loans are a way to bypass some of these barriers and access financing from alternative and specialized lenders that focus on the value of your property and its income potential. However, it’s key to remember that your property secures the loan. Failure to meet your repayment obligations can mean the lender has the right to seize your property.

If you need investment property loans for your LLC, you have various options. Finding the right loan and lender can help you start growing your business.