This page covers California rentals financed between $1M and $5M: single-family homes, 2-4 units, condos, townhomes and small multifamily buildings. The financing is the same as anywhere else in the US: a business-purpose loan to a US LLC, secured by a non-owner-occupied rental. What makes California different is the state's tax and rent rules, which affect the numbers the loan is sized on.
This page is general information. It is not tax or legal advice, and California's rules change; confirm them with your advisers before you buy.
How the financing works
If the property needs work first, a bridge loan (up to 80% LTV) or a renovation loan (up to 90% LTC) can fund the purchase and the works, with the DSCR loan as the refinance once it is leased.
- Loan type: a DSCR loan, qualified on the rent against the loan payment (the debt service coverage ratio)
- Leverage: up to 80% LTV
- Borrower: a US LLC with its EIN and a funded US bank account
- What you do not need: a US credit score, US tax returns, US pay stubs or a Social Security number
- What you do need: identity and source-of-funds documents, a recent bank statement, the lease or projected rent
- Property: single-family, 2-4 units, condos, townhomes, small multifamily up to 9 units; non-owner-occupied only
The California LLC tax
Every LLC that is organized in California, registered there, or doing business there owes the California Franchise Tax Board an annual tax of $800, even in a year with no profit, until the LLC is cancelled. An LLC formed in another state that owns and rents out California property should expect to register in California and pay it. LLCs with larger California income also owe an additional LLC fee scaled to that income. A single-member LLC that is disregarded for federal tax is still subject to these California charges, and a foreign-owned one also files the federal Form 5472.
Property tax and the LLC change-in-ownership rule
Under Proposition 13, property is reassessed to market value when it changes ownership, and the assessed value then rises by no more than 2% a year or inflation, whichever is less. Buying the property resets the assessment, so underwrite the tax on your purchase price, not on the seller's bill.
An LLC adds a rule investors often miss: when interests representing more than 50% of an LLC are transferred, cumulatively, the real property it owns can be reassessed as a change in ownership. Bringing in a partner or selling a stake later can therefore raise the property tax and reduce the coverage ratio the DSCR loan was sized on.
Rent rules
For a lender, these rules matter because they cap how fast the rent, and therefore the coverage ratio, can grow.
- The statewide Tenant Protection Act limits annual rent increases on covered housing to 5% plus the change in the cost of living, with a maximum of 10%
- Newer housing (built within the last 15 years) is exempt from the statewide cap
- A single-family home or condo is outside the cap only if it is not owned by a corporation or a REIT and the required notice is given to the tenant; whether an LLC-owned home qualifies depends on who the LLC's members are, so ask California counsel
- Cities and counties with their own rent control can impose stricter limits, and the stricter rule applies
When you sell
Two withholdings can apply. California generally requires withholding of 3 1/3% of the sale price on sales of California real property, unless the seller qualifies for an exemption or elects the alternative calculation based on the gain. And if the LLC is a single-member LLC owned by a foreign person, the federal FIRPTA rule generally requires the buyer to withhold 15% of the price. Both are credits against tax actually owed, recovered by filing returns, and both are worth modelling at purchase.