Once upon a time, real estate investors felt comfortable putting their holdings in limited liability companies (LLC). Tax strategist Diane Kennedy is warning, however, that LLCs may no longer be the way to go when it comes to investment property mortgages underwritten by the two big mortgage buying companies in town: Freddie Mac and Fannie Mae.



It seems that Freddie Mac, probably followed closely by his sister Fannie Mae, has announced a change in the rules on refinancing property that has been held by an LLC within the first half of 2008. The rule change, announced on April 22, 2008, also stated that Freddie Mac will be restricting the number of one family to four family buildings an investment holding company can own, lowering the number from ten to four. Freddie Mac states the reason for these changes, particularly the refinance rule change, as due to continued credit deterioration and declining home values in many areas of the country..

The rule changes become effective August 1, 2008.

This has created two camps of strongly held feeling among real estate investors. One side says this is good news, that it will weed out the competition and keep novices who may not know what they’re doing out of the market. Others are dismayed, finding themselves on the verge of purchasing their fifth property and suddenly having to find another way to finance their purchase.

Ms. Kennedy, herself a real estate investor, thinks the news was timed very badly: Smart investors are positioning themselves to take advantage of our current market. As [house prices] begin to rise again investors will once more be looking for ways to leverage their equity as beneficially as possible. She feels the move will limit the choices investors will have before them to finance and refinance their holdings. She speculates that perhaps private mortgage companies will fill the gap left by Freddie Mac's rule change.

The changes only affect residential properties of between one and four units. Large commercial property investors have nothing to worry about. But speculators, who are trying their hand at investing in real property for the first time, may find themselves dismayed at the limiting options at hand. On the other hand, as one particular blog commenter put it, “this will keep investors who don't know what they're doing from getting in over their heads". He points out another benefit, too, as it “will keep shady brokers and sleazy sales people from being able to smooth talk a new investor into buying up a lot of properties with negative cash flow and/or no equity".

So, there are definite pros and cons to the Freddie Mac changes. American business people are nothing if not creative and innovative when it comes to making investments. There are private mortgages companies they can approach, or portfolio mortgage brokers.

At the very least, real estate investors may have to revise their thinking when they form business models to invest in property.