HELOC, LLC, Taxes - Newbie looking for clarity

12 Replies

Hello BP - I am new to REI with 10 yrs experience. After renting my wife's former house for ten years we are ready to take the plunge and begin investing in Real Estate wholeheartedly.

The information I have found on BP has been incredible and from what I have learned I want to keep as much of my money as I can in my pocket and not tied up into any one property. Because of this, I have applied for a HELOC. When I first heard of this strategy it seemed like a no brainer. Get the LOC, use it to buy cash and rehab, rent it out and refinance to pay off the loan (either find a bank willing to do so immediately or let the property season for a year).

We are also going to LLC to protect our personal assets which seems an obvious move (even though we never did with my wife's rental).

I have run into a couple of potential hurdles in regard to this strategy and am eager to hear what the BP community thinks.

They are:

-If I purchase the property in my name and then transfer to an LLC the bank can call the loan at any time. I've heard that this doesn't happen very often but the example that has me worried is if my loan is sitting at 5% in 15 years and the rates go WAY up to 15%-18% the bank may call my loan in an effort to raise quick cash.

-The answer to the above issue is to purchase originally through my LLC. I am curious as to how that is done. Do I fund the LLC and provide proof of funds that way?

-Finally, if I do purchase the home in the name of the LLC and need to take rent payments from the LLC to pay the loan, wouldn't that be taxable income? Even worse, if I refinance the property (owned by the LLC) and then take that money to pay off the HELOC loan is that also considered income and taxable as well?

I understand that there will be taxes to pay and that I need to speak to a professional before moving forward but am interested in some direction from those who have been there before.

There are a lot of you out there doing this so I promise to keep Dancing With the Stars at bay while I await your answers.

Thanks in advance for your responses.


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LLC's can obtain loans/mortgagees. However, LLC's are not available to obtain a conventional mortgage(Fannie Mae/Freddie Mac).

You would pretty much need to get a portfolio/commercial loan. These lenders will likely require the members of the LLC to guarantee the loan.
These loans normally have slightly higher rates and shorter terms with a potential balloon payment. Call up a couple portfolio lenders in your area for terms/rates.

Paying back a loan is not a taxable event. You will be taxed on the income the rental property generates.

Buy the property in an Illinois Land Trust. Manage the property in an LLC. You will sign personally for the loan and the bank will be happy. The problem will be finding a banker who understands all of this.

On the same note of transferring a house from my personal name to an LLC.... I purchased a house with cash and want to transfer it over to an LLC before selling it for tax purposes. Is there anything legally wrong with doing this?

@Greg Campbell welcome to BP and congrats to taking the plunge into REI. I am right in your backyard. Your concerns about the LLC are valid. The workaround is don't do a LLC. Instead, take out an umbrella policy on your insurance.

Everyone has been told for generations to do a LLC, and there certainly are some pros to that. But if you are financing, then the LLC doesn't do you much good. Terms are worse, and costs are higher. It's commercial financing, you don't get the pretty Conventional rates and terms. So why do you need a LLC? Likely because someone told you that's the way you are supposed to do it? Protection? From what?

An increasingly more popular option is to get an umbrella policy. You can get a $1M - $5M policy for around $200-$500 a year (not exact, just making a point). This protects you from the slip and fall, or whatever people told us to be concerned about that we need a LLC. Costs around the same as filing for an LLC, doing the annual renewal, and filing LLC taxes. And you can still write off property expenses on a personal Schedule E. You don't need a LLC for tax deductions.

And if you want anonymity, that's what a Trust is for.  You can form a Trust, and you CAN buy the property in Trust using Conventional financing.  Some lenders won't do that, so make sure you align yourself with a rockstar lender who knows the guidelines, doesn't have overlays, and is looking out for YOUR best interests.

Best of luck!

@Thea Linkfield nothing wrong with that, the LLC transfer concern is when you have a mortgage, it can trigger the due on sale clause. If there's no mortgage or lien holders, then you can do whatever you want.

But if you go to sell it to someone who is buying with FHA financing, there are "flipping" guidelines that come into play within the first 180 days of your transfer to the LLC. Just so you are aware.

@Zack Karp

Appreciate the detailed explanation and suggesting the umbrella policy. I use it for my properties in AZ.  

As stated, if you want to purchase the property under an LLC you will not be able to procure a conventional, residential loan....and commercial loans typically come with less attractive terms. I personally prefer (on residential properties) going with a land trust and an umbrella insurance policy to further cover risk. This is a good conversation for an attorney though.

Thank you @Zack Karp I did not know about the "flipping" guidelines so I appreciate the heads up! I will look into it.

@Greg Campbell that's awesome!  Best of luck house hunting, I'm ready to help as soon as you are ready!

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