First Time Buyers (Duplex)

[Chad Smith]

Hello! I have recently purchased a duplex with a conventional loan. I am hoping to refinance in around 2 years because my interest rate right now is so high. I am living in one half and renting the other half. I would like to put the property in an LLC, but am I allowed to refinance the property when it is in an LLC (My loan broker said I could not)? If I have to take the property out of the LLC to refinance are there any cost consequences?

[Katherine Serrell]

Great question. It would depend on what kind of loan you were refinancing into. If you refinanced out of your conventional into an investment property or a commercial loan the answer also depends.. some banks and credit unions do not lend to LLCs. However, a huge chunk of banks and credit unions do and they are not hard to find.

If you wanted to put the property in an LLC you would need to create an LLC, contact a bank or credit union that lends to LLCs and explain to them that you want to refinance into an LLC and they will take it from there.

Huge caveat is that you will need a minimum 20% equity in the property (some lenders even require 25-30%) at that point so if you used a low down payment loan to buy the duplex you would need to either hope that it appreciated to the point you have that 20% equity in it OR you would have to pay down the principal amount to get to 20% equity. 

For example: if you bought a 500k duplex with a 10% down loan that means you have 10% equity and your loan balance is $450k. So, to get to 20% equity, you would either need the property to appraise for around 560k (560,000x.80=448,000 so close to your loan balance) but if the property had not appreciated and was still worth what you paid for it (500k) you would have to pay the principal down to 400k (500x.80=400k) So you would need to come up with 50k cash (Loan balance= $400,000-$450,000 = -$50,000) to get the equity you need to be able to get an investment property loan for the LLC on the refinance.

Another two downfalls to this is that commercial loans/investment property loans have higher rates and you technically cant owner-occupy them. So, if you want to avoid higher rates, dont have enough equity yet, or dont want to move...you should refinance and leave the property in your personal name. As you can see from the 1000 other posts on here about whether or not you should put your property in an LLC posts.. an LLC is just one "layer" of protection but a good insurance policy and an commercial umbrella liability policy should do the trick.

Hope that helps!

[Leo R.]

@Chad Smith

RE: interest rates. Unfortunately, there's no guarantee that rates will go back down...it would be nice if they did, but bottom line: nobody knows what will happen in the future. Because of that, financial models need to stand up to worst-case scenarios (incl. scenarios where rates don't come back down).

RE: LLC. This is a frequently debated question. Even without an LLC, you can cover some of your liability by having a strong landlord insurance policy (in fact, I'd suggest doing this regardless of whether you do an LLC...an experienced insurance agent can help you determine what type of policy you need).

You are correct that most conventional lenders won't allow you to put the property in an LLC, and many mortgages have a clause that would make the mortgage due if you transfer to an LLC (google "mortgage due on sale clause" for more info). However, according to many investors, it's uncommon for the lender to discover that a property has been transferred to an LLC, and it's uncommon for them to enforce a due on sale clause because a property was put in an LLC. Often, as long as the lender is getting paid on-time, and they don't see any other red flags, they'll leave the owner alone...on the flip side, now that we're heading into a recession, lenders are getting much stricter, and it's possible that some lenders will start enforcing due on sale clauses (but, that's just a guess)... 

Regardless, it's important to understand that an LLC is not a foolproof method of protection. For instance, if the financials of the LLC are improperly managed, it can remove the limits of liability, and make you personally liable...so, it's worth reading up on this topic, and discussing it with an experienced CPA and attorney to understand how to run the LLC in a way that actually helps limit your liability.

Good luck out there!

[Basit Siddiqi]

Interest rates may be lower, the same or higher in two years.
Do the calculation in 2 years to see if it makes sense to refinance.

There is some language that a SMLLC can potentially get conventional financing.