Refinancing Rental Condo - Start an LLC?

Question

Hello BP Community,

I'm new to BP and am a fledgling real estate investor.  Here's my situation:  I've been the owner of a condo in the Chicago suburbs since 2007. Originally purchased as a primary residence, however young family outgrew the space and we purchased a single family home, out of state. The condo, like much of the Chicago area, experienced a severe correction during the housing market downturn and was underwater, so we could not sell without bringing a check to closing.  We've been renting the condo out since 2010 and have been "slightly" cash flow positive every year, which has been improving every year.  Property values have now improved (although still down 10-15% from peak of '07), and principal has been steadily reduced. We now have 18 years left on 30 yr.  A few questions for the BP community:

1)Considering refi into new 30 year; would greatly reduce P&I payment each month and increase monthly Cash Flow.  Goal is to maximize monthly cash flow.  Any thoughts on this approach?

2)With refi, is now a good time to establish an LLC?

3)Looking at additional properties in higher growth markets, such as Boulder, CO or Ft. Collins, CO. Establishing above referenced LLC can be used for additional purchases, correct?

Really just looking for guidance on what to do with current condo and how to set myself up for future purchases. Monthly cash flow is the goal.  Any advice is appreciated!

Rod Stanback · Answer

Hi John,

Welcome to BP!

You can refinance your condo as an investment in your personal name. An entity is always preferred for everyone's protection but it isn't a requirement for loan-term buy and hold loans.

Since it's an investment property, the terms of your loan would be the same if it were in an LLC or not. Ultimately it boils down to the equity that you have in the property and your ability to repay the loan.

1. Depending on your current interest rate, I highly recommend refinancing ASAP before the fed raises rates again (rumored to happen by February)

2. I would suggest leaving this one in your personal name because you will incur costs for the "transfer taxes".

3. Yes, the LLC can be used to make additional purchases. Then you refinance and repeat to build your portfolio!

Let me know if you have additional questions.

Thank you!

Amanda G. · Answer

Start with the end in mind. If the goal is cash flow, are you better served keeping/refinancing the current property, or selling and investing those funds in a different market? It is tempting to look at the past, but that's not actually relevant. What is important is what assets you have today, and how best to apply them to your goal.

On your specific question of LLC- you will probably get better refi options if you keep the property in your personal name. After that, if you choose to assign it over to an LLC, you are taking the risk, however small, that the bank will call the loan due. You can also research loan options for LLC, those are commercial loans and they have very different terms and times than conventional personal purchases.

Good luck!