Starting out: HELOC and LLC

4 Replies

Hi everyone, I am pleased to part of this community. I am just starting to get my buy and hold real estate investing career of the ground and need some advice. I have been doing a fair amount of research over the the last year and have learned a great deal. Now it's ready for action (I think).

My situation: I own a home without a mortgage and am looking to obtain a HELOC for 180K. My credit is good and the loan should not be a problem. The rates through First commonwealth credit union seem to be the best after calling a few banks etc. It almost seems too good to be true. HELOC 180K at a 3 year fixed interest only payment of 1.1% then will increase to 4.49% for the rest of the 10 year duration of the loan. Should I run with this deal, and also I want to start an LLC. How do I obtain the loan and "put it through" an LLC? I know these are basic questions, but I want to start right and make this venture a successful reality.

Any other things I should be doing at this early stage?

I appreciate your advice.

Regards.

Welcome to BP, Darren! Sounds like you're off to a good start. 

A HELOC is how I started and I still use it regularly. I have a similar deal to yours, so it's a good deal but totally believable. That's why it's so important to check around.

You could structure the LLC a couple of different ways. The biggest question is how you intend to hold your properties. If you are thinking of buying properties in your LLC with money from your HELOC, you are at risk of co-mingling funds which pierces the corporate veil provided by the LLC and renders it useless for liability protection.

The most straightforward way to solve this would be to ask the bank if you can put the HELOC in the LLC's name with the same collateral and a personal guarantee from you. You could set up the LLC's operating account at that bank to build your relationship with them and for convenience for you. If you can use the HELOC to pay for an entire property, you can put the properties in the name of your LLC and you're good to go.

Another option would be to set up the LLC and try to get a commercial line of credit with your home as collateral. When you are ready to buy a property, this makes it possible to put the property in the LLC's name. Some people try to buy the property in their personal name and quitclaim it to the LLC, and that's a bad idea, especially if they are using a HELOC that is also in their personal name.

The important thing with an LLC is to treat it like a completely separate business and document anything going into or out of the LLC, otherwise it's a thin corporate veil that won't offer you any protection. You don't want to have an LLC holding properties and a HELOC in your personal name that you use for the downpayment, or the LLC is a waste of time.

I hope this helps,

Originally posted by @JD Gunter :

Welcome to BP, Darren! Sounds like you're off to a good start. 

A HELOC is how I started and I still use it regularly. I have a similar deal to yours, so it's a good deal but totally believable. That's why it's so important to check around.

You could structure the LLC a couple of different ways. The biggest question is how you intend to hold your properties. If you are thinking of buying properties in your LLC with money from your HELOC, you are at risk of co-mingling funds which pierces the corporate veil provided by the LLC and renders it useless for liability protection.

The most straightforward way to solve this would be to ask the bank if you can put the HELOC in the LLC's name with the same collateral and a personal guarantee from you. You could set up the LLC's operating account at that bank to build your relationship with them and for convenience for you. If you can use the HELOC to pay for an entire property, you can put the properties in the name of your LLC and you're good to go.

Another option would be to set up the LLC and try to get a commercial line of credit with your home as collateral. When you are ready to buy a property, this makes it possible to put the property in the LLC's name. Some people try to buy the property in their personal name and quitclaim it to the LLC, and that's a bad idea, especially if they are using a HELOC that is also in their personal name.

The important thing with an LLC is to treat it like a completely separate business and document anything going into or out of the LLC, otherwise it's a thin corporate veil that won't offer you any protection. You don't want to have an LLC holding properties and a HELOC in your personal name that you use for the downpayment, or the LLC is a waste of time.

I hope this helps,

 I thought with LLCs being pass through taxes funding within them would matter very little? 

@Tanner Barnes - It matters a great deal. What you are referring to is if you structure your LLC as an S-Corp, the net profit of the organization flows through to your personal tax returns and is taxed at the personal income rates.

The liability of the organization is a different matter entirely. If you co-mingle funds or use the organization simply as a face for your personal activities, the "limited liability" part of LLC doesn't hold up. In a legal liability case, the judge or attorney will attempt to "pierce the corporate veil" of the LLC by arguing that it's just a front for your personal activity. If that occurs, you are personally liable for everything the LLC did.

Activities such as co-mingling funds or swapping assets back and forth without loan documentation are activities you would never do with an arms-length organization, and they are evidence that your LLC is not an arms-length organization, which means there is no corporate veil or liability separation.

For these reasons, many investors are ceasing to bother with an LLC for the purpose of personal investing, especially if they have to put the loans in their personal names anyway. They just get lots of liability insurance and invest in their personal names. An LLC is not a magic shield against liability unless you structure it properly and manage it carefully. If you don't treat it like a separate business, it isn't one.