Can you roll a HELOC into an LLC?

Question

Hi All!

My wife and I have a condo, we are thinking about  leveraging our full HELOC for an investment, however we don’t have kids yet and may need to buy a house soon. Can I buy an investment via HELOC then create an LLC and refi? I don’t want to forfeit buying a home because finances are tied up in the investment. Or, would It be better to buy the house fist, then use the equity for the investment?

Thanks!

Edward B. · Answer

@Mario Bellavia, if the note is in the name of the LLC AND it is non recourse, then it will not affect your personal borrowing power at all. If you have personally guaranteed the note though, which will likely be required for a brand new LLC, then you may have to disclose the note on your loan application anyway. Thereby negating what you were trying to achieve.

HELOCs are much easier to set up than standard loans, although both are technically bank loans, and can actually improve your credit score if they have a zero balance. Additionally, it could allow you to move/close faster than someone relying on financing.

Robert Carraway · Answer

@Mario Bellavia

True.  The HELOC is easier to execute.  But, it will have more of a negative impact on your credit score.  Your credit score is impacted by credit utilization.  So, if you have $100 of HELOC available, and you use all or most of it, then your score will go down.  By obtaining another loan, you will increase your available credit, and your utilization will be less impacted.  Seems counter-intuitive, but it's how credit scores work.  I'm assuming that you'll still be on the hook for the loan linked to the LLC.  If a bank will give your LLC a loan without a personal guarantee or link to your credit.  You are right.  But, I doubt you'll get much interest from the banks unless you put a large down payment into the deal to minimize their risk.  Also, you'll pay a higher interest rate.

Mario B. · Answer

Thank you @Edward B. and @Robert Carraway you've both been a big help.

Mario B. · Answer

@Robert Carraway I imagine a bank loan would negatively affect my ability to qualify for a larger mortgage down the road.  A HELOC is easier to setup then a bank loan also, no?  If I had the note registered to an LLC I assumed it would take the financial focus off me and my ability to qualify for a forever home.

Robert Carraway · Answer

@Mario Bellavia

Mario when I said finance the investment I meant using a bank loan to purchase the property right out of the gate.  I don't see the value in using the HELOC, only to later refi.  Why not use bank financing for the initial purchase, if that's your end plan anyway.

Edward B. · Answer

@Mario Bellavia, yes you could do this. Or you could just get the loan for the property in LLC to begin with. Understanding that the loan to the LLC will be under less favorable rates and terms than a standard residential loan.

Mario B. · Answer

@Robert Carraway Thanks.

Shopping banks Monday to ask around and do my HW.

I don’t have enough funds to finance the investment upfront. Connecticut unfortunately is a very expensive market, specifically where I am, however the returns are still decent.

Robert Carraway · Answer

@Mario Bellavia

So, yes, you could do this, but some banks might balk at the refi to an LLC.  Why not finance the investment upfront and only use the HELOC for the down payment?

Mario B. · Answer

@Edward B. Thanks for your feedback.

My question is, if I create an LLC with the sole purpose of it being for the investment purchased by the HELOC, can I take a loan out under the LLC to pay back the HELOC, thus allowing me to sell my condo and use the funds for a house.

Edward B. · Answer

@Mario Bellavia, I don't understand your question or what you are trying to do. The HELOC is in your name and will always be in your name unless you close it. If you max the HELOC, or even borrow against it, it will likely impact your credit score and DTI and thus your purchasing power for a new home. If you are looking to by a forever home then you should not make any major financial muscle movements leading up to that.

Can you roll a HELOC into an LLC?

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