Strategy for cashing out investment property with conventional mortgage

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Strategy for cashing out investment property with conventional mortgage

John Teabout
Member since 2019 · 2 posts · 1 vote

My wife bought a condo for 178K with a conventional mortgage (10% down, 4.25% APR) in 2019 before we were married. Then I bought a bigger condo for our primary residence in 2022 for 275k with a conventional mortgage (5% down,1.5% APR). We rented my wife's condo and are currently getting $2,350 per month. My wife's condo is now worth 300k+ and we are looking for a strategy to pull cash out for a new deal that involves potentially putting her condo in an LLC.

Should we create an LLC and do a cash-out DSCR loan? We are concerned that the new interest rate will create negative cashflow on the rental. Does this also mean "selling" the property to the LLC and paying capital gains tax?

Should we leave her conventional loan and take out a HELOC? We have checked with a few lenders and because it's not our primary residence anymore lenders won't offer a HELOC.

Any suggestions?

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  • Brandon Croucier
    Lender · Lake Havasu City, AZ · Member since 2024 · 700 posts · 285 votes
    2y

    Hi John,

    It's a matter of opportunity cost.

    Yes capital is more expensive right now, but based off cyclical and long term data, asset prices begin to rise rapidly as money becomes cheaper.

    *Getting Capital Now And Buying More Assets - Will Most Likely Increase Greater Returns Then a 2% Spread In Interest Rates*

    I do recommend a DSCR loan if your property is producing enough income, its a great product and is being used all across the nation to scale portfolios rapidly!

    0Reply
  • Patrick Roberts
    Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
    2y

    You can look at getting a commercial line of credit from a local bank if your cash needs will be short term. If youre planning on continuously deploying the cash from the equity in the condo, a cashout refi probably makes the most sense.

    Conventional loans are typically the better deal vs DSCR, but you wont be able to get a Conventional loan if the property is owned by an LLC. You would need to use a DSCR loan if you plan to combine with LLC ownership or if income/DTI is a problem in qualifying.

    0Reply
  • Caitlin Davis
    Lender · 645 Madison Ave. New York, NY · Member since 2023 · 28 posts · 12 votes
    2y

    For a HELOC, the property must stay in your personal name, but it is possible to secure one on an investment property. While most banks don't offer this, I can arrange investment property HELOCs in PA, NY, OH, FL, and GA. With either option, there's no capital gains tax since it's a loan, not a sale. A DSCR loan allows for a cash-out refinance based on the property's cash flow, and a quitclaim deed at closing can transfer the property into an LLC, with only the transfer tax to consider. To determine the best option, we should run the numbers for both scenarios and see which is more profitable. Happy to assist with that!

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  • John Teabout
    OP
    Member since 2019 · 2 posts · 1 vote
    2y

    Thank you all for the replies.

    We are going to try for a Investment Property Loan that allows cash-out, likely a Freddie Mac product, instead of a DSCR loan. Our broker believes our rate will come out better and that it's doable. More importantly, the property has already appreciated substantially and we want to pull out what capital we can now so we can start scaling up. Talking through a potential deal at the moment.

    I like the idea of a line of credit, but we don't have business credit so I'm assuming a commercial line would be tough. Eventually, we will get a HELOC on the second condo so that if/when we move, it is already in place.

    @Caitlin Davis Do you offer this product in NJ? Sorry I didn't mention my state.

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  • Caitlin Davis
    Lender · 645 Madison Ave. New York, NY · Member since 2023 · 28 posts · 12 votes
    2y

    Yes, I am licensed in New Jersey as well.  

    0Reply
  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    2y
    Quote from @John Teabout:

    My wife bought a condo for 178K with a conventional mortgage (10% down, 4.25% APR) in 2019 before we were married. Then I bought a bigger condo for our primary residence in 2022 for 275k with a conventional mortgage (5% down,1.5% APR). We rented my wife's condo and are currently getting $2,350 per month. My wife's condo is now worth 300k+ and we are looking for a strategy to pull cash out for a new deal that involves potentially putting her condo in an LLC.

    Should we create an LLC and do a cash-out DSCR loan? We are concerned that the new interest rate will create negative cashflow on the rental. Does this also mean "selling" the property to the LLC and paying capital gains tax?

    Should we leave her conventional loan and take out a HELOC? We have checked with a few lenders and because it's not our primary residence anymore lenders won't offer a HELOC.

    Any suggestions?

    Hey John, 

    As others noted, you might want to shop a few local CUs to finance this with a HELOC. If you are unsuccessful, there is a DSCR 2nd Mortgage that allows closing in an entity and CLTV is up to 75% . I wouldn't touch your 1st mortgage unless the blended rate (Both the 1st and 2nd Position loan rate) is higher than a traditional cash out refi.

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