How to cash out refi a house new single family home purchase

3 Replies

Buying a single family home with a private interest only loan (no lien recordings).  No prepay penalties.

The goal is to quickly purchase the home that I believe is greatly undervalued with cash from the loan, then in 6-12 months get a mortgage to convert the expensive private loan into a lower interest, longer term, amortizing loan.

Question is who should take title of the home right now in order to be able to apply for the mortgage later? Me, my business partner, our LLC, a newly created trust, something else, does it matter?

My concern is that if our LLC takes title to the home now, then in 6 months if I were apply for a mortgage to purchase the house from the LLC, the bank would consider it a non arm lengths transaction and not offer the mortgage. The LLC has also claimed a loss for 7 consecutive years. Are there any lenders that would cash out refi the single family home for the LLC? I remember reading about Blackstone B2R years ago for leveraging a portfolio of homes, and would like to ask if anyone has experience with them?

If the LLC would not qualify for a cash out refi loan under any program, then should I take title to the house now and apply for a cash out refi as soon as the minimum ownership period is satisfied? The private loan used to purchase the house is not recorded as a lien and there are no records of it. Anyone have any experience or advise on how best to proceed?

@Eugene G.

I think the answer is a lot more simple than you might think. I would hold in it my name and then do a refi on a 30 year fixed loan. The single best investment tool you have available is a 30 year fixed rate mortgage. Get as many as you can. First in your name and then in your wife's name. Soon enough you will have to work with commercial ARM's.

As far as the LLC part of your question is concerned. I generally question the need to hold a SFR in an LLC. The LLC does not protect your asset per se, it just acts like a firewall and limits the damage to what's inside the LLC. This becomes relevant if your assets outside that LLC are worth a LOT of money and start to attract predatory lawsuits.

IMO your defense startegies are in the following order: run a professional buisness and provide a safe property, so there is no good reason to sue you in the first place. Second: your landlord insurance. Third: get a personal (or commercial if incorporated) umbrella insurance with a $1M limit. It will cover liabilities that exceed the limits of you other insurances. It has to be a pretty good case to be worth more than $1M...

I often get asked about asset protection and my response usually is: what risks do you want to protect yourself from specifically? The reply usually is: I don't want to be sued by a tenant. Well, it's the US, anyone can sue you for anything, but they only will, if you give them a good enough reason and if there is enough money on the table (to pay the lawyers). A 4000 unit appartment holding company will need a different defense strategy compared to a landlord who owns 3 SFR's (and is leveraged 75%) - just not enough meat on the bone.

In the end it's a personal decision you have to make and it is between legal risks (getting sued) and financial risks (rising interest rates). 

Thanks Marcus for your response!  I'm leaning towards doing exactly as you recommended for the title. Do you know the minimum holding period before I can apply for a 30 yr fixed rate mortgage?

@Eugene G. A lot going on here but I'll do my best to answer this as best as I can.

If you were to take cash out of this property, a conventional loan would require you to be on title for 6 months before doing so. A conventional loan will very likely have the best rates and terms on a investment property cash out loan. You will have to close in your name too but you can switch title after closing to your LLC if you wish to do so.

If you need the cash out right away there could be some portfolio/commercial loans from a local bank (local to the property itself) which would lend money within the 6 months. They would likely still require you to personally sign for the mortgage but you could keep title in the LLC name if you wanted to. I say "could be" because each bank will govern it's own money differently. So you would literally have to call each and every bank to find out their terms. A conventional loan we all know those rules. So some banks might be able to do this and might not. You will just have to call each one or maybe work with a broker?

Feel free to ask more questions if you need.  Thanks!

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