Should I put my rental in an LLC before or after opening a HELOC?
So we have one rental property that is 100% paid off and cash flowing each month. The property has a long-term tenant that is very easy to work with. The property is currently NOT in an LLC, but I've had thoughts about setting one up for it and any other properties I buy in the future (I do have a $1M umbrella insurance policy on it and the highest liability insurance I can get).
I would like to open a HELOC against the property in order to secure the downpayment funds I would need to buy a second (and maybe third) property.
Is it better to roll the property into an LLC before or after applying/securing a HELOC? Any advice would be greatly appreciated!
You will be able to get a higher LTV and terms if it is in your personal name. There is a chance that if you get approved for a HELOC in your personal name and then move the property that the HELOC company will close the line. While there is also a risk that they call the whole note due, it is more likely that they just take your unused credit to 0. I would really consider moving it into an LLC, and doing a cash out refi on a long term fixed rate. While you will pay interest all the time vs just when you are using the line, 2-3% a year if you are paying interest on it 12 months a year vs 6 months a year shouldn't make or break your deals and it will bring consistency to your portfolio.
Kyle,
Just a quick caution, check with your current agent to see if the company will move the policy to the LLC or if the policy needs to be rewritten in a different company. That could increase your cost and also be a flag to your mortgage that it is no longer in your name. The coverage needs to be in the LLC name because the LLC would be the owner on the Title.
I would also suggest reviewing the things you will need to do (sepparate bank accounts, etc.) to keep the protection of the LLC. Lastly, check with your CPA for the additional costs of the LLC and if there are additional tax prep. costs.
You cant just move a property into an LLC. The LLC would have to purchase it from you. This would also subject you to capital gains tax on the sale.
Quote from @Kyle Rhine:
So we have one rental property that is 100% paid off and cash flowing each month. The property has a long-term tenant that is very easy to work with. The property is currently NOT in an LLC, but I've had thoughts about setting one up for it and any other properties I buy in the future (I do have a $1M umbrella insurance policy on it and the highest liability insurance I can get).
I would like to open a HELOC against the property in order to secure the downpayment funds I would need to buy a second (and maybe third) property.
Is it better to roll the property into an LLC before or after applying/securing a HELOC? Any advice would be greatly appreciated!
I would not move it into a LLC, I would just get make sure you have a good insurance policy and a good property manager.
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@Kyle Rhine hmm, lots of different comments here...so I'm just going to answer your question directly if you don't mind.
When applying for a "line of credit" on an investment property some lenders won't care whether it's in your LLC or not....and some lender might require it to be in your LLC. So the recommendation I would suggest here is to check with your lender first on what to do. If you don't know a lender already, then consult other real estate investors in your market on who good lenders are to use for this type of thing. Usually it's smaller, more local banks that offer better terms for us on investment properties but if another investor has a good suggestion then follow up on that lead first.
Hope all of that makes sense. Thanks!
@Lawrence Briggs thanks for the mention.
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(@Andrew Postell, @Chris Seveney, @Lawrence Briggs, @Jim Pellerin, @John Mocker, @Nathan Grabau) Thank you everyone for your advice! I spoke with my lender and I think this will be my plan (feel free to poke holes in it!):
I'm going to leave the property in our name for now, open the HELOC, use some of those funds to improve the property, and then do a cash-out refi on it (for a higher appraisal value). In the meantime we will keep the max liability insurance on it and our umbrella policy for protection.
We will use ~50% of the funds from the cash-out refi as down payments for another 2 rental properties (should be doable in our area as home prices are lower than most of the country). We'll retain the other ~50% of the cash-out refi funds and use them as needed for repairs to the new properties, reserving some as a rainy day fund for any surprises, then work on paying down the notes on all three properties with the rental income received.