cash out Refinancing problems with LLC

Investor · Conifer, CO · Member since 2013 · 69 posts · 11 votes

I am struggling to refinance my triplex because it is in an llc. I own the triplex out right and believe it will appraise around 230,000. It rents for 2275.00 and the NOI is around 1100.00 per month. I'm looking for 130,000k to get my original investment out and to continue investing. Banks are reluctant because of the llc. I'm considering a personal guaranty but would rather not go that way. Any suggestions?

I recently saw a post about someone purchasing the houses in their name then after the refinancing they changed the deed into a trust. That might work on my next investment. Does anyone have experience with this as well?

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Jeff CopelandBusiness Member

Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes

As already stated, conventional residential loan products are for individuals, not business entities.

Legally and ethically, you have two options:

1. Keep property in LLC's name, and use commercial financing options (which are not at all competitive or comparable to residential loan products).

2. Take advantage of (still historically low) residential interest rates and 30-year fixed rate financing, and transfer the property into your own name. This is very simple (just a one page quit claim deed added to the already mountainous pile of loan paperwork you'll be signing).

When using #2 (which I personally think is a no-brainer - use as much conventional residential financing as the banks will give you, then start using commercial financing or other creative solutions), the key is to carry very good liability insurance.

What many people don't realize is that liability insurance not only insures you for losses up to your specified policy limits, your insurance carrier also has a "duty to defend". Meaning, If I claim I stubbed my toe on the door step of your rental property and I'm owed $5 million for the loss of my pinky toe, your insurance carrier steps in and says "Hell no, we'll give you $50 to cover your copay at the walk in clinic...Have a nice day and be on your way." And they will go so far as to fight that battle in court (or settle) on your behalf. So solid liability insurance is better protection that most people realize.

And in any case, how often have you heard of a residential landlord being sued (and losing) for some type of premises liability? I'm in the industry, and I don't personally know of a single case. I know it happens...but I don't think it's nearly as common as some people fear.

Finally, all the talk about "just refinance in your name, and then immediately put the property back in your LLC's name" is not legal or ethical, and every mortgage note has a due on sale clause which would allow the lender to call your note due immediately. Maybe you'll get away with it for a few years. But what about 10 years from now if mortgage rates are at 9% - do you think your lender might have some incentive to call your note then? Best case - you just refinanced out of your 4.25% 30-year fixed loan at your new rate of 9%. It's a risk you need to be aware of if you try to cheat the system.

Hope that helps!

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Account Closed
Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes
9y
@Daniel Levine I am not sure what you were trying to get from having the property held by an LLC. Most people are attempting to get asset protection by segregation. If that is what you have in mind you need to talk to a professional about your entire strategy.
If you have enough assets to worry about segregation then you should spend the money on getting the advice.
The reason I am saying this is because the financing you are talking about might negate any protection the LLC is providing.
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Daniel Levine
OP
Investor · Conifer, CO · Member since 2013 · 69 posts · 11 votes
9y
that is a concern. Would a personal guaranty on a loan pierce the corporate protection of the llc? I want to stay protected from a tenant who uses me, so my personal assets are safe. Also would like to protect my personal assets from loss however I need the loan to continue investing so I am considering the personal guaranty.
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Mike McCarthy
Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
9y
If you are looking for a conventional mortgage, you need the house titled to you personally. Even if you change the title to the LLC, the loan will still be in your name. I'm not a lawyer, but I'd imagine that would negate any protections that the LLC provides if you run into legal trouble.
From my research/understanding, you need to sort of make a decision between going conventional loans and protecting yourself with insurance, or going LLC and commercial loans.
Both can work, it's what makes most sense for you and your short/long-term plans.
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
9y
Thank you for sharing another problem with placing little residential properties inside business entities @Daniel Levine.
Lenders and insurers expect commercial 5+ unit buildings to be inside an entity. In the name of asset protection - borrowing, title insurance and hazard insurance policies are at risk (with shady after the fact transfers) with houses and small plexes. Cheers!
0 Reply
Stephen Hundley
Realtor · Lafayette, LA · Member since 2011 · 297 posts · 175 votes
9y
Put in personal name and get better insurance if you want better financing terms.
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Andrew McLain
Investor · Kansas City, MO · Member since 2016 · 21 posts · 9 votes
9y
Daniel,
At Residential Revival we own all our homes in our LLC. We wanted to build a business instead of a group of friends whom each own real estate. With that said, we struggled originally with finding financing/refinancing options but you'll just have to reach out to local commercial lenders. They will readily lend to an LLC. You will have to personally guarantee it. We haven't found any way around that. Also, their rates have always been ARMS on 5-10 terms with 20-25 year ammortizations. That's just the name of the game commercially. Since we have hit that wall ourselves, we are instead going to focus on doing flips and General Contracting work until we can buy rentals with better terms. Happy Investing!
3 Reply
Daniel Levine
OP
Investor · Conifer, CO · Member since 2013 · 69 posts · 11 votes
9y
thanks, that is very helpful. Arms and balloons is all I have found, both of which scare me. However I will continue hunting. It is nice to hear I am not the only one struggling with this. Many of the BRRR posts I read try and make it look easy. The personal guaranty doesn't really bother me, however do you know if that pierces the llc's Vale? Maybe a lawyer question.
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Daniel Levine
OP
Investor · Conifer, CO · Member since 2013 · 69 posts · 11 votes
9y
Does anyone know how hard the process is to switch the deed out of the llc and into my name?
0 Reply
Thomas Williamson
Investor · atlanta , GA · Member since 2012 · 287 posts · 148 votes
9y
We do this all the time, it's not a problem. All of our properties are held in the name of the LLC. We just completed a cash out refinance with one that had a 30 year fixed rate mortgage on it, and another large bank agreed to do the cash out re-fi on it with another 30 year fixed rate 4.75%. At closing, the attorney simply transferred the property from our LLC back into our names, and then back into the LLC after the re-fi was done. It wasn't a big deal at all. Keep shopping for the right bank and attorney.
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Stephanie P.Pro Member
Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
9y
@daniel Levine
I am not a lawyer but...
If you co-mingle personal funds at all, you are negating the purpose of the llc and run the risk, if sued, to lose more than what you've put into the llc. Llc, personal guarantee, etc... at this point doesn't really matter. Get good umbrella insurance and roll on.
Good luck
Stephanie
@Daniel Levine
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Justin B.
Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
9y
I have done this a few times through my LLC which holds all my properties. I haven't had any issues but you will be looking at a "business" type loan which is usually ammortized over ~20 years and the interest rate will be a little higher than conventional. Also, I'm sure you will have to personally guarantee it, but no that should not "pierce the veil" so to speak. It's very common and shouldn't affect you negatively. Just keep looking around to banks. Since you are only looking to finance around 60%, you shouldn't have a problem finding a bank to do it. Good Luck!
0 Reply
Lily Quan
San Jose, CA · Member since 2016 · 36 posts · 7 votes
9y
@Daniel Levine Private lender will lend to LLC. That is a niche product that a creative portfolio lender can handle from your stated scenario. No need to take it out of the LLC, just to put it back in. Find a local lender and they will be able to help you.
1 Reply
Jeff CopelandBusiness Member
Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
9y
As already stated, conventional residential loan products are for individuals, not business entities.
Legally and ethically, you have two options:
1. Keep property in LLC's name, and use commercial financing options (which are not at all competitive or comparable to residential loan products).
2. Take advantage of (still historically low) residential interest rates and 30-year fixed rate financing, and transfer the property into your own name. This is very simple (just a one page quit claim deed added to the already mountainous pile of loan paperwork you'll be signing).
When using #2 (which I personally think is a no-brainer - use as much conventional residential financing as the banks will give you, then start using commercial financing or other creative solutions), the key is to carry very good liability insurance.
What many people don't realize is that liability insurance not only insures you for losses up to your specified policy limits, your insurance carrier also has a "duty to defend". Meaning, If I claim I stubbed my toe on the door step of your rental property and I'm owed $5 million for the loss of my pinky toe, your insurance carrier steps in and says "Hell no, we'll give you $50 to cover your copay at the walk in clinic...Have a nice day and be on your way." And they will go so far as to fight that battle in court (or settle) on your behalf. So solid liability insurance is better protection that most people realize.
And in any case, how often have you heard of a residential landlord being sued (and losing) for some type of premises liability? I'm in the industry, and I don't personally know of a single case. I know it happens...but I don't think it's nearly as common as some people fear.
Finally, all the talk about "just refinance in your name, and then immediately put the property back in your LLC's name" is not legal or ethical, and every mortgage note has a due on sale clause which would allow the lender to call your note due immediately. Maybe you'll get away with it for a few years. But what about 10 years from now if mortgage rates are at 9% - do you think your lender might have some incentive to call your note then? Best case - you just refinanced out of your 4.25% 30-year fixed loan at your new rate of 9%. It's a risk you need to be aware of if you try to cheat the system.
Hope that helps!
Copeland Morgan LLC4.770 Reviews
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