HELOC on a LLC owned investment property? - HELP!

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HELOC on a LLC owned investment property? - HELP!

Account Closed
New to Real Estate · Lakeland FL, United States · Member since 2016 · 17 posts · 8 votes

Please help a newbie out! I would love some help and/or advice on my next step. Here's my situation: My partner and I own a single family home through our LLC and bought it outright, all cash deal. We paid $303k last year for it and just got an appraisal back at $346k, which is in-line with what we were expecting. Rental income is $2k/ month and our cash flow is $1,685 after tax, HOA, and insurance. I feel we're in a great spot given the equity, cash flow and not having a mortgage. Our area is hot right now with new builds popping up everywhere, A+ school district and a ton of fun things to do for families..

But... I'm having trouble finding the 'best' strategy for our next step. I understand I can't take out a HELOC due to the property being in a LLC (and we do not want to change the title) so here's my thinking. Pull out cash from the property via commercial loan and use it for the 20% down payment on a second property, then finance our second property via the commercial loan route since it will be coming from our LLC. My goal is to not use any cash, or very little, out of pocket. I understand then I'll be paying two loans essentially, one for the down payment and the other on the mortgage. There are other properties for sale in the same neighborhood, at the same general price-point that will get similar rental incomes that we have now.

Am I on the right track or way off? I'd love to hear some examples of what you all have done in the past or other strategies I'm not aware of. Any and all advice is welcomed and I thank everyone in advance.

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Doug Pintarch
Rental Property Investor · Harrisburg, PA · Member since 2018 · 369 posts · 406 votes
8y
Originally posted by @Ryan D.:

So as others pointed out, speaking specifically about cash-on-equity, the return is poor. This does not necessarily mean the entire investment is a poor one, as there are multiple ways to make money in RE. Your real return here is relying on equity appreciation, just be aware of that, and equity appreciation is (almost) always speculative. 

That being said, there are a few things to note concerning your plan to pull out equity:

  1. This is a residential property, not a commercial property (anything 4 or fewer units is considered residential), hence you can only get a residential, not commercial, loan against it. 
  2. I am not aware of any lenders who will loan on a residential property that is titled under an LLC (they may exist, but I've never heard or come across them). You will almost certainly have to pull this out of the LLC and put it into someones name to get a loan on it. This is certainly not a show stopper.
  3. Once you put the title in someones name, you can then get a loan/HELOC/etc against the property (recourse against the person in who's name the property is titled). After this is established, in most cases you can then deed the property BACK into the LLC. Easy peasy.

Ryan this post answered a question I was going to try and find an answer to before I showed my true newb status and asked it again.  Thank You.   :)

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  • Neal Collins
    Developer · Portland, OR · Member since 2014 · 732 posts · 490 votes
    8y

    @Account Closed Get used to this song and dance because this is one you'll be doing for a long time as it is a great way to scale. Good luck.

    2Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    Sell the property, it is a terrible income investment due to horrendously low rent to value numbers  Invest in multiple true cash flow properties using leverage if you want to see true positive cash flow.

    A 300K property will never have positive cash flow with rents at 2K per month. In addition you are buying cash flow at a rate of $2 for every $1 of income. This is a terrible investment. Your equity opportunity value for investors at 10% is costing you a monthly loss of income of $1200/month.

    This property as a long term hold has extremely high negative cash flow. All you really have is a faith investment relying 100% on appreciation to balance your monthly losses. When th emarkets turn you will lose that as well.

    1Reply
  • Account Closed
    OP
    New to Real Estate · Lakeland FL, United States · Member since 2016 · 17 posts · 8 votes
    8y

    Thanks Thomas. Can you elaborate a bit more on the $1200/ mo. loss and poor cash flow rate you mentioned above? This is the first opinion I've heard that our investment is a terrible one and I'd love to get underneath why that is. 

    0Reply
  • Walter Key
    Realtor · Keystone Heights, FL · Member since 2015 · 340 posts · 118 votes
    8y

    @Account Closed. I think what Thomas is driving at is that you're only getting about a .67% return on your investment ($2K/MO on $300K investment). If you were to sell, bank that $315K-ish after selling expenses, and then look for some quality rental properties to invest in using the cash for a 20-25% down payment, you'll find some much better investments and be able to scale quickly by using the cash from the sell to leverage multiple properties with a far better ROI.

    1Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    8y

    You will have a lot more expense than HOA, taxes and insurance. Maintenance and long term capital expenses. Even though you've just renovated the property, tenants will cause damage and things will break. You have to start budgeting now to replace those big ticket items. Flooring, for example, is going to have to be replaced frequently in a rental and you cannot charge all of this to tenants. Its a wear item, like belts and tires on a car. You'll miss rent due to vacancies. You'll have utility costs. Legal costs. Accountant costs. Even if you manage yourself, you should assume that about 35% of the gross rent will go to all expenses and capital. So, you're left with about $1333 in NOI after accounting for all expenses. At best. With an HOA, who knows. (Not to mention, does the HOA allow rentals or have restrictions? Or might they in the future?) For a 20 year amortization loan at 5% for $260K (75% LTV) I get a P&I of about $1700. So I think you're in the hold about $366 a month. Some months you may be OK because you only expenses are HOA, taxes and insurance. Those are the BEST months. The worst months can be much worse.

    If you elect to use a property manager they will take 10% of your collected rents plus a months rent (or so) to fill a vacancy.  With one vacancy a year that's about 14% of gross rents.  So you're in the hole more like $650.

    So, as a rental, this one is poor.  Simply taking rent  divided by value (0.58%) tells you this is a crummy rental.  That ratio doesn't need to be 2%, like for a low end rental.  But a value over 1% is really needed for a good rental.  The long term play here would be to hold for appreciation.  If you can stomach periodically having to come out of pocket for big expenses and you think the value will increase then perhaps you want to hold on to this.

    0Reply
  • Scott W.
    Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
    8y

    get a loan on this property in order to boost your return. leverage helps. we just came off 1 of the worst downturns in almost a hundred years; chances are good you will see appreciation.

    1Reply
  • Scott W.
    Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
    8y

    oh btw, I had a rental about 5 years ago; posted on BP and they said they same stuff to me. it was worth $125k and I owed $129k. didn't cash flow. today it's worth 200k as is and I owe 98k on it.  oh, and I kept raising the rent too. 

    0Reply
  • Ryan D.
    Rental Property Investor · San Jose, CA · Member since 2013 · 188 posts · 228 votes
    8y

    So as others pointed out, speaking specifically about cash-on-equity, the return is poor. This does not necessarily mean the entire investment is a poor one, as there are multiple ways to make money in RE. Your real return here is relying on equity appreciation, just be aware of that, and equity appreciation is (almost) always speculative. 

    That being said, there are a few things to note concerning your plan to pull out equity:

    1. This is a residential property, not a commercial property (anything 4 or fewer units is considered residential), hence you can only get a residential, not commercial, loan against it. 
    2. I am not aware of any lenders who will loan on a residential property that is titled under an LLC (they may exist, but I've never heard or come across them). You will almost certainly have to pull this out of the LLC and put it into someones name to get a loan on it. This is certainly not a show stopper.
    3. Once you put the title in someones name, you can then get a loan/HELOC/etc against the property (recourse against the person in who's name the property is titled). After this is established, in most cases you can then deed the property BACK into the LLC. Easy peasy.
    2Reply
  • Doug Pintarch
    Rental Property Investor · Harrisburg, PA · Member since 2018 · 369 posts · 406 votes
    8y
    Originally posted by @Ryan D.:

    So as others pointed out, speaking specifically about cash-on-equity, the return is poor. This does not necessarily mean the entire investment is a poor one, as there are multiple ways to make money in RE. Your real return here is relying on equity appreciation, just be aware of that, and equity appreciation is (almost) always speculative. 

    That being said, there are a few things to note concerning your plan to pull out equity:

    1. This is a residential property, not a commercial property (anything 4 or fewer units is considered residential), hence you can only get a residential, not commercial, loan against it. 
    2. I am not aware of any lenders who will loan on a residential property that is titled under an LLC (they may exist, but I've never heard or come across them). You will almost certainly have to pull this out of the LLC and put it into someones name to get a loan on it. This is certainly not a show stopper.
    3. Once you put the title in someones name, you can then get a loan/HELOC/etc against the property (recourse against the person in who's name the property is titled). After this is established, in most cases you can then deed the property BACK into the LLC. Easy peasy.

    Ryan this post answered a question I was going to try and find an answer to before I showed my true newb status and asked it again.  Thank You.   :)

    2Reply
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