Financing question for a newbie

3 Replies

My husband and I are newbies at investing. We currently have a vacation rental that is free and clear in Arizona. We'd like to purchase some long-term rental properties in Wisconsin where we live. What is the best way to go about financing for this? Commercial? Residential? HELOC? Another option?

Also, we do not have an LLC set up yet. We are planning on doing that eventually. Is it better to do that now or later? We've had mixed advice on this.

there are several options, you could do a Non owner occupied Cash Out, on the Secondary Market like Fannie or Freddie, you could take a Line of Credit, some banks may do a HELOC most will not because its a HOME Equity Line of Credit, and because its not your Home most will not, but you could do a Commercial Line of Credit, I have a couple, one is for 3 years the other is 2 years, but dont be surprised if they only offer you a 1 year term to start. you could also cash out on a commercial note, 3 or 5 year term, 20 or 25 year amm, these are pretty easy to get if you or the property have decent income, your biggest struggle will be that you are out of state, so may want to look to banks that are in both your home market and where your property is, like BMO for example, still a smallish bank so somewhat flexible, yet large enough to be in both markets, good luck

As to your question about the LLC, this is how I break it down for people looking at real estate investing and asset protection - I call them the pillars of asset protection. (1) Avoid high liability actions [this is more of just executing common sense,] (2) find a great insurance policy, (3) compartmentalize your assets [LLCs, C Corps, etc.,) (4) separate your assets from your operations [operations contain the most liability,] (5) introduce layers of anonymity to hide your assets from prying eyes.

I approach these issues from the mindset of being an investor myself, so it all has to come together in a way that is profitable. That means depending on how much your assets are worth and what you future goals that - my advice would vary. Ultimately, if you are looking at purchasing more properties I would recommend looking into the Series LLC, as you only have to publicly file the "parent" Series LLC and then you can create an unlimited number of "child" series under it - each offering the liability separation of individual LLCs when operated correctly. Check out this article for more on that option.

I would definitely recommend trying to find a "dream team" to help you get established in real estate investing. There are many issues you will face, and having a trusted team including a professional CPA, banker and attorney (all preferably in real estate themselves) will give you a huge advantage. Start asking different professionals these questions and compare their solutions - stick with the professionals who have the best "niche" advice.

@Sarah G. lots of good questions here.

The "best" might likely be a Line of Credit (LOC) for that property. A Line of Credit will have super low closing costs. And you only pay interest on it when you use it. Now, two of the common areas of concern for LOCs I see out there is the 10 year maturity date and the adjustable rate. Since LOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the LOC will modify into a different product all together. Meaning after opening the LOC for 10 years it will cease to be a LOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

So if you purchase and rehab properties with your LOC, then REFINANCE that property to pay your LOC back...then that's exactly what a LOC is designed for. Use, pay back, use again.

However, when it comes to the refinancing step of that property you just purchased there are some pretty important rules when buying with cash or a HELOC/LOC.  Sometimes you will see the term "Delayed Financing" come up.  You should NEVER face delayed financing.  Not only will it limit how much money you will receive but your rate will be HIGHER too!  So if you create an LLC then there's a really good strategy that I wrote a post on HERE. It highlights all the pitfalls but the 3rd section is how you properly structure buying a home with your LOC.

*WHEW*  I know this is a lot so feel free to tag me with any questions. Thanks!