HELOC on a SFR in an LLC

3 Replies

Hi everyone,

I am in the process of purchasing 50% of a single family home in Rochester NY that is owned by two brothers who inherited the property.

One brother wants to sell his interest to me and move to a condo in the spring. I would be partnering with the other brother(my friend) on this property to turn it into a single family rental.

The property is worth between 100-115k and has no mortgage or debt on it currently. I will be acquiring my interest in the property in December then we will be forming an LLC to hold the property. My partners brother will be renting the property from us after close for approximately 5 months. During this time we will be doing some cosmetic work to improve the property and get it ready to re rent at a higher rate once his brother moves out.

Rough deal details (more specifics still need to be agreed on)

The deal will consist of me giving my partners brother a small down payment with the rest being a loan that will be paid once he moves out. My partner will be subsiding 1/2 of his brothers rent until the date he moves out in order to keep his cost of living the same until he is out of the property. The rent to the LLC paid by my partners brother will be the same as the holding costs of the property. To make up for me making no profit during the 5 months the loans interest rate on my purchase will be 0% so effectively the rate will be the opportunity cost of getting higher rent for the few months he resides in the property. Also we will have access to do the cosmetic upgrades while he lives there and covers the costs. Also we will be splitting the benefit of not incurring a commission on sale so the purchase price will be lowered by 1/2 of the commission that would have been paid. My partner will incur all of the costs to subsidize his brothers rent as that is what he wants to do to help his brother out until he leaves.

Our goal once the property is renovated (minor cosmetic renovations such as painting, wall paper removal, replacing outdated linoleum flooring and updating landscaping) is to obtain a HELOC to finance the next deal.

After we use the HELOC to acquire the second property for cash plus potentially additional funding from my father as a loan we plan to rent it out after a few weeks of renovation. Once it's rented for the minimum time a bank requires we will refinance and pay back the HELOC/my father and use it to acquire a third property and so on.

The rental that the HELOC would be obtained on should be able to rent for 1,200 to 1,400 per month and will have 100% equity when we goto a bank.

Does anyone have experience with obtaining a HELOC on a single family rental in an LLC using only the equity in the property and the rental income coming in from that property to obtain the line?

We talked to a banker at Key bank and they said this would be possible to use only the property in the LLC and it's income to obtain the line of credit. They said they would potentially lend on up to 85% of the FMV of the property using only the equity and income generated by renting it out. The property would need to be rented for I believe at least 6 months and we would need to produce a lease agreement fir the tenant.

Based on your experience is this a common way banks will let you pull the equity out of an investment property?

Is there a better way?

Do the terms above seem like they are consistent with deals that you have done? If not what terms have you seen on similar properties?

Does anyone have any other ideas that may be better for us to consider than the HELOC?

Thanks for everyone’s help!


I cannot answer all your questions but I can share what i have done. I have found it quite difficult myself to find a lender who will allow lending to an LLC that isn't at least two years old. I am going on two years in December so I will try myself soon. I have done two "Cash Buyouts" (term they used for HELOC on rental) and some banks are loosening up and allowing it more, even ESL is recently doing it now. The standard is typically 75 or 80% unless you have a good relationship with Keybank to actually get 85%. Keep in mind that you will still have closing cost on a cash buyout (5-7k) according to that house value locally. Also, don't be married to that home value, an assessor will come in and low ball it everytime and possible say it's worth 85k and then you get 75-80% of that. Would it still make sense if that did happen?? Something to consider. What area of Rochester?

I agree with everything Dennis said... 

I have no relationship with Key Bank.  But, a client of mine just did a blanket mortgage on a package of rental properties through ESL.  Their computer generated appraisal system saves quite a bit on closing costs as the appraisals are free.  Although they make up a portion of that money by requiring you to use their attorney and charging quite a bit for it.  The appraisals were quite high though!  20%-30% over our already very liberal valuation!  

@Brian P Carolan Key Bank is doing Lines of Credit at 85% LTV???? That's insane. I've never heard of any lender going that high on an investment property - ever. I've got alarms going off in my head like crazy here because many lenders will go up to 85% on a PRIMARY HOME....I know what you are thinking "well, we told him it was an investment property"....but what normally occurs is that once you get into underwriting and then they tell you their limit is really 85% on primary homes and it's 75% on rentals...or something like that. And the first person who spoke to is "sorry, I didn't know" or something like that. The other items I would certainly ask about are what are the rate and terms? Meaning, is the Line of Credit a 10 year line of credit? 15 year? 5 year? How often does it adjust? What is the floor and ceiling to the adjustment? What happens if I have a balance when the Line of Credit comes due?

If it does turn out that Key Bank is willing to provide 85%...meaning, you ended up closing with them and having access to it....please get a referral agreement with them because you will be able to refer everyone in the country to them.  I just have a feeling that they will adjust that figure.  And what they adjust it to is probably fine, but 85% would be crazy.  Keep us posted!

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