Interest rate vs. Liability protection: do I have to choose?

Question

Hello BPers- I've got 4 active SFRs and want to grow to 10. Debating whether to keep the loans/properties in my name and benefit from long-term super low interest rates or convert into LLCs and do commercial loans that have shorter terms and will inevitably see rates climb in the next 5 years. Is there a loan product that doesn't force me to choose ie. long-term low rates, but can be applied to a property owned by an LLC?

Barb Asay · Answer

Have you checked what your actual interest rate would be for a commercial loan?  You're calling 4.5% for a mortgage "super low" but that's the rate I've been getting for my commercial loans.  Well, varying 4.5-5.5% over the last 3 years or so but on the low end of that most recently.

So maybe its not what you were thinking it would be?  That or maybe you need to shop financial institutions?  I'm at a small local bank and they've been fantastic to work with.  And I guess my rates are nothing to complain about if you've only found higher!

Daryl Luc · Answer

Here, this thread, while a couple of years old, is populated by people local to you and most likely contains what you're looking for.  https://www.biggerpockets.com/...

Gideon Blustein · Answer

Thank you for the good information. The mortgages are not considered primary residence, they're investment property mortgages but they are in my name so I get residential rates, not commercial. "super low" right now I consider 4.5 to 4.75 - I'm asking the question: is that not as low as I think it is? Are there 30 year commercial loans at rates similar to this?

Daryl Luc · Answer

If you have 'super low' rates, that implies to me that you may have mortgages that were extended to you as primary residences.  I guess that's a question, since I'm not aware of super low rates on investment property.  So, anyway, I can tell you this, flipping the deeds from individual name(s) to an LLC will begin two balls rolling that can really take you down.  One is if any clause exists in your mortgage that identifies the property as excluded from use as a rental.  Most do if presented as a primary residence, to which you signed an affidavit at least twice..once on application and again at closing.  If any of this is true, then the mortgage company can call the loan due the minute and second they discover the LLC ownership and it's purpose.  The other problem that surfaces, and perhaps first, is when the insurance company submits to the mortgage company a request for payment of the property coverage (even if they knew all along it was being rented and the coverage was a landlord policy).  The policy invoice will reflect the LLC naming, not the naming that is on the original mortgage documents.  This puts them into a tail spin and they usually will throw the invoice away.  After not getting an invoice that reflects what they are looking for (correct name per their records) they assume that coverage was dropped.  This starts a series of nastygrams coming at you and a whole lot of phone calls back and forth that may or may not end well.

Consider your moves carefully.  Talk with a lawyer that has successfully done what you want to accomplish and has dealt with all the gotchas.  There is another way that can work in certain situations, and again, you will need the advice and counsel of an attorney that knows this stuff from experience....a trust.  It may work as an irrevocable, it may be revocable, it may not work at all in your state.  In any event, it would still  be work to keep the mortgage company in line since names on deeds and policies will change.

Gideon Blustein · Answer

Yes - but I also don't want to give up my beautiful long term, low interest rates. Commercial loans I've researched have shorter terms/higher rates. Wondering if there are any loan products that are closer in terms/rates to residential mortgages.

Nicole Heasley Beitenman · Answer

So you're saying you want to move those 4 properties into an LLC and use the combined equity from them to take out a commercial loan?