Home Equity Line of Credit (HELOC) issues...

22 Replies

Okay first the good news. PenFed is really amazing when it comes to HELOCs for a Rental Property. 80% LTV. Very fast response. I applied Friday and heard Monday I was approved, "when do you want the appraisal?". Appraisal cost is $405 in my situation. Another tidbit of information... max they can lend on is if someone has 3 properties. So 1 owner occupied and 2 rentals. Owner occupied is 90% LTV. Rentals max 80% LTV.

Now for the dilemma. Found out NFCU does 95% LTV owner occupied. Signed all the papers, etc... they ask, "who's on the Title?" I say, "X LLC". Oops. NO GO! (Turns out same with PenFed) Property has to be held in your name(s). So after song and dance seeing if the business side of NFCU could help (BTW they only offer 75% LTV max and not on your primary residence) only option to get the 95% LTV is to re-Title in our names and re-apply. FYI appraisal cost in this situation at NFCU is $495.

Questions for my fellow BPers... 1- do you know of any banks/credit unions that will lend when secured with a LLC and/or Trust Titled property? 2- If so, what LTV have you been able to acquire? 3- Are there any tax consequences of which one should be aware? 4- Anyone encounter a similar situation? 5- If so, how did you address the issue?

Thanks in advance!

1) I know private lenders that will loan to an LLC (Lima 1, Colony Finance, etc), but not in second position. Banks may do it if you have a relationship with them. 3) What tax consequences are you worried about? If you are using a pass through entity, it should be the same as you doing it yourself.

@Edward B. sorry for my late response... Only tax consequences I was worried about was with the County. I've since discovered (in Clark County, NV) that all I have to do is transfer Title to a Trust and then we can transfer to the the names on the Trust. Just filing fees are what we'd incur. Luckily any lender would be in first position as the property is paid off. In my current situation, I'll just transfer everything into our names so I can get the benefit of NFCU's 95% LTV.

On another note... do you know of anyone that does non-recourse lending when the 20% down on a multifamily property is from a self-directed IRA?

Thanks for your input!

Why do you even need appraisals?

I’m literally going through this with PenFed this week on my rental.

Got approved with 80% LTV with just a drive-by. Actually, they just looked at sales comps and gave me $6k more on the HELOC then I originally had estimated. Beat both Zillow and Redfin actually.

@J.M. M. , I believe Lima One Capital had a non recourse option when I refinanced with them a couple of years ago, but I do not remember for sure. Other than that I don't know. Currently I don't put rental properties in my IRA because it eliminates the inherent tax advantages of them. Also, if you are going to borrow money to purchase property in your IRA make sure you have a firm understanding of UBIT. At 80% LTV it can take a substantial bite out of your returns.

@Aaron Hunt , as I shop around I am finding that when you go over 80% CLTV lenders are requiring an appraisal. Frustrating, but makes sense since they have less room for error.

@Aaron Hunt , where was that property? The rental condo I'm pursuing the HELOC for is in North County San Diego. Appraisal fee was $405. As Edward B verified above, I think I remember PenFed stating because I wanted the 80% LTV, an appraisal was required.

@Edward B. ,  Thank you. I'll research the UBIT. First I've heard of it. So in what you've learned, do most people not leverage their self-directed IRAs for income generating properties?

Originally posted by @J.M. M. :

@Aaron Hunt, where was that property? The rental condo I'm pursuing the HELOC for is in North County San Diego. Appraisal fee was $405. As Edward B verified above, I think I remember PenFed stating because I wanted the 80% LTV, an appraisal was required.

@Edward B. ,  Thank you. I'll research the UBIT. First I've heard of it. So in what you've learned, do most people not leverage their self-directed IRAs for income generating properties?

Vegas. I was surprised myself but they even sent their comps list in the mail to me. When I saw it I called them up and said, if you guys are saying it's worth $6k more (a single model match actually did sell for $2k higher than their estimated value), then gimme my moneys. No appraisal required even at 80% LTV - I confirmed with them yesterday over the phone and made sure they knew it was a rental property.

@J.M. M. , I believe that most people never do anything with their self directed IRAs. They get talked into opening one, but never actually pull the trigger on an investment. So if you do anything you are probably ahead of the game. 

I do know people who use leverage in their IRA and who invest in rental properties. You just want to make sure that you are eyes wide open or you can get yourself into trouble. I believe that the IRA has to pay the UBIT so if you did not know that you may not have enough money in the IRA to cover it. Then what do you do? Your ability to contribute to the IRA is capped. Same with major repairs on a rental. I'm sure there are some work arounds but it gets complicated and you need to make absolutely certain that you do not do anything prohibited or you will blow up the entire IRA.

IRAs are taxed at trust rates. So anything over something like $12.5k in NOI will be taxed at 37%. If you have 80% leverage on your rental then 80% of the NOI must pay the UBIT tax. Actually, it's not NOI because I am pretty sure depreciation will reduce that as well. I should probably stop talking because this is very complicated and not my area of expertise. Let me defer to @Dmitriy Fomichenko or @Brian Eastman (Safeguard Advisors). Both would know way more on the topic than I.

@J.M. M. & @Edward B.

The use of leverage in an IRA can be a very powerful strategy to boost ROI. The very concept of a tax inside of an IRA scares a lot of folks off from even thoroughly researching the concept... which is their loss.

When an IRA uses debt-financing, the percentage of the income that is derived directly from the IRA capital is fully sheltered. The portion of the income that is attributed to the non-IRA (borrowed) capital is viewed as Unrelated Debt Financed Income (UDFI) and subject to taxation.

I unfortunately do not have the time for a through explanation of the tax, but for most investors it is of nominal impact in terms of both dollars and percent of returns. A $100K property purchased with $40K down of IRA money ... producing 10% return would generate a tax bill of between $0 and $200 per year depending on the deductible expenses. The ROI differential of putting $40K into a $100K property as opposed to putting $100K all cash into the same property will be significant, and that few hundred dollars of taxation plus the cost of a CPA to do the IRA tax return will be a small reduction in the benefits of using leverage.

I have been looking for a non owner occupied homes HELOC. Looks like Pen Fed does it. Can you elaborate on the conditions and terms? Setup cost? 10 year Heloc?

I am getting a line of credit on a second lien deed of trust with the bank that has the 1st mortgage. They are letting me do it in the name of the LLC with a signed personal guarantee. This is a Texas bank though and I am getting about 60% of the equity. No appraisal though.

Originally posted by @Matt T. :

I have been looking for a non owner occupied homes HELOC. Looks like Pen Fed does it. Can you elaborate on the conditions and terms? Setup cost? 10 year Heloc?

It's free to setup aside from having a notary sign the docs. They even give you a 2-Day Fedex prepaid envelope to send back. 

I just closed mine with them yesterday and it's also a free immediate wire to any personal bank account you want. I took the whole damn thing and sent it all to my checking account.

I think 10 year HELOC, I should really read things I sign more closely...

Originally posted by @Matt T. :

I have been looking for a non owner occupied homes HELOC. Looks like Pen Fed does it. Can you elaborate on the conditions and terms? Setup cost? 10 year Heloc?


I'm in the process of taking out a non-owner occupied HELOC with PenFed - should be closing soon. 12 year HELOC, Prime + 1%. PenFed covers the closing costs so long as the line is not paid off or closed within 24 months. If you close it before that, you'll be on the hook for them. There is a $14.95 fee (transfer I think - I'll have to look it up) and if an appraisal is necessary, the borrow pays for it. Typically an appraisal is only needed if the CLTV is >80% (which is irrelevant for NOO since the limit is 80%), the line is >$250k, or the desktop software they use can't get a good value. Mine had no issues getting a value, but there were several recent comps in the area. That valuation came back way higher than my estimated value, too. About 2 weeks into the process, should close within the next week or two.

Why can't you purchase it in your personal name then transfer it to your LLC? Is there a reason why you couldn't do this? I am not a lawyer....lol

Originally posted by @Ed Adams :

Why can't you purchase it in your personal name then transfer it to your LLC? Is there a reason why you couldn't do this? I am not a lawyer....lol

 Most conventional loans have a clause stating they can be called upon transfer of ownership.  I have been told that often they only mandate transferring title back but I suspect they could call the loan and not provide the opportunity to transfer back.  

I have not tried to do this so I do not know what the odds are of the lender calling the loan.  

Originally posted by @Ed Adams :

Why can't you purchase it in your personal name then transfer it to your LLC? Is there a reason why you couldn't do this? I am not a lawyer....lol

Yes, you are correct, Looking at this as an option, Actually Pen Fed recommended moving some to an LLC to get below 3.

Originally posted by @Dan Heuschele :
Originally posted by @Ed Adams:

Why can't you purchase it in your personal name then transfer it to your LLC? Is there a reason why you couldn't do this? I am not a lawyer....lol

 Most conventional loans have a clause stating they can be called upon transfer of ownership.  I have been told that often they only mandate transferring title back but I suspect they could call the loan and not provide the opportunity to transfer back.  

I have not tried to do this so I do not know what the odds are of the lender calling the loan.  

Or even worse, the IRS could consider moving the personal loan to an LLC as income, the same way the view loan forgiveness.

Originally posted by @Dale Varnado :

@Kevin Touw so you didn’t have to pay for an appraisal?

 @Dale Varnado, correct.  In your application, you list a value you think the property is worth and the line of credit you're seeking and they run the property through their software to get a valuation number.  If their valuation comes back in line or higher than what you've listed and based your credit line request on, they'll move forward with their number.  If their program shows a lower valuation than what you've listed/applied for, they'll require an appraisal.

Alternatively, you can ask them what value their program came up with and if you're OK using that number instead, proceed with it. E.g. If you thought your property was worth $150k and their program came up with $140k, you could either get an appraisal done if you're convinced it'd come out at $150k or go forward with the $140k valuation and a lower line of credit.  Their customer service has been wonderful in my experience.

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