Can Equity within an LLC be used for personal Debt?

Question

Hi All,

This question is multi-faceted. So, I apologize in advance for the barrage of questions.

I have a SFH, free and clear, that rents for $1,200/month. It has never been vacant. Before the interest rates make another jump, I want to do something productive with the equity in the house.

My initial thought was to use the equity to expand my portfolio and also upgrade some features on the current house. I also want to put the property into an LLC, but I've recently considered using the equity to pay off some personal Debt.

Regardless of what I do with the equity, my first question is whether a HELOC or an equity loan would be the best option?

What are the pros and cons of using a HELOC or equity loan?

If I put the house into an LLC, will I be able to refinance or get a HELOC right away? Will this help me build business credit?

If I put the house into an LLC, will I be able to use the equity (from a HELOC or equity loan) to pay off personal debt, or would that be considered taxable personal income?

I really appreciate any help you can provide,

A Puzzled Young Entrepreneur

Kerry Baird · Answer

It is very challenging to find a lender that will do a HELOC on a house held in an LLC. There will be other kinds of loans available; interest rates are higher and LTV is much reduced.

That said, I do have business credit with my houses held in LLCs, particularly the STR business, as it is an active business.

Nathan Lose · Answer

@Jent Botterman this is a great question and I think your on the right wavelength with your thought process.

To answer your first question from what I interpreted from your question I believe you're asking about the difference between a HELOC compared to a home equity loan.  If this isn't exactly what you're asking shoot your actual question below and @ me so I can answer it for you.  A equity loan is when you pull out the desired amount of equity up to what you're allowed based off of lending guidelines.  Lending guidelines dictate that you can take cash out of your property up to 75% of the properties value for a rental/investment property and up to 80% for a primary residence.  In other words, if you house was worth 1 million and you had a loan on it for 600k your current LTV (loan to value) would be 60%.  In this situation you would have an additional 20% you can "cash out" for a primary residence or 15% for an investment property.  If you were to choose to do a equity loan the available equity would be pulled out of the property all at once resulting in a 2nd loan against your property for which you would get the whole value of to use immediately.  Following this you would be responsible for the full principal and interest payment on the new loan.  The difference with a HELOC is that this product functions like a credit card with the credit balance being equal to the equity you had available to tap into.  You only make payments on what you use of the available credit and do not need to take it all out at one time.  This can be a good option for property repairs or renovations as you do not need to pay for money that you haven't used yet.

In your case if you know you're going to cash out and immediately use all of the available funds the equity loan makes more sense, but if you will be using it to pay off some other debt and not use the all of the balance a HELOC can be advantageous.  A pro for the HELOC is they can have lower rates than equity loans as the bank is incurring less risk on the LOC because they're normally variable rate compared to a 30 year fixed where you're paying extra for the stability of a fixed rate.  HELOCs are typically variable rate credit lines and can be interest only during your initial draw period (period of use).  None of this is particularly "better" when comparing one to the other.  It's very situational, and they're both great in their own perspective and use case.

Putting the property in an LLC first may complicate things for you a bit.  Some lenders don't work with LLCs so keep that in mind.  If you decide to do the LLC first and then the equity loan 2nd that shouldn't be a problem as it's similar to doing an owners draw (as in your LLC takes out the loan and then you owners draw the funds out of your LLC).  Besides complicating your books and making more accounting work for yourself or your CPA, in concept it's the same thing.  I would however check with your CPA to make sure this works for your particular situation and tax environment as I'm not a CPA and don't know the particular intricacies of the tax code.  It's always good to consult a specialist.

Hope this helped!

Cheers!

Alicia Marks · Answer

I would check with a loan broker about your options. @Andrew Zamboroski is my go to for loan options now.