Does having a property in an LLC make it hard to leverage equity?

Question

I own 2 investment properties in Texas (1 STR, 1 LTR). The STR is paid off, the LTR is financed and I don't have a ton of equity in it - maybe about $60-80k. My plan for this year is to leverage the equity in in my STR to purchase more investment properties (probably more STRs or maybe some land to build an RV/Mobile home park)

Would it be a good idea for me to create an LLC and hold my existing STR under it? From the little bit of research I've done it seems like having an LLC would protect any assets I have outside of the LLC, but then would that make it more difficult for me to work with a bank to leverage the equity in the STR and get financing?

Eliott Elias · Answer

It won't protect your assets, it will make record keeping easier. You will have to use DSCR or commercial financing if you pull cash out from a LLC owned property.

Dave Skow · Answer

@Christopher Oliva-  having any property in a LLC  will make it exponentially  more  difficult to  borrow on it  in the future .....there  always seems to  be  several options that  exist  but  the terms will be  significantly higher than a  new loan for  a non LLC  property

Kerry Baird · Answer

@Luka Milicevic, good point.  In my area, transferring ownership causes transfer taxes to be applied.  I don't recommend that, either, without knowing the risks involved.

Luka Milicevic · Answer

I have no issues and all my stuff is in LLCs.

I don't know if this was mentioned already but please be sure to CHECK your state/local laws before you do any transfers of property into an LLC if it's an STR!!

I quit claimed a property from my personal name to a single member LLC (me) and lost my STR permit as a result because they deemend it a change of ownership

@Christopher Oliva

Christopher Oliva · Answer

@Kerry Baird Thanks for the input! This info is really helpful, having access to financing is a big deal for me since I'm not in a position to put up cash offers for properties, and if having my STR in an LLC makes financing difficult for me then that's going to be an issue.

Christopher Oliva · Answer

@Jason Foy, thanks for the input! I don't think I'd be overleveraged on the STR since I don't have a mortgage on it, my concern is being able to use the 100% equity I have in the STR if i put it in an LLC. Good point on the gross income piece, that's another thing that concerns me about putting the STR in an LLC - Would banks take my personal income into consideration or would they only look at the income I make from the STR?

I'm going to keep doing some more research but I think I'm starting to lean towards keeping it in my name until my portfolio has grown a bit.

Jason Foy · Answer

I think it would be hard to get a HELOC on a STR or LTR. It would be hard to convince a lender to over leverage your property, that lender would be second to your first mortgage. Currently with my LLC I need to use commercial loans which come in like 5-10 year terms   Amortize over 30 with balloon in 5-10. I am a newer investor, so I may not be getting the best financing terms yet. The other problem I think with a STR is if you only have one the bank may question or have a hard time underwriting your gross income. I am kinda stuck in the same situation atm I have 80k or so equity in each property, yet can not refinance and pull any equity out and if I sell I need to 1031 into new asset. The only problem is with 1031 I can move to a slightly bigger property, I feel like my portfolio still needs to wait and mature a bit before I can make a bigger move. The better option might be to force equity in an under market deal and 1031 that into a new STR.

Kerry Baird · Answer

@Christopher Oliva, insurance will cover the liability with the properties, and is sufficient for most investors. Financing for properties held by LLCs will hinder your growth for some time. For example, I need to submit my State STR license, my operating agreement, the articles of incorporation and show percentages of ownership for the entities. We use a S Corp for holding company, and it manages the LLCs. So I have to show that ownership. Rates on investment mortgages are in the 8% range right now, and often require 25% down, have a 5 year pre-payment penalty.

For mortgage sequencing, I recommend starting with the Fannie Mae and Freddie Mac mortgages, conventional ones. Then non-QM or DSCR. I stopped using conventional mortgages when the amount of reserves became onerous. You could go to 10 mortgages with one spouse and 10 mortgages with the other spouse. And then...LLC and non-qm/DSCR.

Veronica Giggers · Answer

Hello. Thanks for the advice and input. We will consider whether we want to use the LLC and what properties we want to use it for.

Kerry Baird · Answer

@Veronica Giggers, yes.  I’d find a broker who can help you find the best loans for your situation.

Does having a property in an LLC make it hard to leverage equity?

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