First Time Buyers (Duplex)

[Chad Smith]

Hello! I have recently purchased a duplex with a conventional loan. I am hoping to refinance in around 2 years because my interest rate right now is so high. I am living in one half and renting the other half. I would like to put the property in an LLC, but am I allowed to refinance the property when it is in an LLC (My loan broker said I could not)? If I have to take the property out of the LLC to refinance are there any cost consequences?

[Katherine Serrell]

Great question. It would depend on what kind of loan you were refinancing into. If you refinanced out of your conventional into an investment property or a commercial loan the answer also depends.. some banks and credit unions do not lend to LLCs. However, a huge chunk of banks and credit unions do and they are not hard to find.

If you wanted to put the property in an LLC you would need to create an LLC, contact a bank or credit union that lends to LLCs and explain to them that you want to refinance into an LLC and they will take it from there.

Huge caveat is that you will need a minimum 20% equity in the property (some lenders even require 25-30%) at that point so if you used a low down payment loan to buy the duplex you would need to either hope that it appreciated to the point you have that 20% equity in it OR you would have to pay down the principal amount to get to 20% equity. 

For example: if you bought a 500k duplex with a 10% down loan that means you have 10% equity and your loan balance is $450k. So, to get to 20% equity, you would either need the property to appraise for around 560k (560,000x.80=448,000 so close to your loan balance) but if the property had not appreciated and was still worth what you paid for it (500k) you would have to pay the principal down to 400k (500x.80=400k) So you would need to come up with 50k cash (Loan balance= $400,000-$450,000 = -$50,000) to get the equity you need to be able to get an investment property loan for the LLC on the refinance.

Another two downfalls to this is that commercial loans/investment property loans have higher rates and you technically cant owner-occupy them. So, if you want to avoid higher rates, dont have enough equity yet, or dont want to move...you should refinance and leave the property in your personal name. As you can see from the 1000 other posts on here about whether or not you should put your property in an LLC posts.. an LLC is just one "layer" of protection but a good insurance policy and an commercial umbrella liability policy should do the trick.

Hope that helps!