How to know if refinancing will still have my property cash flowing

Question

Hello,

I recently completed a house hack that I turned in to a rental after living there for 4 years. I just completed my first year of rental income and great cash flow 800/month cash flow. I am still in the window to sell/cash out refinance with out paying taxes on the money made from the property. How can I tell if my rental will still cash flow after I pull out the money? What is the best way to pull out the money with tax advantage and still keep the rental and cash flow.

I am enjoying the realestate ride and all the learning over the past 2 years.

Thank you for your advice on this topic!

Sam Baker

Clayton Plummer · Answer

@Samantha Baker and @Bill Brandt -

Be careful "just transferring" the property into your LLC.

The bank recognizes that as a "sale" even if no money was exchanged.  All loans have a "Due On Sale" clause:

A due-on-sale clause is a requirement in a mortgage or other loan agreement that the loan be paid in full if the house or asset is resold. These provisions can be triggered either by an entire sale or partial sale of the debtee's interest in the asset.

Don't try to hide the transfer from your bank.  Be up-front and let them know what you are doing, if you decide to put the property under your LLC.  They may be understanding and not call the Due On Sale clause.

Basit Siddiqi · Answer

Make sure for tax purposes that when you convert a property from partial house-hack to 100% rental that you are updating the depreciation schedule to reflect this.I see a lot of people miss out on this.

Bill B. · Answer

@Clayton Plummer

Thanks. As I’m sure you saw. I was saying even having the LLC was a waste of time effort and money. So I certainly wasn’t recommending transferring the property.

Bill B. · Answer

If you just transfer the property in to the LLC, the mortgage will still be in your name. I doubt any bank will give your llc a new loan without your personal guarantee. And if they don’t then it’s still on your DTI. Best case, they charge you much higher interest rate, mayeb over a shorter term, to compensate for the additional risk. LLc’s are almost always disregarded entities so it will also show up on your personal tax return.

Would you borrow your money to a stranger that said they weren’t going to be personally responsible for repaying you?

Samantha Baker · Answer

@Bill Brandt

;)

I guess moving it into my LLC would reduce my debt to income ratio on my personal credit. It would give me personally more ability to pull out a loan under my own credit.

I could pull the money out the same way as if I sold the property to an individual. Open more doors for my LLC to be able to perchance more properties with proof of funds...

reuse the equity out of the rental to buy another one under my own credit.

And so I could leverage more debt under my personal credit and also under the LLC credit.

Am I missing the point?

Thank you for helping me learn

Bill B. · Answer

Why? What are you going to get out of putting it in an llc other than costs and complications? There’s no tax advantage, there’s almost no privacy advantage, there’s a tiny tiny liability advantage, unless you are managing the property in which case there’s basically none.

If you have a net worth over $500k you should have an umbrella policy anyway as you are 10x more likely to be sued personally than the property is. If you don’t, then don’t do any of it.

Ps. If you put @ and the users names and then click on their name in the pop up in your replies they will be notified you talked to them. Otherwise they may never know.

@Samantha Baker

Samantha Baker · Answer

Clayton,

Thank you that makes more sense.

What do you think about me selling the property to my LLC? Is that something I can even do?

Clayton Plummer · Answer

Sam -

You are correct.

Like Bill said above, you won't pay taxes on the equity difference between what you paid for the original purchase and the refinance appraisal amount (up to $250K for a single tax filing, $500K if you file jointly with your partner).

The taxes I was referring to are your property taxes, which will ( I think at least) increase because the value of the home has increased.  That's what I meant by the "taxes" in the PITI monthly payment that's coming out of your pocket to own the rental.

Again, good luck, I hope the numbers work out in your favor!

Samantha Baker · Answer

Clayton,

If the rental is in my name under my own credit debt to income ratio and not under an llc does this mess up the tax free advantage I have. Living in the home 2 out of the last five years? Or do I have it wrong? I understand the refinance closing cost of it.

Would it be better to get a DSCR loan to purchase the house under my LLC I created, and take the cash out that way?

I just created my LLC in March, I was told I needed two years before banks would finance for the LLC.

BTW I'm in the good state of Texas. I know realastate is different in some states.

Thank you for all of the good information. I cant wait to see your advice for the above!

Thank you Bill for the selling advice and the math portion of it! I'll keep that in my notes.

Sam Baker

Eliott Elias · Answer

If you are executing a cash out refinance, you are going to have to make an educated guess on what your new value will be based off of comparables. Run your insurance, taxes, interest-rate, and loan to value in a mortgage calculator and you will see your monthly payments.

How to know if refinancing will still have my property cash flowing

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