Cash out options

[Richelle T.]

Hi everyone So I close on a property this Friday (yay!) and was thinking today about ways to refinance it. I will be paying cash. I have talked to a few banks and I have a few options: 1. Identify next property and use equity in this one to buy the next. I would then have one blanket loan for 2 properties and only one set of loan closing costs. 2. Refinance to a fixed rate and get cash out. I can still cash flow on a 10 year note up to 6%. Rates are looking to be about 4.3%. This would be at a local community bank so I may not even have to wait the full 6 months seasoning. They are willing to refi once leases are in place. Obviously getting my money out quickly sounds appealing. 3. HELOC. I like this idea because I wouldn't have to keep getting loans but the interest rate is higher - around 7% and the rate is variable. What do people prefer/find has worked best? Or should I just go with the lowest interest rate available regardless of flexibility? Thanks for any comments/suggestions.

[Mike H.]

I better take  a step back a little as I think I may be jumping ahead on you

1) You only get 10 conventional mortgages allowed by fannie mae. These are the best mortgage type you can possibly get. LTV of 75%. Best rates and they amortize over 30 years so your cash flow is fantastic and these super low rates are locked in for all 30 years. So these loan spots are worth their weight in gold to an investor.

2) You had mentioned you were looking to put the loans/houses in an S Corp. The only way to do that is to go with a commercial/portfolio loan with a local bank.  And if you do that, then you end up paying a higher rate, a shorter amortization period which raises your payments, and they're typically a 5 yr balloon where the rate can reset after the 5 years.  That creates a risk that your payments could go up.

So what i was suggesting was that if you are going to use an entity, use an S Corporation and get your commercial loans under the S Corporation. Because if you put a commercial loan in an LLC, that will still count against one of your 10 conventional spots even though you aren't getting the same terms as a conventional loan.

But if you get a commercial loan under an S Corporation, then that loan will not count against your limit of 10. So you're much better off putting it under an S Corporation instead of an LLC.

One other thing. If your attorney is only suggesting you putting your property title in the LLC but leaving the loan in your personal name, then thats another issue altogether. I'd still rather create an S Corp instead of an LLC just because at some point, you may want to use a commercial loan and do so without burning up one of your conventional spots.

Your tax benefits are the same regardless of whether you're using your personal name, an LLC or an S Corp. Everything flows through directly to your tax return (i.e. no double taxation)