Refinancing a Portfolio of High-Yield / Low Value Properties

[Elijah Goll]

For the past three years I have been plowing my personal funds into the Indianapolis real estate market and acquiring single family rental homes in need of minimal rehab. I’ve tried to institute good fundamentals from the get-go by keeping meticulous records, outsourcing any task that is not my core competency (Think screening tenants) and building relationships with a network of quick, reliable vendors from whom I can solicit multiple bids to keep costs and lease-up times at a minimum.

My portfolio growth has been slow because I've been using my own money and getting individual mortgages from public lenders. Going forward, I'd like to transfer my existing assets into an LLC to take advantage of tax benefits and tap into private funds to grow my portfolio faster.

Long-Term Strategy: Buy and hold high-yield rentals. I look for a minimum monthly return of at least 1.5%. In other words, if a rental costs $100,000 it should rent for at least $1,500 per month. I am currently doing better than that, averaging a 2.1% monthly return on my portfolio. Additionally, I will execute this strategy in states/cities that are economically sound, business-friendly and where rental law favors landlords.

My Portfolio: Three single family homes acquired over the past three years in Indianapolis, IN. Average home value is $45,000. Total amount owed is approximately $97,500.

My short-term plan of action is as follows:

• 1) Form an LLC in a state with a favorable tax climate such as South Dakota or Wyoming
• 2) Transfer the real estate assets that I own in my name to the LLC (Doing so will trigger due-on-sale clauses, and my lender will require the full balances of the mortgages to be paid)
• 3) Refinance the assets through the LLC with a cash-out refi, use the funds to pay off the existing liens and related refi expenses and use the remaining cash to grow my portfolio

I am looking for:

• 1) Options to underwrite new liens through the LLC in spite of the low number and value of the properties to be refinanced
• 2) Critiques on the short-term plan of action that outlined above from the perspective of real estate, legal and tax professionals

Thanks in advance for your advice.