Getting equity

[Tim Geraghty]

Last summer i purchased my first rental house.  It needed a complete renovation. now there is a tenant in the house.  I now have 80K in equity in the house that i would like to get my hands on. So here is the question I bought the house under my corperation i started for this venture. when looking for a loan, the brokers and banks told me that i need a commercial loan because of the corp. The commercial loan has a higher interest and is a harder process. I was also advised to do a quick claim deed and then get a regular mortgage. Once the deal is done deed it back to the corp.  I spoke to my lawyer and he strongly advised me not to do a quick claim deed. He said it will devolve the corporation and leave me liable in the event of a loss. How do I proceed?

[Darrin Carey]

Your lawyer is partially right. Deeding the property to your name does leave you open to personal liability in a lawsuit. It will not automatically dissolve the corporation.

You are in the beginning investors dilemma. For your first four properties (could be more, depending on specifics) you have to decide which path to take.

Personal name and financing

• Open to personal liability
• Lower rates
• Higher LTV (as much as 95%)
• Personal DTI important
• Property performance less important
• Reach mortgage caps quickly

Commercial financing in company name

• Limits personal liability
• Higher rate (about 1% higher right now)
• 70-80% LTV
• No mortgage caps
• Property performance more important
• Personal DTI less important
• Most likely will still need to personally guarantee loan

The commercial loans are actually easier to process in most cases. And most of them do not report to your personal credit.

Many investors start their careers with personal financing, then transition to commercial after a few properties. 

Regardless, if you pursue a personal mortgage DON'T Quit Claim your property yourself. Some lenders look very strictly at the last transfer, and will reset your seasoning clock based on that. I watched an investor kill his approved refi by doing that. Wait until your personal closing and and let them do it as part of the closing (most lenders are agreeable to this). 

Remember, if you deed it back to your corporation the next day, you have violated the "Due on Sale or Transfer" clause, and the bank can call the entire loan due. More likely though, they will only require you to deed it back to your personal name.

So after all that, the question you need to answer is slightly different than what you asked. The answer to this question will tell you which way to go.

Is the higher LTV and lower rate worth the personal liability risk in the event of a lawsuit?