Refinance into LLC questions

[Nate Paoinchantara]

All,

I am running into a bank offer that I would like to get you all’s opinion -

In the past 3 years, we purchased 8 rental SFHs in our personal name with 30 yrs fixed, average 5% interest. Now, we have an offer from a local bank to refinance all properties into one loan and we can have the loan in LLC. Here are the terms,

• -Prime+1.48% fixed at closing and adjusting every 4 yrs. 20 yrs amortization.

• -0.5% Origination fee

• -Borrower responsible for all other cost associated. (title + appraisal)

• -1% of prepayment penalty if A.) Balance paid in full with internal or external refinancing or B.) More than 20% of remaining balance is repaid annually through source other than cash flow.

All properties are currently leased with ARV at 1.1M with mortgage about 700k.

If we decide to move forward on refinancing, the lender will also offer additional $600k LOC. Here are the LOC terms-

• -0.5% Origination fee

• -Similar rate with the refinance (first 3 months interest only)

• -First ranking mortgager of real estate and assignment of lease and rents on each property financed in this program

We are considering this option as we are planning to obtain more properties to reach our 40 doors goal in the next 4 yrs. We also want to take the current debt out of our name and put in an LLC. Since this is the first time we are dealing with commercial loan like this, I am wondering about terms or what questions I should be asking. Also I have a few questions here-

• -What is the best economical way to handle title? We have title insurance in all properties, so what would be the best way for endorsement and at what cost?

• -What would work best for us if we want to sell any properties? (so we can negotiate with our lender)

I do appreciate every comment! 

[Tyler Hodgson]

To be honest, commercial deals are not my specialty, but I will give you my opinion based on my experiences.

My first instinct would say not to risk the higher interest rate ARM when you have these properties locked in on 30-year fixed rates. Rates are at historical lows right now, and are bound to increase. However, your situation is unique.

• You currently have 8 SFRs in your personal name...you are nearing the FNMA cap of 10, so you are getting close to needing portfolio lenders.
• You want to get to 40 doors in the next 4 years...again the FNMA cap of 10.
• Getting all of the loans and properties into an LLC is great. This greatly limits your personal liability and protects you. Also, by getting these properties (and mortgages) out of your name you will be eligible to start taking FNMA loans again.
  • Here is how I see it working - Buy 8-10 SFRs through conventional FNMA financing, then bundle them up and move them over to the LLC and finance through this bank. Then buy another 8-10 throgh FNMA financing, bundle those up through the bank once they are stable and cash-flowing. Rinse and repeat, until you have your 40 doors, or 50, or 60....
• How does your cash flow look on these properties on 20 year amortization? First 4 years at 4.98%, but let's assuming increasing interest rates and bump that up by 1-2% every 4 year increment. Run the numbers; if it works, it works.
• Closing costs seem reasonable
• Prepayment penalty - how long is that penalty in effect for? The full 20 years? Maybe you can negotiate this to lower your risk a bit.
• LOC sounds good for allowing you some quick financing for new deals. Again, I would get new deals on FNMA loans as long as your are eligible for FNMA loans. Then look at bundling them into the LLC when the time comes.
• Regarding selling any properties: ask the lender how you would handle this. Somehow the loan is secured by the properties, so if you sell one does this trigger a due-on-sale clause? If you sell one do you just have to payoff the loan portion pertaining to that property? Does prepayment penalty come into play? I'm curious how the lender is setting up the Note on this deal and if the note is secure by the properties.

I would love to hear the progress you make on this deal, and your learning experiences from it. In a couple years when I hit 10 units I will be looking to do something like this.