LLC cash out refi to brrrr? suggested lender? or alternative?

Question

I have 3 duplexes in the Detroit suburbs, mortgage free (plus one sfh, with mortgage not pertinent to this discussion).

In 2018, I'm looking to get the brrrr method rolling. So, I sought a cash out refi on the highest valued property. After weeks, an appraisal,  and a pile of documentation, I get an email saying its a no go unless the property is converted to my name from the LLC. As I see it, this was a major oversight on the lender's part as we could have addressed this weeks ago, but I digress.

So, my first question, can anyone recommended a lender that can approve this for me within the dollar figures I have: Apparaised at 60k, I was cashing out $41k minus fees? I've found a couple lenders (Lima is one found through a search here), but they won't lend less than 50/60/75k. I would prefer to leave the property in an LLC for protection.

On the other hand, if I converted it to my name, got the loan, then converted back at sometime, I run the risk of triggering the acceleration clause. I'm a gambler sometimes, but that make me nervous.

Or, do I convert, leave it in my name, and take out a large insurance policy?

Or is there another option I have yet to consider?

Thanks in advance for your opinions and/or personal experience in matters similar to this.

Casity Kao · Answer

@Andrew Kerr Those are good points as my lawyers interpretation is similar that it could happen but they do differ from lawyer to lawyer which ultimately it is what is a judge to think.  It is a lawyers job to ultimately think as conservative as possible.  In terms of “safest” approach I would rather take the approach I stated above versus doing a commercial loan likely with a 5-10 year ballon and 20 year amortization by going commercial route as I think the risk of loss is higher being in this type of financial product versus having the business ownership questioned in court but I respect that view.

Andrew Kerr · Answer

@Jeff P. - This is a common problem folks run into as they don't realize you cannot get traditional financing when the property is owned by an LLC. If you keep it in the LLC, you are going to end up with higher financing costs.

My approach has been to max out the loans I can get in my personal name, get good dwelling coverage, add a healthy umbrella policy, and make sure all my paperwork is reviewed by an attorney. This helps cover my bases.

Then once I am maxed on the loans I can have in my name, I start putting properties in LLCs, and get commercial or portfolio financing. Lima One is a big national lender that does financing for properties in an LLC. Then look for your local or regional banks to get portfolio financing. These are not Wells Fargo, Chase, B of A. These are the local banks with a small handful of branches. Then ask for their VP of lending or commercial lending, don't ask for residential lending.

Good luck!

Jeff P. · Answer

Good points all. I really appreciate the input. I think I will switch it to my name, when and if I will switch it back I'm not sure either way yet.

Andrew Kerr · Answer

@Casity Kao I use to take this approach until a I sat down with my lawyer. The due on sale clauses didn’t worry me as much, but it was a risk. What my lawyer said was, if he was suing me, he would argue that I pierced the corporate veil by moving properties back and forth between the LLC and my name, then having a loan in my personal name for a property that is in deed via the LLC. This would defeat the purpose of the llc, that was a risk I didn’t want to take.

So I go with the approach above by using good insurance, contracts and leases for the properties in my name that have financing. And when I get maxed on conventional financing or do a JV I use LLCs.

But in the end, I think it comes down to risk tolerance and what you have to risk. If you have a 100k loan on a property valued at 100k and have very little in personal assets, then you don’t have a lot to protect. So why spend money on LLCs, Corporations and big umbrella policies. I think people get really hung up on having multiple layers of protection when they are earlier in their life as they tend to have very little in the way of assets. Now if you have a mid to high 6 figure net worth, in assets outside of a traditional retirement account, I would start thinking through some layers of protection like an LLC/holding company or trust plus some extra liability insurance.

Yi Lin · Answer

I wouldn't take the acceleration clause (we are taking about due on sale clause?) risk unless I can afford to have that happen.  To me, it is just unnecessary risk to take.  I know it is unlikely to happen but let me suggest sometime that makes financial sense for the bank/ lender to do so.  Right now the interest rate is low, so say 4.5 percent for investment properties, what if 3-5 years down the road and rate increase to say 7 percent, what bank/lender in their right mind wouldn't want to call your 4.5 percent loan so they can deploy the capital for higher interest rate?  I agree with Andrew Kerr's approach.

Yi Lin · Answer

I wouldn't take the acceleration clause (we are taking about due on sale clause?) risk unless I can afford to have that happen.  To me, it is just unnecessary risk to take.  I know it is unlikely to happen but let me suggest sometime that makes financial sense for the bank/ lender to do so.  Right now the interest rate is low, so say 4.5 percent for investment properties, what if 3-5 years down the road and rate increase to say 7 percent, what bank/lender in their right mind wouldn't want to call your 4.5 percent loan so they can deploy the capital for higher interest rate?  I agree with Andrew Kerr's approach.

Casity Kao · Answer

@Jeff P.  If the bank threatens it then switch it back to your personal name, but I have never seen it happen, only heard of it happening from a person who heard of it happen.  But in general I doubt the last thing the bank wants is to take over a home with renters that is a performing note on their books.

Jeff P. · Answer

@Casity Kao- shouldn't I fear an acceleration clause if I switch back to the LLC?

Kerry Baird · Answer

My lender offers specialty products for LLCs and properties over the ten conventional. Rates are higher. Same with commercial lending.

Casity Kao · Answer

@Jeff P.  I would transfer it back into your name with a quit claim deed, get the financing and transfer it back.  If you do it in your LLC you are going be doing it on the commercial side with some type of a balloon.  I could be wrong on that, but my team calls on banks all the time to constantly find the best financing possible.  We have a private lender that will lend on an LLC fixed 30 but they are lending on a but at 7% so you there is going to be trade off on terms or rate to keep it in your LLC.  But you can also do a blanket loan for all of them to pull cash out if you go commercial.

LLC cash out refi to brrrr? suggested lender? or alternative?

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