Change ownership structure and financing - multifamily

[Satha Palani]

My wife and I own a 3 family in Newark NJ that we bought using an FHA loan (3.5% down) 3 years ago. We currently live in one unit and rent the other units out. I have a loan balance of approximately $410K and pay $270/Mth in PMI. My mortgage rate is 3.75%.

Similar houses in the neighborhood are selling in the 650 to 700K range. We did extensive renovation to all 3 units. Taking what we spent into account, we still have a good bit of equity built up already.    

We are now expecting a child and would like to move to a larger place. I want to refinance this house and pull some of the equity out to finance the new house.

I have been doing some research on bigger pockets on this and see a lot of folks talk about switching ownership to an LLC for added, tax benefits as well as mitigating risk.

How would one go about refinancing and changing ownership simultaneously? 

Would my wife and I establish an LLC and take the new loan out in the name of the LLC?

Would there be tax implications? 

Would the rates I can get financing it through an LLC be very different from what i already have?

I am assuming that any financing through the LLC would have to conventional, would I be able to get a 80% LTV or would it have to be higher?

Are there any specialized lenders i should consider?

As always all inputs are greatly appreciated.

thanks,

satha

[Scott Smith]

Originally posted by @Satha Palani:

My wife and I own a 3 family in Newark NJ that we bought using an FHA loan (3.5% down) 3 years ago. We currently live in one unit and rent the other units out. I have a loan balance of approximately $410K and pay $270/Mth in PMI. My mortgage rate is 3.75%.

Similar houses in the neighborhood are selling in the 650 to 700K range. We did extensive renovation to all 3 units. Taking what we spent into account, we still have a good bit of equity built up already.    

We are now expecting a child and would like to move to a larger place. I want to refinance this house and pull some of the equity out to finance the new house.

I have been doing some research on bigger pockets on this and see a lot of folks talk about switching ownership to an LLC for added, tax benefits as well as mitigating risk.

How would one go about refinancing and changing ownership simultaneously? 

Would my wife and I establish an LLC and take the new loan out in the name of the LLC?

Would there be tax implications? 

Would the rates I can get financing it through an LLC be very different from what i already have?

I am assuming that any financing through the LLC would have to conventional, would I be able to get a 80% LTV or would it have to be higher?

Are there any specialized lenders i should consider?

As always all inputs are greatly appreciated.

thanks,

satha

While I agree with Tom that the LLC may not offer much in terms of taxes, I am always very cautious about leaving my assets exposed. It sounds as though you have worked very hard to build up equity, so it's important to take the appropriate steps to protect that wealth. I kicked off my career litigating major insurance companies for refusing to pay out on claims, so I never rely solely on a single method of asset protection. Tom also pointed out that many people create LLCs that don't do them much good - if you do go down that route, be sure to have a professional do it for you the first time. An experienced attorney with real estate investing experience can help you form an LLC that covers you, then should also teach you how to implement the bookkeeping to ensure there is no commingling. Finally, getting a loan for an LLC can be a challenge, but with the use of land trusts you can keep your financing options open.

I've focused on the negatives to start with, but I want to give a fair look at the negatives and the positives. The LLC will give you great liability protection when created, which will help deter lawsuits before they occur. This means that you have a barrier of separation between your personal life and your professional investment. It is worth a conversation to weigh the costs and benefits, so I would seek out a professional for some guidance.