Refinancing into the company

[Mike Sebastian]

Someone explained a strategy to me the other day that I thought was interesting and would like to get some expert advice on it.

The man I was speaking with owns 10 homes. All of them are STRs and all of them were purchased via a conventional mortgage with 20% down. After he purchased them, he quiet titled into the business name just like has been recommended here. 

After the dust settled on each purchase and they begun to show positive cash flow, he would refinance them into the the business name. He said that he did this to keep his DTI low. Whenever he went to get a new loan they saw the income that made it to his tax return, but no debt since all of that was now in the business. They could only pull up the debt that HE had, not what the business had since the business wasn't buying it outright.

I really like this approach until my portfolio is large enough to simply purchase through the business outright. 

I have 5 mortgages right now, and the income from three of them hasn't hit a tax return yet. I'm also working full time and don't want to take the cash from any of these, so the income won't "look good" until we stop reinvesting it all. The above financing strategy could really help, but I'm unsure of why no one else has mentioned it before, which has me worried. 

Pros: No debt on my personal debt report, income still records the same, agility to move quickly on the first purchase and slowly on the refi, less personal risk, very clear delineation between personal and business assets in the event of a lawsuit

Cons: A slightly higher interest rate, a one-time headache of paperwork to refinance

I see the pros far outweighing the cons, but don't think I've thought of all the cons. I'd love insight from anyone that's been through this, or intentionally avoided this. 

[Chris Seveney]

Quote from @Mike Sebastian:

Someone explained a strategy to me the other day that I thought was interesting and would like to get some expert advice on it.

The man I was speaking with owns 10 homes. All of them are STRs and all of them were purchased via a conventional mortgage with 20% down. After he purchased them, he quiet titled into the business name just like has been recommended here. 

After the dust settled on each purchase and they begun to show positive cash flow, he would refinance them into the the business name. He said that he did this to keep his DTI low. Whenever he went to get a new loan they saw the income that made it to his tax return, but no debt since all of that was now in the business. They could only pull up the debt that HE had, not what the business had since the business wasn't buying it outright.

I really like this approach until my portfolio is large enough to simply purchase through the business outright. 

I have 5 mortgages right now, and the income from three of them hasn't hit a tax return yet. I'm also working full time and don't want to take the cash from any of these, so the income won't "look good" until we stop reinvesting it all. The above financing strategy could really help, but I'm unsure of why no one else has mentioned it before, which has me worried. 

Pros: No debt on my personal debt report, income still records the same, agility to move quickly on the first purchase and slowly on the refi, less personal risk, very clear delineation between personal and business assets in the event of a lawsuit

Cons: A slightly higher interest rate, a one-time headache of paperwork to refinance

I see the pros far outweighing the cons, but don't think I've thought of all the cons. I'd love insight from anyone that's been through this, or intentionally avoided this. 

 Few things with this: if you buy a property in your name the mortgage and note are in your name, if you title it into another name or entity, the guarantor on the loan does not change. 

If you put them into a LLC and get a loan, you typically are required to sign a personal guarantee. If you sign a personal guarantee and have loans in the LLC, when applying for new loans in your personal name yes they do not show up on your credit but you also answer a question on the 1003 are you liable for any other debt and should be required to show the books for your LLC.

The other area where people fail with this is many self manage - which eliminates any delineation between the entity and the individual.