Closing on 1st Rental - Refinancing and moving Deed to LLC

Baltimore, Maryland
General Landlording & Rental Properties
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Closing on 1st Rental - Refinancing and moving Deed to LLC

Matt Holley
Member since 2022 · 2 posts · 0 votes

I am closing on my first rental in two weeks. It is a single family middle unit townhome. Total mortgage payment (including taxes and insurance) will be approx. $1,850.00, the rent goes for $2,400-$2,500 a month, and the tenants pay for utilities. The property just appraised for 30k more than I am paying for it. I want to take some of my initial investment out so that I can reinvest it in the purchase of another property in the same area. I also would like to move the Deed to my LLC.


Question 1:

Should I do a cash out refinance or apply for a second loan on the property to get back $40,000 of my initial investment? I have a rate of 6.875% now but it is in my name and not the LLC.

Question 2:

Should I make my LLC the landlord on the lease, and how long should I wait to transfer the property to the LLC?

The two questions might be answered with one "Wait 6 months to establish the income from the lease and then do a cash out refinance as long as your cash flow from the property is still positive with the new mortgage payment." (That is what I think the answer is but I legit have no idea)

Thanking you in advance for any assistance!

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Jason Marino
Attorney · Member since 2022 · 160 posts · 186 votes
3y

Hi Matt,

I am replying to something that you mentioned in your second question. The strongest asset protection structures usually use a multiple entity structure. This would include using an LLC that you establish as an Operating Company as the landlord or rental manager listed on the lease. This entity would additionally interact with contractors and be your publicly facing LLC. The purpose of this is to separate the liability of interacting from the liability of owning the property. A separate LLC or other limited liability entity would act as a Holding Company and be on the title to the property.

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  • Sasha MohammedPro Member
    Lender · Costa Mesa, CA · Member since 2018 · 337 posts · 245 votes
    3y

    Hi there! Most lenders will have some sort of seasoning period for cash out. Most typical is 6 months before you can go off of appraised value and not purchase price. some lenders will go shorter, if you can document some sort of improvements to the property, but this is not typical. i would say on the refinance, it would likely be necessary to wait at least 6 months in order to tap into that equity, and i would see where the rates are at that time before determining how to proceed forward. at this pace, it could be significantly higher than you're currently paying, chopping your cash-flow to a point you no longer feel comfortable. also, consider if you have a prepayment penalty on this existing loan. 

    As for the LLC, i would recommend an LLC, specifically for the protections. i would even go as far as to recommend a special-purpose entity (one for each property independently). But i would recommend you reach out to a tax advisor to see what this would look like on your taxes.

    Sometimes, moving title (wether into or out of an LLC, or any other change to vesting) is seen as a "sale", and sometimes will result in a property tax reassessment. i typically recommend if you're going to move title, you do it soon after purchase as to potentially prevent this, or limit the chances of this reassessment.

    [email protected]949-351-1338
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  • Matt Holley
    OP
    Member since 2022 · 2 posts · 0 votes
    3y

    Thank you. I do not have a penalty for prepaying the mortgage. I also think my broker, who I like and plan on using for future transactions, doesn't get paid until the loan reaches that 6 month mark. Thanks again for the response!

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y
    Quote from @Matt Holley:

    Warning: I'm going to hit you with some tough love.

    If PITI is $1,850 monthly, that only leaves $550 - $650 for maintenance, vacancy, capital expenditures, and property management. You typically want 30% - 50% of your rent for those set-asides, then whatever is left over is your cash flow. In other words, this property would have to rent for around $3,600 a month to be considered a healthy investment.

    Look at it this way. If your have $650 left over each month, that's $7,800 a year. You can expect to spend around 10% ($3,000) of your gross income on general maintenance each year. That leaves $4,800. If the property sits vacant for one month, you'll lose $2,500 in rent plus another $200 or so in utilities. That leaves $2,100 which is less than the 10% you should be setting aside for capital expenditures. What if you have to hire a property manager?

    A typical scenario: Tenant fails to pay last month's rent, leaves $5,000 in cleaning and repairs, and it takes you a month to turn the unit around and find a new renter. Even after applying their $2,500 deposit, you are out $7,500 which is three years worth of "profit" on the property. 

    Here's a guide that describes what good cash flow looks like and how to analyze a property.

    https://www.biggerpockets.com/...

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  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
    3y

    @Matt Holley you haven't told  us what the value is versus what you paid for it.

    A refinance will only allow you to tap up to 80% of the property value after 6 months.

    Not aware of any lenders that will give you a 2nd mortgage or HELOC to tap the remaining 20%.

    Also, would advise againsti it - even if you could find someone to lend! Saw a LOT of investors lose all their properties in 2008-2010 due to overleveraging.

    Most states require a lease to identify the owner of a leased property, whether a person, trust, LLC, IRA, etc.

    Landlord = Lord of the Land = Owner

    Agent = someone legally representing the owner

    Property Manager = agent

    [email protected]248-209-6824
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  • Kenneth Cheston
    Real Estate Agent · Baltimore, MD · Member since 2020 · 65 posts · 24 votes
    3y

    Hi @Matt Holley,

    Looks like you've already gotten some great advice. I bought my first duplex in Baltimore last year and have had about 6 months on the books for renting to tenants.

    Just to give you an example.

    I bought it for $140,000 ($135,000 FHA loan) and it appraised for $210,000 after renovations. I called around and I was able to get 85% LTV for a HEL. I had $43,500 available to me, but I chose $23,000 so that it didn't kill my current cashflow. The HEL is a fixed rate unlike the HELOC. Drew is right that it's unlikely you'll be able to access that 30k due to LTV limitations (don't know your loan to value). There's also closing costs associated with HELs & Cash-Out Refis that will probably make it not worth it. Helocs don't have any I believe.

    Try calling SECU. I talked to them recently and they said they could do a HELOC on investment properties for 90% LTV with a credit higher than 740. But definitely give caution to over leveraging at this time and it may wipe out what cashflow you have now. It's always worth doing some research just to see how the numbers pan out.

    Sometimes it's better to explore getting money out of the property before transferring to LLC because you can get better terms as an individual; however, it's an inherent risk not having that added protection.

    Let me know if you want to chat further on messaging! I'm a local investor to your area and always love networking.

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  • Jason Marino
    Attorney · Member since 2022 · 160 posts · 186 votes
    3y

    Hi Matt,

    I am replying to something that you mentioned in your second question. The strongest asset protection structures usually use a multiple entity structure. This would include using an LLC that you establish as an Operating Company as the landlord or rental manager listed on the lease. This entity would additionally interact with contractors and be your publicly facing LLC. The purpose of this is to separate the liability of interacting from the liability of owning the property. A separate LLC or other limited liability entity would act as a Holding Company and be on the title to the property.

    2Reply
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