Cash-out refi/Home Equity Loan

[Mike Carroll]

I recently built a vacation home for short term rental purposes in Bethany Beach, Delaware. I also built an in-law suite for my wife and I so we could house hack the property. After 2 extremely successful seasons, we are contemplating moving and renting the entire space out (a bit more cash flow). My question is in doing a cash-out refi or home equity loan for another property, should I do the loan first and then transfer the deed to the home to an LLC? I would like to run the rental through that LLC to protect my second home and our external assets. It also seems more tax advantageous since I will be able to write off the entire home expenses as opposed to a percentage like I can now. Will doing this affect my current (amazing) mortgage rate of 2.99% on the original home? Can I keep the loan in my name and put the deed in the LLC's name? Will a lender allow me cash out refi if they know the original home is a business? Sorry for all the questions, thank you so much in advance!

[Andrew Postell]

@Mike Carroll You have some good responses already but I wanted to highlite a couple of things here just in case:

1. Cash out as a "primary" home or "investment" property - Any loan type will increase your current interest rate. If you were to cash refinance this house as a "primary" home, then your rate would still only a little higher but you also sign that you are intending to occupy the property for 12 months.  Now no one is going to come after you if you move....but if you have to go get another loan for your new house when you do move they will ask. Formally, if you do a cash out loan of a primary home and you live there for the next 12 months, then you are meeting the requirements of a primary home loan.  If you know that you are moving, then getting a primary home loan would be....well, just be careful if doing something like this.  If you know you are moving then an "investment" home loan would be the correct product.

2. Can I get the loan in my company name - yes, of course. This is just commonly referred to as a "commercial" style loan. 30 year fixed rates are common, 75% LTV on an investment property cash out loan is the normal threshold. Loan is in company name, property is in company name. If you keep it in your private name you can still get an "investment" property loan as well which will have more favorable terms than a "commercial" style loan.

3. Investment Property Tax Advantages - once you stop occupying the property then the tax write-offs are different. The ADU is factored into the math but it is not treated as an entirely separate property. Whether you have the property in your personal name or a company name is inconsequential though. It will still be tax deductible the same way - as an investment property. One of the main reasons people want their properties in a LLC name is for asset protection. But that is an ENTIRE other conversation. But if you are claiming the property on your "Schedule E" of your personal returns then the tax advantages are the same. The legal description of the property includes the ADU. Just for an example, if you owned a DUPLEX, it would still be 1 entry on your schedule E if they were on the same plat of land or same "legal description". If you are wanting to structure the property into a partnership, or C-Corp, etc....then other discussions would be had.

4. Line of Credit - A HELOC or LOC would allow you to keep your underlying mortgage in place. So you would keep your current interest rate. Keep in mind that HELOCs/LOCs are both temporary money sources. Meaning, they are not designed to keep money on them for long periods of time. Don't get me wrong - they CAN keep money on them for long periods of time but the rate is adjustable and after 10 years they "mature" into something else...with an even higher interest rate. But if I use them, pay them back, use them, pay them back, etc. then they are WONDERFUL tools.

Maybe I said some things here that were already said...but hopefully there's a couple of other things in there that might help.  Thanks for posting!