All Forum Posts by: Account Closed

This is the arrangement I've got with a small, local bank. It's a construction loan that will be refi'd into a conventional once the repairs and appraisal are done at the end of the run. Interest only until then.

The lender will send someone out to verify the work you are claiming was done and issue you a draw to pay for it.

Obviously, the total purchase + rehab at the end of the run will need to be less than appraised value for the bank to take the risk.

Do not work with large banks, get to know your bank president on a first name basis and they will do these types of loans for you if you are a man of your word. The bank will keep them in their portfolio most likely.

Agreed. It's not the lenders fault that "Joe" bought high and doesn't feel like losing money by selling low. If he's got the means to pay the mortgage, then he should either pay off the debt or simply keep it current until market conditions favor a resell.

It's a tough pill to swallow, but pushing your mistakes on the lenders is the wrong thing to do. Integrity is the word here.

Mitch, I do not envy your $800/year per LLC tax in California. That's rough!

Right, I understand the personal gauruntee requirements. At somepoint when the business has income on the tax returns for a few years, I would assume I could start getting loans under the LLC. I have no problem giving a personal gauruntee until that point.

If I'm looking to do a cash out refi, what value do the lenders use to determine your LTV ratio. If I have a lender that will do, say 75% LTV cash out refi, and I've got a property that is worth $100k, but I purchsed for $65k, how soon would the value be considered $100k rather than my purchase price value of $65k? Is there a typical wait period before lenders use new appraisal instead of your acquisition cost?

If I buy a property as a primary residence with 5% down that is 30% below market value, then later down the road convert it to my first rental property, is it possible to do a cash out refi into the LLC leaving about 20% equity in the property.

House has market value of $100k. Purchase and rehab total $70k which is financed with 5% of the $70k down. I want to convert this to a rental property. Is it possible to refi into the LLC with $10k cash out leaving $20k in equity in the property?

I guess what I'm asking is when I refi into the LLC, can the leftover equity in the property after the refi count as the 20% the banks require on investor loans?

I'm ignoring refi and closing costs here in this example.

+1 what Roger said.

If you were running a business or actively participating in your real estate investment according to the IRS, then your C-Corp analysis would sort of make sense. Although an S-corp elected LLC is still an easier option IMO. You would cut yourself a small salary which would be subject to Self Employment tax and treated as ordinary income and the rest as a distribution subject to capital gains rates.

However, since you are just holding a rental property, the LLC is your best bet, all income will be treated as passive income subject to capital gains no matter what way you slice it. You will not qualify as actively participating with just one rental property.

I'm just playing the devils advocate here. But yeah it does not sound like a good deal to me outright....of course this could be a property worth $1mm.

You're assuming he financed it

I'd probably just go with a LLC for the simplicity of things. No need for a corporation since the income is passive and you won't need the ability to split income between salary and distributions. All the income will be taxed as passive income. All you are looking to do here is limit your liability. A single member LLC will be no different tax wise than you owning it personally and putting it all on your schedule E. To keep your liability protection intact, keep all finances seperate and have all income and expenses run through a business bank account in the LLC's name. You are likely to show a loss on paper anyhow.

This is not legal or accounting advice, just what I would likely do with your facts you posted.