Refi Rental Property?
I own a rental property with my sister. I used to live in it (11 years ago). We owe $86,717 on it at 5.75% interest. Our payment is $740 and it rents for $950. My question is, since it is no longer my primary residence, if we refinanced it, would we still get the low interest rates?
Other factors to consider:
We have both married since buying the house together so that may complicate the paperwork?
We plan to pay it off within 7 years
Could we form an LLC and refinance through the "business"? We may buy other properties together in the future, so we have discussed this before.
According to Zillow (not sure how credible that is) the value is $102,000.
We are each going to pay the minimum payment plus $1000 each a month. It should actually take about 3 1/2 years to pay it off but we aren't ready to start that plan yet (probably next year) as we are paying off personal debt first. So yes, we really will pay it off and have entertained buying another property together later.
- SlumlordLv 77 years agoFavorite Answer
You owe over $86,000 but are planning to pay it off within 7 years? How are you planning to do that? I mean based on your monthly payment it won't happen unless you put some serious funds towards paying off the principal. Regardless, however, if you are fairly sure you will pay it off that soon, for whatever reason, your probably better off just doing nothing. Any new loan will have 1000's in closing costs and since this is now a rental the rate won't be nearly as good as an owner occupied home (though rates are still low so maybe it would be better than 5.75%, maybe not - hard to say).
If you form a LLC, the LLC has no history so you won't be able to refinance or get any loan at all with it. You could form the LLC and transfer the property into it (very useful for insurance reasons). The bank might find out and demand you transfer it back but probably won't find out. There is a risk (the bank, if they find out, could even call the loan, this is very unlikely but a real scary possibility).
Of course you can buy properties together in the future (but not through a LLC unless you pay cash). Your both being married may complicate it a bit but probably not to much.
Long story short - do nothing if you really are going to pay this off in 7 years. If you are not sure about this you can at least go to a bank and see what they can do for you but you might be better off still doing nothing.
- loanmasteroneLv 77 years ago
You would not be able to refinance the property as an owner occupied property, therefore the interest would be higher.
In forming a LLC to place the property in is a good idea. Since the LLC would be new, have no financial history for the past 2 or 3 years, nor would the newly formed LLC have a credit history with credit scores, therefore a mortgage lender would not allow the LLC to be used in a refinance. In forming the LLC make sure you obtain a EIN for banking purpose and credit. Google EIN and obtain the EIN after naming your LLC. There is no cost in obtaining your EIN from the federal government.You would then apply through your state to complete the forming of the LLC. Your state would charge a recording fee. This fee could be anywhere from $50.00 up depending on the state in which you reside.
You and your sister would have to refinance the house in your name with proven income, income tax forms, w-2 forms, pay stubs and other documents that would prove you are able to pay the monthly mortgage payment. You and your sister would also have a credit report and credit scores used to approve mortgage loans.
Since both you are currently married, your spouses might be required, by the mortgage lender, to have your spouses sign off this refinance transaction indicating they would no have a legal standing in this refinance transaction or the property. This is especially true if you reside in a community property state such as California.
Once the refinance transaction has closed you would be able to transfer the rental unit to the newly formed LLC. Your local title company would do this as a courtesy. You would have to inform your title company that you would like to have this done upon the closing of the transaction. You would have no problem and need not have an approval by your mortgage lender.
You would open a bank account in the name of the newly formed LLC and have the tenants make the rent check to the newly formed LLC to be deposited in the LLC bank account. You might also consider placing the deposit into a saving account to draw interest. You are not required to share any interest gained when your tenant move from the rental unit.
In doing this your LLC would be earning money monthly, you would file an income tax for the LLC. If you use the LLC as a pass through for tax purpose this would not work. If you would be building you LLC to operate on its own, then this would work. You should inquire of your tax preparer which would be financially beneficial to you and your purpose of forming the LLC.
You may purchase other properties and place them in the LLC until you have sufficient income to buy properties through the LLC. Handle all transactions of the LLC as a separate entity and a business. The funds are not yours to spend as you would your on personal income. Any money earned is that of the LLC. If you would pay yourselves use a W-2 form as you work for the LLC. Again this would depend on how you set the LLC up. Speak with your tax preparer or CPA
I use this system for my rentals.
I hope this has been of some benefit to you, good luck.
- JackLv 67 years ago
- Your first thought was on target - - you will not be able to refinance this property at the best current rates. This will now be financed as an investment property. You will not get the interest rate reduction you are hoping for.
- Additionally - if you are going to pay off the property in 7 years, the difference in total interest paid on either a 5.75% or a 5% (which you can't get) is small. You won't be able to recoup your closing costs.
- 7 years ago
If you are thinking that now might be a great time to refinance one of your rental properties, think again. While rates are low and the process relatively easy for home owners who are refinancing a primary residence, those of us wanting to refinance our investment properties are discovering that standards are tougher than ever.Source(s): http://lidopropertymanagement.com