Expert: Mike Fortunato - 1/7/2012

Question
QUESTION: Hello,

I have two 2-family houses I bought for investment and income supplementation, owned under an LLC in which I am the only member. One house was extensively renovated, and the other partially,  financed by commercial bank loans and credit cards.  While I got my properties cheap and have low mortgage payments, I have not been able to achieve profitability due to these renovation debts (in the amount of 25K).  Some of the interest rates are not great on these debts.  I recently approached a bank in which I have a checking account and asked about a loan to consolidate these debts.  Interestingly, the loan officer proposed I include my mortgage debt - currently financed at about 6% with another bank - putting all under one umbrella, as it were.  The monthly payment at around 4% would put me into profitability.

My concern is putting all my eggs "in one basket."  I'm a cautious person, and don't want anything to go wrong in which I lose one or both houses.  The umbrella loan would eliminate my mortgages and I would no longer escrow my taxes and insurance (O.K. with me).  My belief has been, that with one bank consolidating my loan debt, and another holding my mortgages, I'm somehow better off, with less risk financially.  Is this just an illusion of mine, or is there some truth to it? Or is it all in the loan agreement and my knowledge of the terms so I understand how not to screw something up which prompts them to take my property?

Thanks for your response.

Peter

ANSWER: I would have suggested the same thing as your bank, with one exception. I think you should have a separate loan for each property, rather than both properties wrapped into the same loan (which is what I think you mentioned). The reason is that if you decide to sell one of the houses, you can do so without having to refinance the entire loan (which incurs costs).

As for your concern about one loan vs several, the risk is the same, except that some of your existing debt (such as the credit cards) isn't collateralized. This means that if you default on those debts, it would be harder to collect by going after your properties. By rolling everything into the mortgage, you are now tagging those debts to collateral which can be foreclosed upon.

---------- FOLLOW-UP ----------

QUESTION: Thanks for your quick response.  It seems that, potentially in a worse case scenario, I could lose everything, with it all tied together.  One slant on the situation I had was to wrap only one property into the consolidation.  I'd like to have one property as a backup residence, an insurance actually, should I need it.   

Thoughts?

Answer
It really comes down to what debts you're defaulting on, and how agressive the collection efforts are. Some creditors will go so far as to try and pierce a corporate (or LLC) veil to get at those assets. I've never been a fan of going into an investment with one foot in and one foot out. If you think default is imminent, then that's another story. But if you can refinance and improve your situation where your turn profitable, I would look in that direction.