One Mortgage or Two?
July 3, 2012 7:24 AM Subscribe
Should I get a second separate mortgage for my investment property, or take a cash out refi of my primary for the purchase?
I am looking to start a business and have found property that may serve to both host that business and also as a vacation rental / second home.
Because I can't afford much of an increase in payments (recognizing that there are other expenses involved in a piece of property), I am considering refinancing my 15 year mortgage to a 30 year and taking cash out of that which I would use to purchase the second property free and clear.
Is there financial advantage to owning the second property in this case, or would it make more sense to refinance my primary home to reduce payments and obtain a second mortgage on the other property?
Also, in terms of setting up a business, would there be an advantage to personally owning the property and leasing it to the business, or instead "investing" my money into the business and have that entity purchase the property and own it separately?
I am looking to start a business and have found property that may serve to both host that business and also as a vacation rental / second home.
Because I can't afford much of an increase in payments (recognizing that there are other expenses involved in a piece of property), I am considering refinancing my 15 year mortgage to a 30 year and taking cash out of that which I would use to purchase the second property free and clear.
Is there financial advantage to owning the second property in this case, or would it make more sense to refinance my primary home to reduce payments and obtain a second mortgage on the other property?
Also, in terms of setting up a business, would there be an advantage to personally owning the property and leasing it to the business, or instead "investing" my money into the business and have that entity purchase the property and own it separately?
This isn't a finance question per se, it's a whole tax magillah. You should get an accountant and discuss your options.
In my world view, you DON'T mix your personal finances with your buisness finances.
posted by Ruthless Bunny at 8:02 AM on July 3, 2012
In my world view, you DON'T mix your personal finances with your buisness finances.
posted by Ruthless Bunny at 8:02 AM on July 3, 2012
Best answer: I'm a landlord, and I don't feel I can answer your question; you do need an accountant familiar with small business AND rental aspects. It's going to be complicated to set this up, to say the least. You need to have hard numbers and run them through different scenarios that fit your situation.
I would strongly prefer a separate mortgage for investment property of any kind. I'm impressed you have equity for a cash-out refi, but do you really want to put your primary residence at risk? Make the numbers work for this property by itself., I say.
Note that you generally are much better off if you can actually claim mortgage interest payments as a business expense. That actually counts against your business and/or rental income on the property, dollar for dollar, whereas the deduction for your primary residence is limited. Similarly, your business rental expenses could be a Schedule C deduction, which then flow to your Schedule E rental income sheet where they are offset by property expenses. While there are many ways to do this, this is the most obvious and common, particularly if your business is a simple LLC.
Anyway, I can tell just by your using the wording "second mortgage" that you're diving into this. That is pretty much exclusively used to refer to an additional mortgage on a single property, like a home equity loan. I would hope that the last decade's experience of many people financing businesses and investment property via home equity loans would be a salient example of how not to do this. In other words, avoid it if you can.
posted by dhartung at 9:54 AM on July 3, 2012
I would strongly prefer a separate mortgage for investment property of any kind. I'm impressed you have equity for a cash-out refi, but do you really want to put your primary residence at risk? Make the numbers work for this property by itself., I say.
Note that you generally are much better off if you can actually claim mortgage interest payments as a business expense. That actually counts against your business and/or rental income on the property, dollar for dollar, whereas the deduction for your primary residence is limited. Similarly, your business rental expenses could be a Schedule C deduction, which then flow to your Schedule E rental income sheet where they are offset by property expenses. While there are many ways to do this, this is the most obvious and common, particularly if your business is a simple LLC.
Anyway, I can tell just by your using the wording "second mortgage" that you're diving into this. That is pretty much exclusively used to refer to an additional mortgage on a single property, like a home equity loan. I would hope that the last decade's experience of many people financing businesses and investment property via home equity loans would be a salient example of how not to do this. In other words, avoid it if you can.
posted by dhartung at 9:54 AM on July 3, 2012
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Talk to your account and maybe a tax lawyer. If you're thinking about starting a business, you should have a lawyer anyway. This would be just one more thing you'd discuss with him. If you're starting a business and you don't have a lawyer, You're Doing It Wrong.
posted by valkyryn at 7:28 AM on July 3, 2012 [3 favorites]