Which state to locate LLC?

[Account Closed]

We currently live in Oregon, we have 2 single family rental properties located in Arkansas, we're looking to purchase our 3rd property in Indiana. Our 2 current rentals are under our own name, but we are planning on setting up an LLC on Legal Zoom and would like to transfer the 2 existing properties to the LLC. I have a few questions about this - 1. Which state should we set-up the LLC in? Is it legal to set it up in Oregon even though the houses are in other states? Or do we need to set up an LLC for each state we have investment properties in (one for the 2 Arkansas houses and a new one for the Indiana house)? 2. Are there any risks/costs we need to plan for when we transfer the 2 existing properties in Arkansas to the LLC? 3. I'm not sure how to go about actually transferring the title, was planning on reaching out to the title company we used when we closed on the houses. We have traditional financing on both houses, so I need to contact our mortgage company as well? 4. For the purchase of our 3rd house, would it be better for us to purchase it under our own name then transfer it to the LLC, or purchase it under the LLC once it's set-up? We will use traditional financing for this property as well, I know commercial loans can have less paperwork, but are they generally higher rates than residential? Lots of questions, appreciate any advice on this topic!

[Paul Thompson]

Really the best advice here is to seek a good experienced CPA and real estate lawyer. Preferably both should actually own rental real estate investments themselves. If you have a local REIA ask around who they recommend. There may even be one in the group.

1. Regarding which state to have your LLC in that is really best answered by an asset protection lawyer. I've asked the same question and I get a varied number of opinions. There are lot of ways to approach. The most common general answer I've received is keep it simple while your small. You can create a more in depth corporate fortress once you have significant assets. But my understanding is if you establish a LLC in another state than where the property is you do have to register a "foreign LLC" in the state where the property resides. The process for establishing these is relatively easy to do in Arkansas. The link is here: http://www.sos.arkansas.gov/BCS/Pages/foreign.aspx

Make sure to do the LLC not the corporation. Looks like it's $270 online. I've never done this myself and again not an expert. But this something you can do yourself if you wish once you've confirmed your strategy.

2. I think it is a good idea to transfer the title to an entity. You do want to create a liability shield between you and your assets. Get good liability insurance and also get an umbrella policy. An umbrella policy is super cheap and can provide protection up to $1M, $2M or higher depending on needs and what you are willing to pay for. Insurance is your first line of defense for asset protection!! Once you have good insurance then establish a good corporate fortress and estate plan. There is a cost to transfer title. But in my opinion it's worth it. @Jacob White does point out if you transfer directly to your LLC for properties encumbered by a mortgage you are very likely transgressing the "due on sale" clause. This is not illegal. It just technically gives the mortgage holder the right to call the entire loan due if they discover the title change and choose to enforce that right. This is unlikely to happen so long as you are current on your payments. But I've heard of examples where it has happened. To remove the concern of this one legal way to solve for this is to transfer your property to a Trust. You may then transfer the beneficial interest in the Trust to your new LLC. From the way I understand the Garn–St Germain Act is this allows owners to transfer property into a Trust provided they keep ownership interest and the banks cannot legally call the loan due.

"a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property"

source: https://www.law.cornell.edu/uscode/text/12/1701j-3

3. It is unlikely to help to contact the mortgage company. But it is worth a try. They may give you permission to transfer to your LLC and waive their due on sale clause rights for that transfer. It won't hurt to try other than your time and exasperation dealing with banks. The title company you used or any local title company could help transfer title when you're ready. You can also do it yourself doing the QCD as stated. But you'll be voiding your Title Insurance when you do so. I think the costs of someone who helps you gaurantee title is worth it and frankly I feel title company services are cheap. In Arkansas you don't need an attorney just a title company who have underwriters checking everything. There will be the title company's fee and transfer tax. But I think it's worth it. You can avoid in the future by buying in an entity to begin with. One advantage of buying property in trust is you can keep title the same but transfer beneficiary interest privately without having to fool with public records and title transfer tax. But using Trusts are optional and an advanced topic. That strategy has it's drawbacks also.

4. You can make offers in your LLC's name. You can also make offers in your personal name and then assign it over the appropriate entity at closing. Assignments are not allowed on most REO properties. So for REO's you'll need a LLC name to make the offer in. So the point is never take title in your personal name. Always hold title in an entity whether it be Trust or a state statute entity like a LLC. If you hold in Trust never have your personal name as the beneficiary. Always have an liability shield between you and your assets. For real estate investors LLC's really are almost always the best choice. Again seek good counsel for your specific situation. But now hopefully you are armed with more info to ask more educated questions.

Commercial loans do typically have higher interest rates, shorter amortizations schedules, and balloon payments. My recommendation is to use up your low rate traditional 30yr fixed rate loans while you can. You will only get so many based on current rules and your debt to income ratio. Commercial loans carry more risk b/c of the balloon payments. When it's time shop your local small banks for those type of loans. But better yet find private money or consider creative acquisition strategies like owner financing, sub2, owner wraps, lease options, master leases. 

Best of luck!