Is an LLC needed before buying the property?

Question

Hi,

I’m just starting out in my real estate investing journey and am looking to buy a single family home to buy and hold as a long-term rental. Do I need to have an LLC set up prior to obtaining a loan or can I have the mortgage in my name but then still buy the property under the LLC name? At the moment I do not have an LLC set up, but I’ve already been pre-approved for a conventional loan in my name - can I use this to obtain the financing but still have the property under an LLC or does the loan need to made out to an LLC and my pre-approval is basically useless?

Eliott Elias · Answer

You do not need an LLC to purchase a property. It would actually shrink your lending options tremendously if you bought a property in an LLC. Your conventional, VA, FHA, or any primary loan options become unavailable. It is however good to stat your LLC and start building business credit.

Richard Loniewski · Answer

Not Really, I just put property offers under the street name LLC (like 123 Main ST LLC). If I get the offer accepted then I form it, but you need to know timeframe in your state for getting one, so you might need to get in advance. In NJ you can create one online almost instantly.

Salvatore Lentini · Answer

@Stephanie St. Germain - you don't need to decide now.  You can change the purchase agreement.  There's no right answer on this one.  You'll get investors arguing both sides.  Yes, it limits options with conventional financing but maybe you're not planning on going that route.  Personally, I had zero income when I first started out because I was self employed.  So I had to go with a direct lender.  Rate was about a point higher but I was able to get 10 properties in year 1 and as time went on I moved on to bigger deals and now I'm able to get loans with traditional banks.  If you buy in your name personally just make sure you get a hefty umbrella policy in case you get sued.  That should put you on even playing field as an LLC liability-wise.

Sean O'Keefe · Answer

@Stephanie St. Germain this is a common question and a good one :) The answer is it depends and it may not be your choice.

• Generally, buying through your personal name can reduce the interest rate - commercial rates on LLC mortgages are usually higher but you can research this
• Most LLCs on incorporation don’t have any credit so it may be difficult to find.a lender
• If you own the property in your personal name you are exposing yourself to more risk and will want to transfer the property into LLC as soon as you can
• If you own property in your personal name and transfer to LLC the lender may not allow or can call the entire loan
• LLC or personal you need insurance

One solution to the above is to buy the property in your personal name and immediately transfer it to the LLC after closing, but you will need to get pre-approval from the lender before you buy the property and plan to do this since not all of them allow this. The lender can call the loan on transfer - this is a risk and you need to be careful. Finally, if you wait too long to transfer the property from personal to LLC there may be taxes on transfer.

The transfer is called a "Quit Claim". If you search the forums for this topic using the magnifying glass feature in top right corner of your screen on BiggerPockets you will find a lot of discussion on "Quit Claim" "Buying through LLC" etc.

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This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

Parmesh P. · Answer

Thank You.

Pradip Chavan · Answer

Hi @Eliott Elias,

In that case, do you suggest establish LLC first, keep it active. Parallelly, start buying rental property, grow your portfolio and later at some point, move these rental properties under this LLC?

I live in SC and started knowing about creating RE LLC

Do you suggest, to eventually move this LLC under Family Trust?

Kai Kopsch · Answer

@Stephanie St. Germain Grait question, and like so often, it varies where you are in your RE Investing endeavor. I would recommend setting up your team and letting your lender help you understand all the benefits of setting up an LLC vs. financing first deals personally.

Wyatt Wolff · Answer

It depends on the terms defined in the loan, but there ARE loans that they can, yes. On your LE, it will say "Assumable" or "Non-Assumable".

Now, will they? That is a different question entirely.

Polo Vazquez · Answer

Getting credit under an LLC is usually more difficult and more expensive. I strongly recommend getting as many loans under your name as you can first. Once you do you can switch the house but there is always a risk that the bank can activate the due on sale clause (meaning they whole loan is due). Having an LLC for protection is not always the best option. Here are a few items I have come across having my owns LLCs that you need to think about.- You will now have to file a tax return for your LLC and these can get expensive.- You might need to pay an annual fee depending on your state

- When you pass away does the basis reset when your kids receive it as an inheritance? If not, and they sell, they would lose on a lot of savings.- You can still lose every single property you have under the LLCIt might be cheaper to just get and insurance that protects you