Should I put props in LLC

Question

I'm a full time Investor and have an LLC.  What are the pro's and con's of transfering my properties to the LLC?  Thanks, Ritch

Mark Yuschak · Answer

In an ideal situation, I want all my properties to be in their own LLC.  It's the best way to achieve maximum protection, in my opinion.

Going forward, each mortgage will be assigned to the LLC, accompanied by a personal guarantee.  I don't want to risk issues with a due on sale from the lender.

For those of you with properties in an LLC, what level of liability coverage do you carry?  I currently have 2 million on all of our properties under an umbrella.  I'm thinking that's too much if I use an LLC considering the inherit protection of the LLC.

Account Closed · Answer

One of the ways the veil is routinely pierced is under capitalization. In other words, not enough assets or insurance to cover foreseeable risks.

Talk to your lawyer, accountant and insurance agent about what the normal and customary coverages for your area are and then carry at least that amount of liability coverage.

I agree with MikeOH, there is some really bad information in this thread. Get professional advice so you know what your risks really are.

Mark N.A · Answer

The next question here might be how and why to divide properties up among LLCs.

Would it be best to do it by 'type' of property?  i.e. low income, middle income, etc.

And is there an optimal dollar limit of property for each LLC?  Obviously, since this is an asset protection issue it would be best to do one rental per LLC, but with SFHs this might prove cumbersome.

What say you all?

Jim S · Answer

You probably will have a hard time transferring a property with an existing mortgage because you would be transferring ownership from an individual to a LLC. That will change the type of loan in the mortgage holders eyes.
            In Maryland you can file one time to transfer property from private ownership to a LLC and avoid transfer and recordation taxes. After that you get dinged by the taxman. Every state is different so you probably want to consult a property & tax attorney in your home state.

Mark Yuschak · Answer

How would you go about putting properties in an LLC which are currently in my name?  The properties I want to put into their own LLC each have a note.

Michael Rossi · Answer

WHOA!  There is some bad info in this thread.
            
            Very few banks will loan you money to buy property in a LLC without a personal guarantee.  With a personal guarantee, buying property in the LLC should not be a problem.
            
            With a personal guarantee, you can not simply run away from the mortgage as you are personally liable for the loan.  Also, LLC's do not have officers, they have members.
            
            One reason to operate in a LLC is that it helps separate your assets and provides some liability protection in a lawsuit.  Also, there are many risks that are not covered by most insurance companies, such as lead paint; asbestos; etc.
            
            Putting your properties into a LLC is not difficult.  You can simply execute a quit claim deed.  However, transferring the property violates the due on sale clause and that is a risk (although probably not a big risk).

Finally, using LLCs does not increase your taxes or alter your ability to get credit.
            
            Good Luck,
            
            Mike

Jim S · Answer

It depends on what your short and long term goals are. You can usually only put 4 mortgages in your name including your primary residence. Any more than that and the notes becomes unable to be sold to  Fannie Mae.  Some local banks that hold their own paper would solve this issue but are harder to come by. 
                        An property held in the name of an LLC is harder to get a mortgage because you can basically walk away with minimal ramifications leaving the lender holding the bag - a problem for them in a declining market. 
                        The benefit of a  LLC is the protection the corporation offers you as an owner from liability. Say one of your tenants buys a dog with your knowledge and it gets out and mauls a child. You are going to get sued and will probably lose. Lots of things can happen that are out of your control that will exceed the coverage on your insurance policy. Defendants will always go after you too as you are presumed to have deeper pockets. 
                        If you do end up keeping rentals in your name then make sure your spouses name is also on your primary residence but not on the rentals. I know in at least Maryland there is protection offered to her in regards to the primary.

Ritch Shepherd · Answer

thanks for the information. I've always been told the main reason to have them under an LLC is to protect you from liabilities, but my thought is I'm covered by insurance.  I've also been told that putting your properties under the LLC cost more when paying taxes and takes away from your ability to receive credit.

Jim S · Answer

LLCs are better choice if you want protection from tenants stupid actions ie.dog bites, drunken parties, etc. Also you can have mortgages on an unlimited amount of properties in an LLC.

The negatives are most lenders are shying away from lending $$ to LLCs as there is also a limited financial responsibility of the owners. You probably will also pay more upfront points and costs when borrowing in the name of an LLC.
We use a LLC but its definitely more of a challenge.
Best of luck
Jim

Account Closed · Answer

The pros and cons really depend upon your particular situation.

If you already have them in your name, it probably does not make much sense to transfer them into your LLC. However, going forward it might make sense to buy future properties in the name of the LLC.

It often comes down to whether you want to build an investing business or just invest in some real estate.