Forming LLC?

Question

Would/ Can you form an LLC before you buy a property. I was told that most banks wont loan to an LLC real estate if you dont have a lot of business history with the banks. What my mentor said was once I bought a property in my name for my first property was to get a "deed of transfer"? to move the property under the LLC. Also once in the LLC, what would the advantages of switching it right away to the LLC? Security? Credit Score? Im a little hazey in this area of the real estate. BTW, I plan to buy my first property in Chicago, IL in the next 6-8 months; so this is my time frame. Am I too early to think about LLC?

Alan Russell · Answer

@Tyler Carpenter, Tyler my first rental was purchased with my LLC. What I discovered is that because you are buying it in the LLC's name you will have to finance it with a commercial loan. The issue I found is that most of the bigger banks would not lend to my LLC, not because of the lack of business credit, but rather because the purchase was not large enough that they considered it not worth their time. one bank in particular told me if the financing was not more than 1,000,000 they were not interested. I had a lot more success with with smaller local banks because, i think, they are more interested in the local market and businesses. I did however, have to personally guarantee the first two that I purchase this way. after that I seemed to have a track record with the bank and they allowed me to obtain the loan in the company name with out the personal guarantee.(not sure if about your bank obviously)the strategies that your mentor is recommending to you, purchase the property in your personal name and then transfer it to the LLC after closing could cause the bank to call the loan due. (they dont like that)Finally to address your other question about LLC's, the primary reason I use a LLC is to protect my personal assets and credit. If the mortgage is in the LLC name (assuming you didn't guarantee the loan) , then if the LLC defaults then it will not affect your personal credit at all. Additionally by putting the property in the LLC helps to prevent someone from suing me personally should they get hurt on the property or something of that sort, it will not however, stop them from going after the LLC assets if you get sued personally.I also purchased a $1Million umbrella insurance policy to protect the LLC and myself. This policy is cheap ($180 per year) and it helps protect my company if the LLC gets sued. It will also help protect me if (and only if) I have an accident while on company business and get sued because of the accident.

Account Closed · Answer

Banks do not like LLCs as borrowers or Guarantors - as the only recourse they have are the asset in the LLC (unless YOU or someone else provides an additional Guarantee)Thus there is little benefit in terms of financing to ever consider using an LLC.Note: to avoid charging orders against your LLC in the case of you getting drunk and doing damage, Never have a ONE Member LLC - otherwise your equity in the LLC and all its assets are up for grabs. Having a second member prevents that from happening - even if they have a piddling share i.e. say 1% and you have 99%A C Corp. is looked on more favorably by banks but still they will ask for Directors Guarantees - in which case tell them to piss off. Once the C Corp has established that it is a viable concern directors guarantees can be eliminate. Which is how Donald Trump avoided Billions of Dollars of debt when 4 times his C Corps. went bankrupt. If it is good enough for the President of the USA it is good for everyone in America!

Will Barnard · Answer

Your hold length, exit strategy, and equity position all need to be considered before the LLC. If you are flipping, an LLC is a "pass through" entity in which the income and expenses are passed onto your personal. The liability protection is to protect your equity in the property. It does not, however, protect it if you are drunk and kill someone's kid. They can still sue you for "your" equity in the LLC. (The liability protection is one way only, protecting the asset from renters, etc. not you from the asset) It is very common to buy the property in your personal name, then transfer it into the LLC as your mentor explained. The title company can do it at the same time during the closing if you wish for a small fee and the filing fees. Usually around $100 depending on your state.

Sergio Altomare · Answer

some other considerations are in the terms of the bank. For example, I have purchased properties - small (2-4 units) multi families under an LLC, and the interest rates are aligned to commercial loans as opposed to personal loans, which means higher interest rates. I live in Pennsylvania, which means that the state also would consider the transfer post close from a personal name to an LLC as a transfer tax eligible event. This makes it really expensive. Echoing what Jennifer mentioned, the bank can require the entire amount of the loan due upon transfer. You really have to do your homework on this. something else to consider is what you stand to lose right now. What I mean by that is the LLC is to protect your assets, so if you're just starting out and don't really have such a high degree of risk then I would argue that it's worth doing everything under your personal name and expect to grow to the point where your first few properties will be flushed out anyway, and therefore you'll be in a much better position to take possession under an LLC, limited partnership, Etc. Our first few properties were all in our personal name, and we eventually started using limited Partnerships for new Investments. Your goal should be to get the credibility and experience with a financing and investing, and then tidy things up as your portfolio grows.

Edwin Brown · Answer

I have to agree, when buying your first property you will most likely need to buy in your personal name in order to get financing. As soon as your loan closes you can execute a Quit Claim Deed, or its equivalent and put the property into your LLC. This does shield you (up for debate in legal circles) from some liability with the property, but you will always be on the hook for the loan.

Lee V · Answer

Have anyone ever switch the guarantor of a loan to an LLC? For example, if i bought a investment property under my personal info, and 2 years later, create an LLC because I want to invest in more properties, can you switch the name on the loan to put it into the LLC only? I guess what Im trying to say is, can you somewhat refi a loan from your personal side into an LLC to clear the debt from your credit ?

Will Barnard · Answer

Regardless of the property in the LLC or just in your name, YOU are the one personally guaranteeing the loan, so yes, your credit would be negatively affected if you and/or the LLC does not pay the mortgage. The only way around this is with a non-recourse loan. Google the term fro more info or go to my website. It would most likely require a 30% down payment on rental properties.

Scott Manners · Answer

Would anyone know if you then file for a manager-managed or a member-managed LLC, would it be more beneficial to do member-managed to have it spread out, especially if you are doing it among a few friends and spouse

April Johnson · Answer

No problem! It won't allow me to upload a pdf. I'll try to see if I can message it to you.

Latimer Luis · Answer

@April Johnson Would you mind uploading a PDF of that article to Google Drive and sharing? It seems to force me to subscribe, which I don't intend to do. It seems like it would be a really great resource though. I've been browsing and I can't seem to find an answer to this question: should an LLC be formed in the state of the property or in the state in which I live? And does that matter?