Transfer house to LLC?

Question

Good Morning BP! Details: My wife and I are talking about buying a new house and renting ours out. We have run the numbers and everything looks like it will work out. My concern is that we will have this rental under our own names and from a liability stand point I am concerned about keeping it there long term. (Or even short term) We are changing insurance to be landlord insurance but it's still a concern. This would be our first rental of hopefully many properties. Plus no LLC or similar exists at the moment. Question: Once I have an LLC/Inc set up do I have to sell my company the property and pay for all the associated costs or is there a better way? Thanks in advance for any assistance! Jesse

Edward B. · Answer

Account Closed is correct. Like I said, there is a A LOT that goes into this decision. There is really no way to transfer the beneficial interest in a property without triggering the Due on Sale clause that I have found, despite what some people would have you believe. The best thing you could hope for is written permission from the bank. It never hurts to ask but I have never gotten written permission. I've gotten verbal permission but that wouldn't be worth squat if they changed their mind. I have been flat out denied too. There are ways to cloud the fact that you have transferred beneficial interest, but in my estimation, and I am pretty sure the lender would feel the same way, you are still violating the Due on Sale clause. It just wouldn't be blatantly obvious to the lender that you transferred the interest.I have transferred several properties without the permission of the lender and none of them has done anything about it. What you need to understand is that they can...at any time. I don't know if I could make the argument that they knew about it and did nothing so they agreed to the transfer by their lack of action. I don't know if it would even be worth the fight. I have heard stories, here on BP, of a lender and/or servicer deciding years later to enforce the clause. It is rare but could happen so you should be prepared to deal with it. In some cases the lender/servicer merely told them to put the property back in the borrower's name, but as I understand it, they don't have to do that. You violated the clause so they are well within their right to accelerate the loan.Keep in mind, though, that you are not doing anything illegal or unethical. At least in my opinion. You have a contract with them and you are violating a specific clause in that contract for legitimate purposes, which gives them the right to take action or not. The clause is in there to protect their interest, not to prevent something illegal. Most often they choose not to enforce it because they deem that enforcing it is not in their interest.

Edward B. · Answer

Account ClosedThere is a lot, and I mean A LOT, to consider when it comes to establishing a business entity for real estate investing. As such, I am only going to answer your specific question but understand that there is a lot more research to be done and questions to be answered before you know if it is the right move or not.From what I have read (and I believe there was a blog post recently about it here on BP) you do not want to own investment real estate in a corporation. I do not own a corporation and cannot really speak to the reasons or complications associated with that. Most people who recommend a business entity for real estate will recommend an LLC. If the LLC is set up properly, you can simply Quit Claim Deed the property into the LLC. You may have to pay some transfer taxes depending on your local laws but that should be minimal. You do not have to "sell" the property to your LLC, though, and should not incur a taxable event.

Account Closed · Answer

Edward B. Awesome. Yes weighing out the legal entity configuration here in Texas will require a lawyer. I already have one in mind. The Quit Claim Deed is exactly what I was looking for.... Thanks!!

Robert G. · Answer

You definitely need to get some local legal advise. For one thing, you need to check to see if transfering ownership (from you to the LLC) would trigger a "Due on Sale" clause. If it does, your lender would have the option of calling-in the remainder of your loan amount. Not common, but it is a possibility you need to be aware of and prepared for....

Edward B. · Answer

@jesse demaree, No problem. I would urge you to seek out a lawyer who specializes in business entities, asset protection, and real estate. In that order. If the entity isn't set up correctly it won't accomplish what you want it to and if they don't really understand AP, which a lot don't in my experience, you may not truly be protected like you think. There may be some nuances to real estate, but a properly established LLC should be able to do RE or anything else you want. I believe the podcast on AP was by a Texas lawyer, so that may be a good place to start. I will tell you that I have had two LLCs for 7+ years and recently set up a new one with an AP specialist. The operating agreements for the first two are like 6 pages. The one for the new one is about 80. The new one cost half as much too. Point is, get an idea of what you are looking for and shop around.