LLC before closing or after?

[Kelly Byrd]

Yea! More LLC questions! Everyone loves LLC questions! Right? ;-)

In an effort to get specific answers, I'll try to be as specific as possible about my situation:

My wife and I are under contract for our first rental property, a 12-unit building. We're going to buy-and-hold this long term. Originally, we were looking at smaller properties, and I was not going to put the first one or two in an LLC just to make it easier to get conventional mortgages. However, this 12-unit came to us suddenly. We liked the numbers, so we jumped on it. With 12-units, I'm looking at a commercial loan. Since we're new investors, I expect to have personally guarantee the commercial loan.

So, I plan umbrella insurance regardless of the LLC or not. We do have personal assets I would like to protect from issues with the 12-unit. Right now, I am thinking that I should go ahead and form an LLC and place the property in that LLC. I know an LLC isn't a magic wand. We'll be having a property manager run the property well. We're not trying to use the LLC to avoid liability for mistakes we make personally or to avoid the bank coming after my other assets if I default on the commercial loan. I'm looking for a firewall for liability surround the property leaking out to our personally held assets. The LLC members would be my wife and I, and for now, let's assume the LLC holds only this property.

With all that said,  I have some questions around timing:

• Because we weren't prepared with the LLC already, we signed the purchase contract as individuals. Do you think changing this during escrow will be a problem?
• If I can't change the purchase agreement and I do find financing before closing (I'll come up with cash otherwise), how much trouble do you think I'll have with the commercial loan and transferring title to the LLC?

Finally, one question about an LLC that I have not seen answered: What are some guidelines for transferring money into and out of an LLC's operating account? We plan to build up and leave CapEx reserves in that account, but if we have an unexpected large expense sooner, we would have to transfer more personal capital in. Or, once our standards for reserves are met, we'll be pulling more money out of the account.

[Andrew Severino]

This is simple. Create the LLC so at closing you can put the property in the LLC.

Commercial loan structures are much more flexible to take title in an LLC, as long as you personally guarantee, and even if they are not you can still close in your personal name and immediately transfer your interest into the LLC. I've done this many times, even with conventional mortgages for 4 units and less. This gives you the additional liability protection should a lawsuit arise

If you have considerable cash in the acquisition, you can create a multiple indebtedness mortgage ( that's how we do it in Louisiana) that is recorded in a second position to the first mortgage giving even more protection for your cash that is invested in the event of a lawsuit. You and your wife would be the mortgagors in this case.

As for you last question, transferring money in and out if an LLC is a non issue. LLCs are extremely transparent, including from a tax perspective. In fact, the LLC should just flow to your personal returns without additional penalties. So pull money out and put money in at will, just account for it properly, and have a separate bank account for the LLC.

Full disclosure: I am not an accountant or attorney, just an experienced real estate investor of 21 years speaking from my personal experience. Consult your CPA to confirm there are no additional concerns specific to your reporting that I am not aware of.

Best of luck! Welcome to the club!