Can I put my first home into an LLC

Question

Hi biggetpocketers,

I have a small townhouse that was my first home purchase and I've been living in for 7 years. I'm moving to a different state so I decided to keep the house and rent it out. The house mortgage is a fixed 30 years through a truist bank. I've read on the forum that people put their investment properties into an LLC so I was wondering if I should do the same before I rent it out? how can I start the process ? And what are the benefits of doing such a switch (if there is any?)

David M. · Answer

@Taha Tekreeti

I wouldn't be so sentimental about the 3.5% loan..  If you sold the property now, you wouldn't be paying 3.5% for that money anymore.  Meanwhile, you remaining equity/appreciation could be earning 5% in a money market and fully liquid, for example...  Maybe you'll find a better investment (or not)..

Sure, if you rent it you may cashflow.  Or, you may have a major capital expense.. Who knows..  Don't base your decision on a low interest rate.

Good luck.

Frank Chin · Answer

There are reasons not to. See LLC for a Home

The most important one is you can lose the homestead exemption in some cases. The exemption protects the homeowner from losing his home from lawsuits depending on the state.

Eliott Elias · Answer

Your lender will most likely not allow it. Ask anyways.

Taha Tekreeti · Answer

@David M. thanks a lot for the thorough response! for your point about sec121 I’ve thought about it and decided to rent for a year or two and see whether I keep the property and use 1031 exchange in the future or sell it within 3 years. The only reason I thought about keeping and renting is because I have 3.5% interest rate and don’t want to lose it.

David M. · Answer

@Taha Tekreeti

And just consider if you will ever use the sec121 exclusion to get the 250k to $500k exclusion to capital gains, if you lived there 2 out of the 5 past years when you sell.  Yeah, basically if you chage in your mind in 3 years or afterwards you'd have to move back in.  The sec121 exclusion is only good for your primary residence that you personally own..

Doug Smith · Answer

Yes, you can. There are clauses in the loan/mortgage docs that allow them to call the loan, but I don't suspect they would do it...and they really don't have a reason to do so. What specifically is the reason for the transfer to the LLC? Unless you have good reason, I don't think it's going to be a rush to do so. Even if you transfer it, the loan payment is still going to show up in your DTI for your new home. Unless you have good reason to do so, I'm not sure I would hurry to make the move to an LLC.

David M. · Answer

@Taha Tekreeti

Well, there are many posts about this, albeit potentilaly hard to find in bp...

At best, there is some amount of limited liability protection afforded by the LLC but ONLY IF you "pay" for it.  Administratively, you need to operate the LLC entirely separately from yourself.  Need to operate from its own bank account, credit/debit cards if any, contracts, etc.  You can't comingle your funds or use as an alter-ego.  These are the "top 2" that pierce your corpoarte veil.

You really should refinance into a commercial loan (legal entities are not eligible for conforming residential loans) so that the loan is in the LLC's name, and not yours.  As I've put forwards numerous times, its looks so much like co-mingling or alter-ego when the ownership's are split.  Who is making the mortgage payment?  Where are the interest payments being deducted?  What if you want to refi and follow the "lender's" advice (who has no fiduciary to you, and has no ability to help you with your LLC's corporate veil since its a legal matter) to move Title back and forth.  Without any additional paper, this layman's opinion is that its alter-ego...

Actually, many investors on this forum actually don't use a LLC.  Thye have posted that.  Even some doing up to and over 50 single family homes.  If you do commercial property then you do need a LLC because of the increased liability.  Just keep your property in good repair, have insurance, perhaps also get an umbrella policy.    Lets face it, "small time" landlords rarely get sued.  We don't even get people to post stories about it.  Some tenant who can't afford to pay you rent can't afford to sue you...  They are going to generally be more afraid of you then you are of them.  And, if  you really think your insurance company won't honor the policy, then probably you should get your insurance from a different company.  By the way, even with a LLC you'll still need to buy insurance...

Oh, as for switching into a LLC to answer your question, you'd quit claim deed the property from yourself to your LLC.  Due on Sale clause is either no longer an issue when transfering to your LLC or the fact that its very rarely called in when you are actually making your payments.

Can I put my first home into an LLC

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