Structure a deal in personal name or LLC?

Question

Hello BP!!I am planning to buy three investment properties over next 2 to 3 weeks in Indiana (My first investment properties - Hurray!!). I will financing these properties by putting 20.0% down the borrowing the remaining. Speaking with few lenders I understanding that the properties needs to be under my name and not a LLC. Reading few forums here on BP always recommends to buy the property under a LLC to protect your personal assets and shield from liability arising from the properties. I wanted to check how does every one else structure their deals and what the pros and cons are of having properties under personal name or an LLC. Other option i have been told is to first get the property under my name and then transfer to LLC or series of LLC. However, i am not sure if doing this would trigger any sort of “due on sale” clause. Or will no problems arise assuming that all mortgage payments are made on time, despite title now being vested in an LLC rather than in the mortgagor’s name? Also, will this transfer jeopardize my title insurance? Any advice on this will be very helpful. I am sure this has been discussed in lengh on BP and if anyone can point me to the right direction or link - that would be great to. Thank you in advance for all your helpTushar Shah

Dale Stevens · Answer

Yes you can QC back to the LLC, but YOU PERSONALLY have your name all over a mortgage that is publicly recorded. So there is ZERO protection for liability if you have the loan in your name. Yes, the loan is cheaper, but is it worth it, if you have no liability protection?Just have the tenant throw a party and have underage drinking? Maybe someone slips on the ice.. falls down the front steps, etc. Your own home, car, bank accounts, etc are now all liable. Spend sometime before buying properties setting up your business and finding BUSINESS Lenders that will give you loans in the name of your entity. This is part of building your business. Further, putting the loan in your own name, you can only do so many properties. I think the current one now is 10? I could be wrong, but that sounds right. And at any time, the Federal policy makers can change that number as that have in the past decade a few times.

John Warren · Answer

@Tushar Shah this is an age old debate here on BP. The issue is that no traditional lender will let you purchase in an LLC. If you want to go that route, find a local portfolio lender that will give you a commercial loan. I am not sure what size properties you are buying, but one of the issues with a lot of these out of state properties is that they are so cheap that they almost don't warrant the added cost of LLC setup and accounting work during tax season.

Tushar Shah · Answer

@Alex Corral @Bob Green Thanks Alex and Bob for your inputs. Based on my discussions with few lenders they telling me that under no circumstances the property can be transferred to the LLC post close without triggering due on sale clause. I inquired if I could deed it to the LLC post close and that was denied too. I was told, I can finance the property in a name of a trust. Have any of you seen or done this? What are the benefits/disadvantages of having the property in a trust versus personal name or LLC?Thanks in advance for your help.

Bob Green · Answer

Hello Tushar,You can finance the properties in a LLC or personal name, however if financing via Fannie Mae or Freddie Mac, they will not allow financing in the name of llc. On the other hand, a local portfolio lender will allow financing in the name of a LLC. It depends if the loan is going to be sold in the secondary market or not. Most banks sell loans and require loan in personal name. Find a portfolio bank or alternative lender who does not sell loans and close under a LLC. In addition to the LLC look into putting your personal residence into a trust.

Adrien C. · Answer

I sell to plenty of rental buyers in NW Indiana and they are all having to buy in their name to get standard financing and then they QC to a LLC they own. They have never had issues with due on sale. The mortgage people you are talking to are just covering their A most likely. Saying that, an attorney I spoke with recently told me there was much less protection provided by the LLC since the owner (you) of the LLC owned the property first. If something happens, a smart attorney will not have an issue going after you. So his point was that it's a waste of time putting it back into an LLC if you buy it in your name first.

David Hedges · Answer

you can get a loan under a llc, but it depends on the lender. many of them are going to want you do do it in a commercial loan. If you structure it in a commercial loan, the upside is you may be able to bundle all three properties into one loan, though the downside is that you'll probably have a higher interest rate, and the terms will likely be 15-20 years. Buying in an llc is good, however a lot of it comes down to what assets do you have that they might go after. If you have good insurance, and if it's early on and you don't have a lot of equity and assets, you'll probably be ok with them under your own name until you are able to move them over at a later date. Myself, I have a mix of some under LLC, and others under me. The reasoning behind it all was primarily which ever way was easiest to get a financing at the time. additionally if you are forming a llc and will be financing under the llc, you also want to have it's address and mail delivered somewhere other than your house, a post office box, or virtual mailbox. Really just something to keep it distinctly separate from you.

Ken Nyczaj · Answer

Try calling as many local lenders in your area as you can. There was an early Podcast episode where the guest called many different local lenders and finally found one within a Walmart. Like Bob said a portfolio lender is your best bet to finance a house in an LLC. In my area there are the big players- Wells Fargo, M and T, Bank of America, but I also found two local lenders that will loan to LLC’s. Maybe another option for your LLC is to use a LOC secure by real estate or investments. That’s what I’m debating right now.

Alex Corral · Answer

@Tushar Shah I'm pretty surprised to hear that. I've read multiple threads & heard even on podcasts that you can deed it to your LC with no due on sale. Not sure about the trust tbh.

Alex Corral · Answer

You buy the property in your name, then deed it to your LLC. It won't trigger the due on sale because it's still owned by you, although via your LLC. I'm also in the middle of deciding this. Hold in LLC, which is more paperwork... or hold in personal name & buy an umbrella policy.