Buying under personal names or LLC?

Question

Hello! I recently started an LLC with two other investors and we are looking to BRRR SF homes in the Philadelphia area. We wanted to create an LLC for each property we buy so that each home is protected separately. Since purchasing a home with an LLC can only be done with a commercial loan we were considering buying it in our personal names and later transferring it to the LLC. This would give us a better mortgage rate but incur a transfer tax (Philly 4.02%). I wanted to see how other investors were doing this and see if there is a preferred method. I know things may vary a little state by state.

Secondly, if we do buy the home in our personal names and never transfer it to the LLC, we can still run the rental payments through the LLC. This should build the LLC's credit but leave the home less protected as it is not under the LLC. Does anyone do this for their properties?

Any help would be appreciated.

Gene

Secondly, if we do buy the home in our personal names and never transfer it to the LLC, we can still run the rental payments through the LLC. This should build the LLC's credit but leave the home less protected as it is not under the LLC. Does anyone do this for their properties?

Any help would be appreciated.

Gene

Dan Barli · Answer

Hi @Eugene Carelli that is a constant dilemma for people. If you do buy the property personally and then transfer it to your LLC, that could trigger the due on sale clause found in most standard mortgages. You will hear people say that it's rarely enforced, but I have seen it happen, so I caution against doing that. I would recommend that you get the commercial loan and factor the transfer tax into your numbers to make sure you are doing it the right way.

Chris K. · Answer

@Eugene Carelli

A few thoughts:

• One purpose of an LLC is to shelter the members from outside liability. But the other purpose --- and equally important one --- is to protect against liability from each other. Without an LLC, you guys are effectively forming a partnership where everyone is a general partner. As a general rule, each general partner is liable for the actions of the other partner as part of the partnership. So if one of the members messes up, the other members may personally be liable for the conduct of that particular partner. I personally don't do partnerships for this very reason. As a lawyer, I've seen too many crazy situations.

• I personally believe new investors should avoid partnerships/multi-member LLCs as long as possible. Getting all the terms worked out is a long and potentially stressful process. It can get expensive if you work with attorneys and accountants. This is especially true since most of these partnership/LLCs involve a sweat-equity partner and money partner. I think there are better ways to handle such relationships.

• Later transferring the property may trigger the due-on-sale. And as you said, you will also likely incur realty transfer taxes.

• As for running the rental payments through the LLC, I don't really see a point. For one, the amount of business credit that the LLC can build running the rental payments for a small multi-family is virtually none. For most small businesses, lenders will require a personal guarantee from the members for any kind of loan. So I'm not sure if running the rental payments through an LLC is worth the hassle.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Eugene Carelli · Answer

Thanks for all the info everyone. This was very helpful!

Brandy Y. · Answer

Since we have  quiet a few attorneys on this thread,

re due on sale clause , what  are the attorneys opinions re the change in the "due on sale " clause  based on the changes in fannie mae guidelines from Nov 2017, and proceeding with the same

https://www.fanniemae.com/content/guide/svc110817....

D1-4.1-02, Allowable Exemptions Due to the Type of TransferA  transfer of the property [...] to [...] a limited liability company  (LLC), provided that: the mortgage loan was purchased or scuritized by  Fannie Mae on or after June 1, 2016, and the LLC is controlled by the  original borrower or the original borrower owns a majority interest in  the LLC, and if the transfer results in a permitted change of occupancy  type to an investment property, such change does not violate the  security instrument (for example, the 12 month occupancy requirement for  a principal residence).

Thanks

P.S thanks to Chris Mason who posted this on this thread

https://www.biggerpockets.com/forums/49/topics/610...

Nick Brown · Answer

Hi @Eugene Carelli first off I would definitely talk with a real estate attorney/CPA so they can help you with your specific situation.

A good amount of the investors that I work with choose to have one LLC hold a number of different properties. For example, Eugene, Bob and Susan form ABC LLC that holds 5 SFR rentals in Philly. And then if Eugene branches off with other investors they form another LLC to hold other properties. I'm not sure it makes too much sense to have 20 different LLC's for every single property you guys own together.

@Dan Barli is correct as well. While rare, it could trigger the due on sale clause when transferring properties to different entities.

Ari Bildner · Answer

Thanks so much for the advice!..is this different state by state? how do most experienced investors protect themselves if they have to take out the mortgage for one or more assets in their own names?

Eugene Carelli · Answer

Thanks for the recommendation Dan

Buying under personal names or LLC?

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