Buying Second Multi-Family

[Jacob Lapp]

Hey Everyone,

I bought my first triplex last August with the plan to claim residency for the first year.

My plan is to do this every year. Buy, claim residency for a year and repeat for the next 4 years.

When I bought the first one, I bought in my name. But plan on creating an LLC for the next 3.

I talked to my mortgage guy and told him I was planning on waiting until August to purchase next one. He told me it did not need to be a full year.

My questions are;

1.) What does the process look like for switching title from my name to LLC on my currently owned property? Is it expensive?

2.) Is my mortgage guy correct? Can I buy next property in less than a year?

3.) Are there any differences between the first purchase and the 2nd?

Unrelated

4.) Has anyone rented out furnished apartments? Pros and cons?

Thanks!

[Erik W.]

@Jacob Lapp, hi and welcome to BP!

Okay, several things need to be addressed in this post. #1 - serialized buying a home, claiming residence, then turning it into 100% rental #2 - deeding a property to an LLC.

Neither are illegal as far as I know (double check!), but let's consider what's actually happening.

#1 - My guess for why you are claiming residency is you want to get the super sweet loan terms only offered to owner occupied, conventional borrowers.  Doing that repeatedly is sort-of, kind-of, but not really abusing the intent of the program to help owner occupant buyers, not real estate investors.  I doubt anyone from the Govt is going to show up and bust your chops for it, but the banks might eventually catch wind of what's going on and say, "hey, this guy is sort of messing with the terms of this special deal" and refuse to do any more loans of that nature.  Maybe.  It all depends on their lending criteria.  So just be aware, some day for some reason they cannot explain to you today, they may simply decide to quit lending to you on theses kinds of programs.

#2 - Assuming you are getting a super sweet loan program like an FHA conventional mortgage or some other mortgage that will get sold on the secondary market: pretty much all of those loans have what's called a "Due on Sale/Transfer of Title" clause. Basically, it says you cannot, without the lender's permission, sell or transfer title to any other person or entity, even if it's an LLC that you own. If they find out you did this, they have the right to accelerate the full amount due and demand you pay off the entire loan in 30 days. I have never heard of a lender actually enforcing that clause, but be aware it CAN happen. Also, be aware that when you sign that loan document, you are promising NOT to do that. "They ain't gonna catch me and even if they do they probably won't punish me" doesn't mean you aren't breaking your promise. I kind of have this thing about integrity. Dr. Thomas Stanley in his book, "The Millionaire Mind" said that the #1 personality trait of multi-millionaires was "Fanatical Integrity." It's worth thinking about that. You can manage liability in other ways that are probably more effective, such as taking out a beefy liability insurance policy. Liability insurance is cheap. Also, knowing the law and keeping your properties in good repair will head off most problems. Million $ lawsuits are rare, and in the cases that someone does lose a lot of $$$ typically they were acting foolishly for an extensive time.

As far as transferring title, usually a basic Quit Claim deed accomplishes that. Be aware, though, this may foul up your Title Insurance policy. Better is to use a Warranty Deed. Talk to an asset protection attorney in your state to learn more about why. Basically, if someone were to sue you on a title claim, your insurance could deny it since they didn't insure your LLC: they insured YOU!

I hope that helps.