Buying Second Multi-Family
Rental Property Investor · Souderton, PA · Member since 2020 · 124 posts · 106 votes
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!
@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.
@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.
Hey Jacob, most if not all residential lenders(1-4units) offering financing via conventional/FHA or other loan products will want you to occupy the property for 12 months as part of the "primary residence" requirement for that loan down payment. Also note that loan down payment, which I classify as anything less than 20% will have a mortgage insurance premium or Private mortgage insurance which affects cash flow and may take up to ten years to come off.
Also, in residential property depending on if it’s a deed state or mortgage state(Check local laws) will require a human being and not a corporate entity to be on title and on the mortgage.
If you really want to get your assets into corporate entities you can buy 4+ units which now becomes commercial or you can pay off your mortgage completely and then transfer to a corporate entity.
Hope this helps.
FHA says you need to stay 12 months, can it be 10 months? Probably, but that's the rule. You can refi your FHA and use your FHA to acquire again, should you have enough equity in the first property. Refinance using an investor DCR loan product.
@Jacob Lapp, you need to read your loan docs. As @Erik W. mentioned, transferring ownership typically results in you paying off the mortgage immediately.
And as noted by @Eric Johnson, most conforming loans allow a rehab window of 3 months, but once that rehab period is over you are required to occupy the premises for at least 12 months. Will they check? Maybe. We ended up buying a 2 family with the intent to move in, and things changed and we didn't for over a year. We never got caught, but also did not take out any other mortgages around that time.
@Erik Whiting Thanks for your input! Sorry for the late response.
Yes I am after the good interest rates. From what I've heard there is no funny business with doing this strategy to start.
Integrity is very important to me. I am just looking into what action will give me the best outcome that is legal.
As far as I view it, we have a system used to keep people down. If I can find loopholes to help me that are legal I don't see it as violating my integrity.
Thanks again!
@Jorge Perez thanks! Sorry for the late response.
I ran the numbers with my mortgage guy. I put 5% down with a conventional mortgage. Yes this meant the dreaded PMI (which was only $68 a month) which saved me $40,000!
I would have been able to afford this but wouldve drained my savings. I'd rather lose $68 a month and be able to buy more properties to make up for this.
This is why I prefer this system.
Let me know your thoughts?
Thanks!
@Eric Johnson Thanks! Sorry for the late response.
Current loan was 5% down with a conventional mortgage. Is it possible to refi conventional to FHA and transfer title there?
Thanks!
@Jacob Lapp to follow up, I think what you are doing is very smart. While I would agree that parts of our system are used to keep people down (why is it a Freddie Mac SBA or commercial loan is non-recourse, but primary resident aren't), transferring into an LLC creates many issues, as outlined above.
I wish you the best though. Leveraging your ability to claim residency and get the best rates on properties can really supercharge your real estate portfolio.
@Jacob Lapp Congratulations on your triplex. You have a smart plan in place. Best of luck executing it.
@Marlen Weber Thanks!
@Jacob Lapp
You were able to get a 5% down conventional owner occupied loan on a triplex? I thought that was only for SFR.
@Ricardo S. Yes! 1-4 units is all viewed as residential at least in PA!