Seeking Advice on Transferring Rental Properties to an LLC

[Jim Carey]

Hi Everyone,

I'm new to BiggerPockets and looking for some guidance on managing my real estate portfolio. I currently own 9 long-term rental properties, all under my name. I'm considering transferring these properties to an LLC to facilitate further property acquisitions, as banks are limiting my lending due to exposure.

I've heard that setting up a Holding LLC to own the properties and another LLC to operate and lease them can provide an added layer of protection. I'm also exploring the option of hiring an attorney or title company to assist with transferring the deeds. Most of my lenders seem open to allowing the transfer of mortgages to the LLC once it's established.

Does anyone have experience with this process? My goal is to start purchasing properties directly under the LLC. Any suggestions, step-by-step guides, books, or resources would be greatly appreciated.

Thank you!

[Randall Alan]

Quote from @Jim Carey:

Hi Everyone,

I'm new to BiggerPockets and looking for some guidance on managing my real estate portfolio. I currently own 9 long-term rental properties, all under my name. I'm considering transferring these properties to an LLC to facilitate further property acquisitions, as banks are limiting my lending due to exposure.

I've heard that setting up a Holding LLC to own the properties and another LLC to operate and lease them can provide an added layer of protection. I'm also exploring the option of hiring an attorney or title company to assist with transferring the deeds. Most of my lenders seem open to allowing the transfer of mortgages to the LLC once it's established.

Does anyone have experience with this process? My goal is to start purchasing properties directly under the LLC. Any suggestions, step-by-step guides, books, or resources would be greatly appreciated.

Thank you!

@Jim Carey

Hi Jim,

I have a word or two of caution for you.  I'll start out by saying I'm from Florida -so don't know Tennessee's specific rules -but would encourage you to consider / check out the following possibilities that impacted us when considering the switch to LLCs:

1. Understand that the LLC you want to switch to is basically considered 'another person' when it comes to taxes. This means it's not really a "transfer" from yourself to yourself... it's essentially a sale of the property to the LLC (which is not you). That means that all the regular fees associated with the sale of a property will likely apply to each "transfer". So whatever the transfer taxes are for the sale of a property, they will likely apply to you in the transfer to the LLC. For us, this would have worked out to be thousands of dollars per property.

2.  In Florida, there is basically a form of 'grandfathering' when it comes to valuation of a property for tax purposes.  In short, the legislature said Municipalities can't raise taxes by more than some percentage per year... think it's around 3-4%.  But effectively this created a cap on what municipalities could raise taxes by.  So when the value of a property went up by 10%-20% in a year, they could only raise the taxes by the 3-4%.  This created a grandfathering where there was what was called a "cap differential".  For our personal house, as an example, this differential is in the hundreds of thousands of dollars where the municipality was not allowed to raise our taxes more than that 3-4% amount each year.  It applies to all forms of real estate though (here in Florida)... not just homesteads.  The catch is - as soon as you sell / transfer the property - the cap is removed and they can tax at the present value, not the purchased value that may be hundreds of thousands of dollars less.  So that sort of froze us in our tracks as to transferring to LLCs.  Had we done the transfers immediately when purchasing the properties, this would not have been as much of a concern.  But if you are like us, and have owned them for 5+ years where we all saw the run-up in values between 2020-2023(ish) - this could be of substantial impact if Tennessee is similarly positioned. 

The alternative for us was to consider an umbrella policy for our properties.  This worked out in the short term until the insurance companies came back and said, "You have too much risk to insure" (via an umbrella policy).  At the moment we are left exposed, so to say... but there is probably a commercial option for us - if we can afford it.  (We presently have 39 doors across 27 properties).

As to how to continue to finance properties - this is what we did:

We went to our local bank - which happens to be a portfolio lender (meaning they don't sell their commercial loans - they hold them in house).  Because of this, we were able to refi 5 of our smaller Fannie Mae loans into 1 commercial loan -and at the time - lower our interest rate from the 5's to 4.1% (This was in 2020 in case you are wondering about that rate).  The advantage was that this freed up 5 Fannie Mae loan slots for us to continue to buy properties through our own name.  The downside was that commercial loans only 'lock' for 5 years typically.  So we are now facing a loan reset in a few weeks where it will be based on the 5 year continuous maturity note rate from the Fed, plus a margin of 2.25%.  Probably looking at going from that 4.1% to about 6.25 or so, depending on if the financial world implodes in the next 2 weeks! (lol!)

One other consideration - which will depend on if you are married or not...  We made sure to put each property just in one of our names.  This has the advantage of giving you 20 Fannie Mae loans available to a married couple - although it drops by at least 1 each, because Fannie Mae makes you be joint on your personal house if you own it.

Hope some of it helps!

Randy