First REI property not under an LLC, what do you suggest?

Question

My business partner and I are in escrow on our first investment property, in Pittsburgh.  It's a single family home that we're gonna do long term rentals on.  We close in about a week, but our biggest mistake was not getting an LLC set up early enough.  The property is now in our personal names, rather than under the protection of an LLC.  We did take out a $1 million umbrella policy for the property, as well as umbrella policies on our personal insurance as well, so we should be pretty well protected in the event of a lawsuit.  My question is what do you all suggest we do in terms of a business entity, now that it's too late to have this property in an LLC?  Transferring the property into the LLC will trigger the Due on Sale clause from the lender, and we'd have to pay a 4% transfer tax which seems like a waste of money.  Do these umbrella policies provide us enough liability coverage if we were to operate this first long term rental under a DBA?  I'm curious to know how we can operate this business without the LLC in place.  Any suggestions are greatly appreciated!

Andrew Postell · Answer

@Johnny George transferring the property into a LLC will not automatically trigger the "Due-on-Sale" clause.  Did you have a chance to read the clause?  It's in your Note.  I'll summarize a little here but it basically states that the bank MAY call the note due.  And if they do then they must give at least a 30 day MINIMUM amount of time for you to fix the title ownership.  And that's if calling the note due in such a way is legal in your state (it's not legal in every state).  I can't speak about the transfer tax of the process but most investors change title after they close on a conventional loan to an LLC with no problems.  The real story is that a bank will not be calling the note due if you are paying on time.  Remember when banks foreclosed on everyone who wasn't paying their mortgage?  People still hate banks from that.  Could you imagine the back lash from banks foreclosing when people pay on time?  The intent of the "due on sale" clause is to not foreclose on properties in good standing but to allow the bank an easier foreclosure process if it were to happen.  Foreclosure processes can sometimes last 2 or 3 years.  This clause makes it easier for the bank.  It also prevents the loan from being assumable.  FHA/VA/USDA loans are all assumable...which means if you sell the home you can actually sell the note to the next person.   It is important to know about this wording in your note but it has not been enacted upon in several years.  Feel free to ask more questions if need.  Thanks!

Account Closed · Answer

@Johnny George while Andrew is correct about how the due on sale clause works I personally don't recommend it unless you know your bank is not going to screw you over.  Remember you are just a number to them, plus breaking your mortgage contract can potentially do more damage than good.  You don't need the protection of an LLC in this scenario.  What you need to do is use NREIG / REI Guard as your insurance provider and purchase an umbrella policy from them.  You can have up to $10,000,000 in coverage with all those policies in place.  REI Guard standard policies cover $1 million / 2 million aggregate on any property nationwide.  The umbrella policies have various intervals.  You will be easily covered under your personal name should you get sued.  You really don't need an LLC unless you have the properties paid free and clear and can transfer them easily.  The LLC is more of an accounting thing in my opinion.  It keeps your financial assets separate from your personal for tax purposes.  Yes it does have liability shielding too, but that's where insurance can take over.  Hope this helps.

Andrew Postell · Answer

@Johnny George normally you would need enough time for the deed to be recorded with the county.  So maybe 10 days or so?  Then you can actually make the change.  You can absolutely start the process before hand but the title company will complete the change once the original deed/note was recorded.  And there are many different opinions on having the property in an LLC, having insurance, etc.  I'm not advising you to actually follow any particular strategy but rather just answering your question on what is possible.  Hope that makes sense.  Thanks!

Johnny George · Answer

@Andrew Postell Thanks for this info!  Makes total sense, and I agree that they'd have little reason to trigger the Due On Sale if payments are being made on time.  I haven't had a chance to read the Note yet, as our closing date is next Friday 6/9, and final loan documentation hasn't been made available to us as of yet.  I will be sure to pay attention to that once we have the paperwork.  How soon after closing would you suggest we start the process to transfer the title into an LLC?  Since no payments have been made yet, nothing can be considered as "paid on time."  I have no doubt that payments will be made on time as we stand to cash flow on this property, but is there a certain period of time that we should wait before we attempt to transfer the title into an LLC?  And if so, what's our best course of action in the meantime, in terms of setting up a business bank account, etc?  Should we operate under a DBA until we start the transfer process or is there a better way to handle this?  Really appreciate your help!

First REI property not under an LLC, what do you suggest?

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