Can you close your STR investment property in an LLC? Hint: The short answer is yes.

Question

The majority of our STR investors and vacation rental buyer clients ask or elect to close their acquisition in an LLC.

The primary determinant (beyond the tax implications) is whether the lender will underwrite and permit the borrower to close in a company or require the individuals to be reflected on title.

The majority of conventional mortgages (full income verification) require the mortgage to be closed in the borrowers individual name(s). Usually only business purpose mortgages (DSCR or debt service coverage ratio) or non-conventional (Non QM) permit the contract and closing to occur in the businesses name.

Most borrowers that close conventionally can transfer the title to an LLC post closing. Borrowers will want to check with their mortgage broker or banker on any limitations to ensure the note cannot be called if transferred to a corporation.

The recording can typically be executed within 2-4 weeks of closing with the title company, there is a typically a cost associated with the recording.

Any similar experiences or cautionary tales regarding the use of an LLC for an investment property or STR acquisition?

Robin Simon · Answer

I would just add that we do a full attorney review of LLC docs prior to closing loans and the vast majority still have issues that need to be fixed/amended (albeit this is a short easy process typically).  Important to make sure everything is super clear regarding signature authority, consent requirements and everything is up to good standing with the local state

Tanner Lewis · Answer

I would just really stress the complications associated with transferring title post-close with a conventional mortgage. Normally, this triggers a due-on-sale clause, which allows the lender to call the loan due. Its not frequent, but it does expose you to additional problems.

Mark S. · Answer

@Jacob Sherman I’ve done this numerous times, as have other investors I know, and none of us has ever had a lender trigger the due on sale clause. I used to work for a large regional bank and I don’t recall us ever implementing this option.  Yes, it is possible but it doesn’t seem to happen very often if the lender insiders the Lon a good investment.

Jacob Sherman · Answer

Can't transfer to LLC if you close in individual name because lender didn't agree to it unfortunately . Has to be titled the way the lender agreed to it . They are able to call the loan if does transfer to LLC . This can be noticed if the lender ever sells to another servicer as well .

Charlie Gonzalez · Answer

Hi AJ,

That is correct. Non QM lenders are the outlets to be used if trying to close an STR in an entity. Normally, there should not be a pricing adjustment. You will need to talk with each lender to confirm.

Mark S. · Answer

@Dan Thomas I actually feel the same as you regarding LLCs. Sure they add an extra level of protection but in reality how much more than having excellent insurance coverage? And no small investor (those with a handful of properties) has ever been able to provide me with a situation where a properly insured owner has been successfully sued and not covered by the insurance. Not saying it couldn’t happen but I’ve never seen it. But if it helps people sleep at night then I guess there is value.

Dan Thomas · Answer

@Mark S.

From what I have heard I tend to agree with you. It probably isn't likely it gets called. But there is still risk. For me, although it isn't likely it is called, if it is called I risk my 2.7% interest rate for what will probably be closer to 7% for a commercial rate.

What value are you getting by having your asset in an LLC that you would risk that spread on a rate?

I hear risk mitigation and taxes often....from what I understand (but could be wrong) pass through entities like LLCs don't impact taxes all that much and a good insurance policy is much better on the risk management front than an LLC that may or may not be ran properly. At least that's what my lawyer tells me. We have some properties in LLCs but it is always because our bank has required it not out of our desire.

Joseph Chiofalo · Answer

Hi AJ,

Yes, Non-QM loans can close in LLC for title purposes.

Conventional and government loans will have to close in the borrowers name for majority of lenders. They may be able to transfer title to LLC after closing, but it will be best to check with your lender if there are any restrictions to do so prior to that lender selling that loan in the secondary market.

Max Ferguson · Answer

Hello fellow Fathom(ist?)(ly?) lolHere in Colorado, for most folks I know, just keep it in their name. Piercing the corporate veil is easy (from what a lawyer I talked to said) and unless you are running a large operation I have heard it isn't worth it here. Back when I was in the acquisition side at a large apt holding firm, every property was in a separate LLC, and when I spoke to investors there (Nebraska) it seemed like small and large investors kept everything in LLCs as well.Not sure if it is just state by state or what, because I always thought that was the way you did things as an investor.

Can you close your STR investment property in an LLC? Hint: The short answer is yes.

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