BRRR method - put property in LLC or personal name?

Question

It has been 10+ years since I have bought a rental property. We currently have 7 loans in our personal name. I was looking for a bank to do a cash-out refinance in our LLC. One banker asked, "why don't you put it in your personal name? Fees and terms are better in your personal name and since you are the sole owner of the LLC, what's the difference?" I said for liability purposes. Then he said... "the property has insurance" (and we also have a personal liability umbrella). Would love to get some input. Thanks.

Weston Couch · Answer

@Tim Harwick Hi Tim, those are good questions, and I think they're best answered with the bigger picture in mind. When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables can dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur. The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time. The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets(so it wouldn't be a good idea to put all your properties into one LLC). Compartmentalization means that if something happens to one property, people suing can’t touch you or the other properties. You should use either LLC’s (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE. If you’re interested in using an LLC, this article also further explains the advantages of a Series.The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a “asset holding company”) and a completely separate company handles all of your operations (this is a traditional LLC a/k/a “operating company”) For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc. The fifth pillar is owning everything anonymously. If people don’t know that you have assets, then they are less likely to sue because there’s no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn’t matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.

Marc Winter · Answer

@Cindy Veit, what kind of banker asks a question liket that? One without proper experience. Find another one.You can find a more informed banker; transfer of title always comes with some risk. Usually nothing ever happens, however, I'd rather just go right through with the LLC.

Weston Couch · Answer

@Cindy Veit Hi Cindy, a good insurance policy can cover the majority of your liability exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.Feel free to connect with me if you'd like to know more.

Dan Gamache · Answer

@Cindy Veit a private lender will require the properties be in a LLC or some sort of business entity so you are ok there. You could do a cash out refi up to 80LTV. These deals are no personal income verification as it is based on the rental income. You could get a 30 year loan either fixed or adjustable (on properties 1-4 units), rates are dependant on credit and how high you go on LTV.

Cindy Veit · Answer

I ended up doing a cash out re-finance in my LLC. There was no seasoning and the bank did it off of the appraised value. It was very easy. It took some searching, but I was able to find a national bank to do it - it was First Citizens. If you want the contact person, feel free to message me (I don't think I can post it)

Tim Harwick · Answer

@Weston Couch Thanks so much for your insight, really helpful, especially the comments about the limits of insurance. I'm also intrigued by the idea of a Series LLC, honestly never heard of that before. It looks very promising. I'm definitely looking into that. Thanks!

Brad Larsen · Answer

@Cindy Veit Would recommend looking into forming a Trust - and placing properties inside of that. Atleast weigh the differences with a local attorney who can advise you on that formation with the pros / cons. Hope this helps!

Tim Harwick · Answer

@Weston Couch I would love to know more. Do you suggest investors put all their properties into an LLC? Are their cases where insurance and personal liability is enough? Thanks!

Nick Giulioni · Answer

Could you punt them back to your name for the refi and then kick them right back into LLC? They can always do due on sale clause - but I personally have never had it happen (or heard about anyone else).