Credit Union offers loans for LLC, but must personally guarantee

[Heath Neely]

So I before I started shopping for my first property, I called the mortgage broker that I used the last time I purchased a house. I decided that the rates and closing costs he quoted seemed reasonable for a 30 year term. I decided that I would just go that route with an umbrella policy, and not register as an LLC, at least not for a while. So on a whim, I call up my local credit union. They offer an LLC (or sole proprietor, doesn't matter) 5 year adjustable, based on the current 5 year treasury note (currently about .5%) + 3.25%. It is a 5 year fixed, and the last 10 years are adjustable. (Can be capped for 5 points). They also have an option to amortize the 15 year for 25 years with a balloon. So far, I was tempted to go the LLC route if the property can cashflow with a 15 year mortgage (not considering the balloon). For an LLC, you must personally guarantee the loan, which at first, I thought, fine, that makes sense. Then my wife asks the obvious questions about the LLC and the veil of protection. Let's say we own 10 properties and have mortgages on all of them. A tenant breaks a leg and sues for an exorbitant amount of money and wins. All the companies assets are taken. Now we owe mortgage payments for all 10 properties, but have nothing, correct? If so, what did the LLC protect us from? The deeper my thoughts go, only unsecured loans make sense, otherwise, you might as well just go at it as a sole proprietor and finance with 30 year fixed conventional loans, right? Please help me to see if I am missing something.

[Don Konipol]

@Heath Neely

Since the 1st lien any any of the 10 properties is held by the lender, the person successfully suing the LLC would receive an interest behind the lenders interest. Only when the lender, whom you personally guaranteed is paid off would the successful plaintiff receive anything. And so as long as the lender was satisfied, your other assets would be safe and you'd have no personal liability. That is the protection offered by a "remote" legal entity holding title.

To go further, I wouldn't hold 10 properties in an LLC. If you do then creditors can satisfy claims for one property against all the other properties. Should worse come to worse, you want to limit the creditors claim to one property each, so your equity at the other 9 properties is not jeopardized. You can do this through creating a separate LLC for each property, or the way we do it is we created a Series LLC, and each property is owned by a separate series of the LLC. This provides the same protection as having each property in a separate LLC, but saves on legal, filing, formation and accounting costs.

If you’re worried about asset protection ( and anyone with eve a minimum of assets to protect should be), you’ll want to check assets “exempt” from creditor attachment by state law, as well as Federal law. While books have been written about asset protection that merely scratch the surface, most people can arrange their financial affairs by placing assets in certain protected “pockets”

1. By Federal law, all assets held in qualified pension and retirement plan are protected from creditor attachment. This includes defined benefit plans, 401ks, Keough plans, etc.

2. Exception to above are plans that contain only one beneficiary, like a solo 401k. These are protected by separate Federal law to a value of $1.8 million.

3. IRAs protected by Federal law to $1.2 million

4. Some states, such as Texas and Florida, have unlimited protection for all money in any retirement and or pension account, as long as the contributions to the account were made in adherence with Federal guidelines. Texans and Florida also protect any and all annuities, whether public or private, as well as value of life insurance policies, from creditor attachment.

5. All states have some amount of protection for personal residence, from $5000 to unlimited, depending on the state (Texas and Florida unlimited ). However, If one were to file bankruptcy, your homestead would only be protected for the full amount of the exception if you owned a home in that state for the last 39 months.

While these are the basics, it should be enough to create a good plan for up to $5 million on assets.