Setting up an LLC before or after buying a property

[Ryan R.]

I was thinking of setting up an LLC to hold the property I'm trying to buy. Is it generally better to set up the LLC before and use it to buy the property or buy on my name and transfer to LLC after? Would it affect my ability to get conventional residential loans if I buy the property using an LLC? Would love to hear the implications for transfer to LLC after the acquisition as well

[Charles Carillo]

@Ryan R.

It really depends on the mortgage you are getting. Mortgages for investment properties usually have no problem being put in the name of a LLC but you may have problems if you are trying to get a residential loan with the property in a LLC or if you want to quit claim it after closing into a LLC. I would speak to the lender beforehand.

[Jonathan Taylor]

You cannot close a conventional loan in an LLC only a personal name. What you do after you close, is up to you. There are loan programs that can close in an LLC but those aren't conventional. But this question should be directed to a CPA with knowledge in your state. Investor's will chime in but trust the word of a CPA or Real Estate lawyer instead of folks on this site.

[Ryan R.]

@Charles Carillo Thank you!

[Ryan R.]

@Jonathan Taylor Thanks, makes sense!

[Greg Houts]

@Ryan R. I worked with a real estate attorney and CPA to do just that. They're both members of BP but not openly pitching for them. You should define your reasons for putting property into a LLC in the first place. Are you the only investor (i.e., is this a single-member LLC)? If yes, then this would "pass through" accounting/tax wise onto your personal 1040 return. If others are involved then do you need a LLC or would a JV agreement work? LLCs structured as partnerships require filing a separate business tax return (1065) and then each partner gets a K-1 that flows to their personal 1040. That costs money for a tax accountant to create. Are you doing this to separate business from personal? Are you doing this for the liability protection (assuming you do everything correctly and set it up with professionals)?

Regardless of an LLC, you should keep business expenses completely separate from personal. LLCs allow you to open a business bank account (and possibly a credit card) with the business EIN/Tax ID so you can build credit for the business (you will have to personally qualify since the business will have no initial credit established). If you don't use a LLC then create a separate bank account and potentially get a separate personal credit card that's only used for the business. Do proper bookkeeping regardless, but this is imperative with an LLC since failure to do so can invalidate the liability protections. Have an attorney draft a proper LLC operating agreement, etc. Finally, know the state and local rental/tenancy laws (especially in NY) to keep yourself out of hot water (as best possible...people will sue you for sneezing these days).

@Jonathan Taylor is 100% correct about conventional/personal financing. The mortgage and note has to go against your name and then the "due on sale clause" becomes an issue if you deed directly into a LLC after closing. Using a land trust in the middle (especially if you're 100% owner of the trust) is one creative legal way to (potentially) avoid that. Seek proper legal and tax advice first.

[Basit Siddiqi]

@Ryan R.

conventional lenders normally don't when title is owned by an LLC.
The issue with transferring the property after the purchase is that there will be added costs to transfer the property.

Best of luck.