Buy a rental property and transfer to LLC?

Question

Hi everyone,

I'm considering putting an offer on a 4 unit rental property. This will be my first real estate investment if it goes through. I don’t want to live in it so I'm going to do 25% downpayment. I want to open an LLC and have the LLC own the property to protect my personal assets. Should I buy the property under my name, then open an LLC and transfer the property into the LLC? Or should I wait until I have the LLC opened, and then purchase it with the LLC? I just don't want to miss out on a deal and also I'm not sure what types of loans I would get under the LLC. Would I be looking at additional costs to transfer ownership to the LLC?

Also if I transfer ownership to the LLC, should I refinance the mortgage so it is under the LLC? I’m wondering if I would have personal liability in court if the mortgage is under my name, or if I would just be seen as an equity investor in the LLC, and the only thing at risk would be the property that the LLC owns.

Thanks in advance for any advice.

-Joe

Edward B. · Answer

@Jaren Woeppel

@Joe Rinella

It is absolutely easier to get a loan in your own name vice an LLC. In addition, the terms will be significantly better. You will likely be able to get a lower interest rate along with 30 year amortization. In the LLC you will be dealing with a commercial loan. They will require a larger down payment (although 25% may be enough), a higher rate, and a shorter amortization (i.e. 20-25 years) and likely a balloon payment in 5-10 years. That will all make your payment higher and make it more difficult to cash flow.

If you want to put the property into the LLC, though, the best route is to get the loan through the LLC. Even if you personally guarantee the loan (which you likely will have to) it shouldn't show up on your credit report and count against your max number of loans. The property will have to support itself though. In other words you will have to meet a Debt Service Coverage Ratio (DSCR) in the 1.2 + range. That means your NOI (rent - maintenance, vacancy, property management, utilities, etc.) will have to be 1.2 times greater than your mortgage payment. Having the higher payment associated with the commercial loan will make that more difficult to reach.

If the numbers do not work with a commercial loan or if you don't have time to get everything in place you can get the loan in your name. I have cleared with the bank ahead of time during a refinance about transferring the property later into an LLC. Some banks will say yes and some no. I never actually tested it, though, and if they say yes I would get it in writing to cover your behind. You can role the dice an transfer it anyway. I have done that with no issues so far, but have also read recently that banks or servicers that purchased the loan from the original have decided to exercise the Due on Transfer clause years later. If that happens, you may be given the opportunity to correct it, that is, transfer it back into your name, but I don't know that they are obligated to do that. You can use a land trust to obscure the fact that you have transferred the property but from what I have read, you are still violating the Due on Transfer clause so if they discover it you may still be forced to remedy it or pay off the loan.

I don't know about Mass but a quit claim shouldn't be more than a couple hundred bucks. You may have to pay for recording fees too. To have a legitimate attorney set up your LLC will run you $1.5k-$3k and you will have annual fees too. Mine are a ~$140 in FL and $200 in NC. You can LegalZoom your LLC but your are running a risk that it won't actually protect you in a lawsuit.

For your final questions. If the property is deeded to the LLC then the LLC is liable regardless of whether the mortgage is in your name or not. There are ways to "pierce the corporate veil" but that is not one of them. It may lend weight to other arguments but that fact alone should not be enough. You certainly could refinance it under the LLC later but you will have to pay the origination fees all over again and that will likely be several thousand dollars.

Obligatory disclaimer: I am not an attorney and know nothing about Mass. Everything I have said is based off of my experience and should not be considered legal advice. Talk to a Mass licensed RE or business attorney to get the real deal about anything you get from these forums.

John Kent · Answer

Joe, I would close with title in the LLC. If you loan doesn't allow taking title in an LLC consider closing in your name than using a Land Trust if a land trust is a viable option in your state.

Also, check with an entity formation company or attorney in your state to see how long it will take to form the LLC. Sometimes this can be an expedited process and you will have your articles of organization back in time to continue your deal in the LLC name. The company or attorney should be able to fast track your EIN application as well.  Of course this depends on the state and I am not familiar with the Massachusetts formation process.If you transfer the property into an LLC with a loan in your name you will most likely violate the due on sale clause in the loan terms.

As for extra costs of owning in an LLC, you will have to account for the cost of maintaining your business entity with the state and local government along with complying with any state or federal tax reporting regulations.

Edward B. · Answer

@Stephanie Hardy,

To answer your question, yes. They should be very familiar with and/or specialize in AP, RE, and business entities. AP is the hard one I found. There are a few out there. None of them local, unless you happen to be from, oh I don't know, Las Vegas. That happens to be where the attorneys I used are based out of. There and Washington state, but they do business nationally. I came across them while researching AP. I was skeptical because they aren't local and have quite the marketing machine. After meeting with numerous local attorneys, though, I ultimately went back to them. Part of the issue is that I own property in three different states so a local attorney could not do everything that I needed. Their prices were very very competitive compared to the local attorneys as well. I had a lot of work done because I was overhauling my entire estate plan so they worked with me on the pricing. Since your AP plan should work with your Estate plan I wanted to set it up right from the start. They have set up my Revocable Living Trust, 2 LLCs, and 4 Land Trusts. All for only slightly more than local attorneys were asking for the Trust and 1 LLC.

There product is very impressive and professional. The trust is incredibly thorough and covered all of the wickets that I read you need to look out for because many trusts don't cover them. For example, what to do with retirement accounts. If your Trust does not specifically address the issue the trustees hands may be tied when it comes to that. For the LLCs, I paid almost twice as much for LLCs from local attorneys in NC and FL back in the day. Those operating agreements were like 6 pages, this one is around 80. And it is all with an eye toward AP. Another example, a lot of attorneys ask if you want to be able to take distributions whenever you want. Sounds good, right? So they right into the operating agreement that the members can demand distributions. Well guess what, they may have just eliminated your charging order protection. That is the same problem with boiler plate operating agreements that you get from internet websites. LLCs are very flexible and can be formed to accomplish whatever you want, so if you just go with something off the internet or someone who doesn't really know what they are doing it can undermine the whole effort. That is all my opinion of course, you can judge for yourself and I encourage you do so.

Anyway, I have to run my kids to soccer. The name of the law firm I used is Anderson Business Advisors and I recommend you at least check them out. They should pop up if you Google them. I can give you some other names of firms I considered or have come across in my dealings that may be a good fit as well. Bottom line, if you decide to go this route, I would shop around for someone that you are comfortable with and that will do it right and to your satisfaction. A lot of it is about peace of mind, but if it is ever tested in court, you want to know that it will accomplish what you paid for it to do.

Lee Smith · Answer

One thing I don't think anyone pointed out in this thread... In some states, if you purchase in the name of the LLC, and something goes wrong during the purchase phase, you may need to get a lawyer involved to get your earnest money back..I had a client who went to purchase a house. He was buying in his LLC's name. Long story short, the inspection brought up some big issues, and he wanted to back out of purchasing the property. The seller said they were keeping the EM funds... He decided to sue them, but later found out he had to bring a lawyer to the small claims court because the PA was in the name of an LLC and not a person... Basically the law in that area stated if an LLC is involved, then they need to have a lawyer to plead their case.   It would have cost $200-500 to bring a lawyer into the deal, and could have been a losing proposition.. Luckily the seller backed down and returned the EM funds...

Edward B. · Answer

@Stephanie Hardy,

Yes there will be a paper trail.

However, if the LLC is properly set up and maintained you will still enjoy the liability protection that it offers. The LLC can offer some privacy too, and even a lot of privacy if done properly, which is good because it discourages lawsuits, but an opposing attorney can always discover your assets. If they choose to go through the time and expense of a lawsuit at some point you will be forced to disclose all of your assets. If you do not you will be lying to the court which, of course, is a crime.

In this case, though, your attorney will make the case that you are not liable and you should not be a party to the lawsuit. Only the assets in the LLC will be exposed. It is not bullet proof, nothing is in law, but if you are doing everything right, it is highly bullet resistant. A well set up asset protection plan will discourage most frivolous lawsuits. You need to weigh that against the costs of setting it up, though.

This is all lawyer stuff and you need to talk to a local attorney to get the real deal for you and your situation, also because a lot of this is very state specific. You can get opinions and other people's experiences here but it may not apply to you at all. Nevada is considered one of the business friendliest states when it comes to asset protection, though, so you have that going for you.

James Syed · Answer

Welcome to BP.

@Joe Rinella

You could buy the property under your name now, if you don't want to miss this opportunity like you had stated in your post.

Buy the property under your name and make sure your lender will allow you to quit claim deed. Another word for it "assumption".

I have a series LLC which allows you to place multiple properties under small boxes while you have the same mother LLC. In addition, consult a good real estate attorney to set it up of you instead of going nolo or some other online legal service. A competitive LLC formation is critical for assets protection.

Hope it helps a little.

Steve Vaughan · Answer

When I place commercial property into my LLC, I do it from minute one.  That way I don't have lender or insurance issues.   If the owner and lender aren't the same, or the insurance and the beneficiary aren't the same, you will have issues.

A 4-plex, non-owner occ is on the bubble.  Not a 'commercial' property, yet obviously investment property.  If you are able to get a loan and insurance in the name of the LLC (even recourse, personally guaranteed) I'd definitely establish it first.  Having it first also gives you more anonymity.  A quitclaim deed later leaves an obvious paper trail in addition to a myriad of other potential problems.  Good luck @Joe Rinella !

Scott Smith · Answer

I work extensively with these kinds of questions with my client, 100% of which are real estate investors looking to protect their assets. The answer is fact specific, so be careful when selecting an attorney that is not merely setting up the LLC but knows how to do the transfers and holdings correctly. Contact me offline if you want more details.

Stephanie Hardy · Answer

@Edward B. thanks so much for your reply. I've read about all different types of attorneys to consult with. Do you think I should speak to a real estate attorney or an asset protection attorney or maybe a RE attorney does both or a totally different attorney, haha? I don't really know. Thanks.

Stephanie Hardy · Answer

I just found this thread, so I hope jumping in is okay. If a person were to set up an LLC, but get a personal mortgage to finance it, then transferred it to an LLC, wouldn't there be a paper trail an attorney can follow if you ever get sued?

For example, say you are purchasing multiple properties over the years personally and then making the transfer to an LLC. Each home is in a separate LLC. One of those homes is a rental and the tenant is suing you. Wouldn't their attorney be able to figure out all your assets and try to sue you for everything because they can see your whole paper trail? Would the fact that even though they are under LLCs be moot because they can all be traced back to you?

Buy a rental property and transfer to LLC?

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