Rental Property Investor · Soldotna, AK · Member since 2014 · 73 posts · 28 votes
I know the topic of LLC or not has been discussed more times than I can count here a BP, so I hope this discussions does not become a debate of whether or not rental property should be held in an LLC. My particular question is:
Is there a way to put residential real estate (1-4 units) into an entity without quit claiming and triggering a "due on sale" clause or refinancing into more expensive commercial and/or portfolio loans?
My attorney has advised that I leave my properties (several 4plexes and duplexes) in my personal name as long as I have a good general liability insurance and umbrella policy (which is already in place).
I am okay leaving things as they are, but I am just wondering if I am missing something as many folks on BP don't seem to have an issue with this.
Please let me know your thoughts. Thanks in advance.
Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
10y
Check with your lender. Acceleration is something the lender does, so they are the ones to talk to. Check your loan. I just pulled up one of mine and it specifies: "Even if you sell your home by letting an approved purchaser (that is, a creditworthy owner-occupant) assume your mortgage, you are still liable for the mortgage debt unless you obtain a release from Iiability from your mortgage lender."
If you are the current owner, and you provide evidence (Operating Agreement, etc.) that you are the only owner in the LLC, they may be willing to let you. Ultimately, it's up to them so you should check with them.
Attorney · Winchester, VA · Member since 2015 · 726 posts · 387 votes
10y
Whether due on sale clauses reach a particular transaction depend almost entirely (except for a few federal provisions) on local law. Many states allow for an acceleration of a loan for mere re-vesting of title, while others may prevent it. You cannot be sure until you consult an attorney licensed to practice in the state you are operating in.
Lenexa, KS · Member since 2015 · 206 posts · 53 votes
10y
There's so much confusion on this topic. I've been told by my lender that if I put my LLC's name on the title then it will trigger the DoS clause. However I'm not excited about carrying properties in my name, one denied claim away from really bad times...
Fishkill, NY · Member since 2013 · 88 posts · 36 votes
10y
Among other things it may depend on your existing mortgage terms. We have a few rental properties, all purchased under LLC's except for one under our name. We tried to do a transfer into an LLC but the mortgage company will file a quit claim per the mortgage agreement. So we just bumped up our insurance for that one.
Rental Property Investor · Soldotna, AK · Member since 2014 · 73 posts · 28 votes
10y
FYI: I spoke to our attorney again and she verified that the state of Alaska does allow for acceleration of a loan for re-vesting of title. Which means if I quit claim into an LLC it can trigger the due on sale clause. If anyone has information to the contrary I would very much appreciate it.
Does anyone have any other suggestions for the original question:
Is there a way to put residential real estate (1-4 units) into an entity without quit claiming and triggering a "due on sale" clause or refinancing into more expensive commercial and/or portfolio loans?
Thanks to those who have already taken the time to comment. Any other suggestions will be greatly appreciated.
Investor · Gaithersburg, MD · Member since 2013 · 659 posts · 441 votes
10y
The simple answer to your question is probably that most (if not all loans) that you can get in your own name are not available to LLC's (or any entity). If buying through an LLC you usually have to get a business or in-house loan. It typically caries a higher interest rate (~2% more), a 5 or 7 year balloon, and a lower amortization.
I've bought 10 SFR's with my LLC and I pay about 2% more interest than I could get in my own name. They also carry 5 year balloons and are only amortized over 20 years. I invest with family so there are 3 of us and an LLC makes sense for what we do. If I was alone in this, I would have bought in my own name as much as I could and had appropriate insurance, etc.
Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
10y
Check with your lender. Acceleration is something the lender does, so they are the ones to talk to. Check your loan. I just pulled up one of mine and it specifies: "Even if you sell your home by letting an approved purchaser (that is, a creditworthy owner-occupant) assume your mortgage, you are still liable for the mortgage debt unless you obtain a release from Iiability from your mortgage lender."
If you are the current owner, and you provide evidence (Operating Agreement, etc.) that you are the only owner in the LLC, they may be willing to let you. Ultimately, it's up to them so you should check with them.
Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
10y
Most of my rentals are in WA and I've QCD'd them into my LLC with no action from my lender. Basically if you are current on your payments, its unlikely that they will take any action, but you are still exposed to acceleration in that respect.
You might consider creating a land trust with your LLC as the beneficiary, then quitclaim the property to the trust. Banks would see this as an acceptable change since this is more typical for those who have revocable family trusts and want to put all assets into the trust. With your LLC as the beneficiary you then also get a second layer of asset protection for liability from renters, contractors, etc. Also, a trust is a private document that is not recorded so your privacy is maximized.
I now buy all of my flips with a land trust as the buyer and my LLC as the beneficiary, and have quitclaimed my rentals into a different trust for the above reasons.
FYI: I spoke to our attorney again and she verified that the state of Alaska does allow for acceleration of a loan for re-vesting of title. Which means if I quit claim into an LLC it can trigger the due on sale clause. If anyone has information to the contrary I would very much appreciate it.
Does anyone have any other suggestions for the original question:
Is there a way to put residential real estate (1-4 units) into an entity without quit claiming and triggering a "due on sale" clause or refinancing into more expensive commercial and/or portfolio loans?
Thanks to those who have already taken the time to comment. Any other suggestions will be greatly appreciated.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
10y
@Bob Malecki I tried to educate the most knowledgeable RE attorney in my area (I'm in central WA) about Land Trusts and the Bronchik system specifically. It used my entire 1/2 hour $40 consultation and ended up where he said he'd look at it further on the clock (@$300/hr of course).
Basically he said if he doesn't know about it, no local judge will know about it either and will most likely deny anonymity & liability protections sought through it. Here a Land Trust is land basically owned by a municipality or the state and protected.
Local law and interpretations of them are key as @Matthew Kreitzerpoints out.
Investor · Anchorage, AK · Member since 2014 · 43 posts · 7 votes
10y
Tyson,
I am also in Alaska and I've had exactly the same question. I haven't had the time to do anything with LLC's yet but when I considered it I ran into the exact same question that you had. I also spoke with an attorney who gave the same advice (keep a good umbrella policy).
Up here, relating to Bryan Otteson's point, I have had several people tell me that some banks "don't care" if you quit claim into an LLC because "people do it all the time". That said, I personally don't trust this and wouldn't completely trust it lest it were in writing and I think the attorneys are correct that acceleration can happen. I think some lenders are more friendly than others to the idea of putting properties in LLCs but with both lenders I've use when asked to dig into the loan paperwork the loan officers did find due on sale clauses. At this point I would consider Bryan's strategy of trying to get a lender to sign off on the transfer......It might work. Also I think that I'd hate to be the person who had quitclaimed into a LLC when the previously friendly bank had a cash crunch and called a loan that they wouldn't have called during "good times". I think that can and sometimes does happen and I imagine its really ugly. Some banks (the bad ones- typically faceless and non-local) are very untrustworthy and will call and loan on a legal issue just to get at the business's cash even if the loan is performing just fine. So personally, I will proceed cautiously with this but please let me know how it goes and if you find anything different.
Rental Property Investor · Soldotna, AK · Member since 2014 · 73 posts · 28 votes
10y
@Brett Roth, I will let you know if anything comes of this. I have looked at the LLC dilemma several times over the last 9 years hoping something new would come to light. I am not too optimistic at this point :) Thanks for affirming that I am not the only one with this issue.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
10y
@Tyson Cox We looked at this every which way for our buy-and-hold rentals and eventually concluded there's no reasonable way to transfer ownership to our LLC. We now hold all financed properties in personal name. The LLC acts like a manager and is an Additional Insured.
In this situation, the LLC pretty much serves no legal purpose, though there are other reasons it's helpful in our business (LLC holds during and operates rehabs purchased with private money, ability to quickly do JVs, using credit that doesn't hit my personal credit report, etc).
This is in CA and our business model simply wouldn't work without guaranteeing long term financing at very low rates.
Galion, OH · Member since 2015 · 24 posts · 6 votes
10y
Could this be done with the LLC, in essence, buying the privately owned property for what is owed? & Being that you own multiples, could the LLC buy one, then another, then another-? - Unless the LLC does a deal to buy them all-? Seems harsh, considering there would be fees associated with all this. However, if the end result is all properties under the LLC and you further protected to keep some separation as a person . . . ?
I really would like folks to talk more about this issue. From the time that I decided I was going to start buying real estate (which I have not as of yet), I just decided I would establish an LLC that I would aqcuire them under. Please everyone, continue this conversation. I realy would like to hear from both people that bought as yourselves vs. thos who have purchased under LLCs-----the pros and cons of each side!
@Tyson Cox We looked at this every which way for our buy-and-hold rentals and eventually concluded there's no reasonable way to transfer ownership to our LLC. We now hold all financed properties in personal name. The LLC acts like a manager and is an Additional Insured.
In this situation, the LLC pretty much serves no legal purpose, though there are other reasons it's helpful in our business (LLC holds during and operates rehabs purchased with private money, ability to quickly do JVs, using credit that doesn't hit my personal credit report, etc).
This is in CA and our business model simply wouldn't work without guaranteeing long term financing at very low rates.
Good luck!
Wow, you have no substantial asset protection. You are working in a high risk mode when you hold investment properties like rentals in your personal name. The LLC service a large legal purpose if a tenant or contractor sues. You may want to do more research since your back end is quite exposed...
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
10y
I don't disagree, but I'm out of avenues to do more research on the topic.
The question we've ended up with is not "what is absolutely better?" but rather "which of the available practical options is the best choice?"
For us, those options include:
1. Hold each property (1-4 residential) in a separate LLC. Great asset protection. High expense ($800+/y per LLC in CA tax and misc fees), high overhead (bookkeeping and paperwork), and high financing costs (5y/25am @ 5% + 1.5pts).
2. Hold all properties in a single LLC. Good asset protection and acceptable entity overhead. Still high financing costs. A judgement at one property puts the portfolio at risk.
3. Transfer the properties into one or more LLCs and hope the residential loan is never called. Good asset protection, acceptable entity overhead, great financing costs. If I could get over concerns about this being unethical, there's still the very real risk that I lose the favorable financing when I need it most.
4. Hold properties in personal name. Poor asset protection (none). Minimal expense, acceptable overhead, great financing costs (30y @ 4.25% + 0pts).
Assume also that there's $1M insurance on each property and a $3M personal umbrella in place.
It just comes down to math. What's the likelihood of a suit? What's the likelihood of a suit with costs over $4M? What's the impact of each? What's the opportunity cost of operating under a heavier overhead? What's the value of the optimal financing if the property is held over 5 / 10 / 30 years? How likely is the lender to discover and object to the title change?
@Bob Malecki - Would love to hear any thoughts or suggestions or more insightful or sophisticated or experienced ways to think about this, but I have to make some assumptions about all those variables and the math tells me it's better to hold in personal name and protect with insurance than to take options 1, 2 or 3. Anyone's input on that highly valued.
Basing much of my understanding on legal consult I've had and John T Reed's writeup here: http://goo.gl/pnmYae, amongst others.
PS: By "hold in personal name," I really mean held in a living trust.
Attorney / Investor · Salt Lake City, UT · Member since 2015 · 228 posts · 198 votes
10y
I like Bob's suggestion by using trusts. Here are my thoughts:
From a strict legal standpoint, titling in an LLC DOES violate due on sale clause (it doesn't fit in the exceptions to the Garn-St Germain Act). However, banks most likely will not care. If discovered, they will just want to confirm that you are the owner of the LLC (and hence that the borrower still owns the property) and call it good. I "heard" a rumor that some banks we're starting to call this in, but I have not "seen" it in practice. Even if they call it in, you can also put title back in your personal name and see if that makes the bank happy.
Titling in a land trust with the LLC as a beneficiary, still--technically--violates the due on sale clause. The trust exception is for the family trust where the borrower (the human) is the trustor and beneficiary (this exception was created specifically because families put their personal residences in family trusts). However, the trust will be less of a red flag. And as long as you are the owner of the LLC that owns the trust that owns the house, most banks will probably be satisfied that you are still the owner. That's what they really care about--that you haven't sold the house to someone else.
I also recommend the trust for a second reason--titling out-of-state properties. Most clients with property outside of their home state (where their LLC is formed) title them in a trust, with their LLC as the beneficiary. Trust are not registered with the state, so do not need a registered agent nor do they pay yearly registration fees. This could be helpful for CA.
CA is rare with that $800 hit on LLCs. So, an advance, and even aggressive, strategy could be to set up an LLC in another state, and preferably one that recognizes series LLC. Then title your CA rentals in a trust where the beneficiary is the foreign (outside of CA) LLC or series. Use a separate property management LLC (just 1) for management. Then don't register the asset holding one in CA.You're only paying the $800 on one LLC (the management one), but you can still separate out the liability from all your rentals. Check with your accountant on the tax consequences.