LLC for rentals?

Question

I currently have 4 rentals, all SFH, in my name excluding my own residence. I have a LLC I started when was trying to purchase a Mobile Home Park last summer. The deal fell apart, but can I use this LLC to my advantage in single family homes or single mobile homes?? Also I live in Texas if that matters on the LLC. Thank you for the advise.

Bret Allen · Answer

You can definitely transfer the property into an LLC to isolate premises liability risk, and people do it all the time.  Piercing the corporate veil is tough in Texas, even for the best trial attorneys.  If the accident happens after you transfer the property to a correctly formed and maintained LLC then you are in a much better defensive position in the slip and fall case then if you owned the property individually.   Best practice is to keep your properties as safe as possible.  If you know about a risk to others, fix it.  Don't think it a good idea to try and hide behind an LLC for known issues.  But accidents do happen, and unknown or unthought of risks do exist.  Those occasions are when you want to be properly set up.

Edward B. · Answer

@Terry Hall,

John is totally off topic, he isn't trying to answer your question, he is offering you an alternative way to finance your real estate investing.

To get back on topic, I would say you really need to talk to an attorney or the attorney that set up your LLC. LLCs can be very generic and the language in the operating agreement allows you to participate in any business that you choose. That is not always the case though. Some LLCs are set up for a very specific purpose and the operating agreement may limit the activities that the LLC can participate in. I bring it up since you mentioned that you set up the LLC to buy a MHP so there may be limiting language in there. I am assuming you were doing that by yourself but if you had partners then your LLC probably is not usable for what you want in its current form.

You really need to understand the language in your operating agreement and an attorney familiar with Texas law is best suited to help with that.

Bret Allen · Answer

Interesting discussion here.

@Terry Hall,

On the LLC issue, there won't likely be any "due on sale" clause issues.  If a bank wanted to call your note due under the due on sale clause under a Texas Deed of Trust, then they would likely have to first declare a default under the loan docs and Texas Property Code and give you a chance to cure the default.  If you own the LLC 100% then you could arguably cure the default by transferring the property back to your name, individually.  Where is the harm?  The bank would have a hard time justifying a foreclosure in this case -- assuming you are current on your payments, taxes, and insurance.

All said, I have not seen a bank use the due on sale clause in residential real estate in Texas with few exceptions -- all of which include the transferor using a transfer to deceive the bank and being in default for other reasons i.e., missed payments, no insurance, etc.  Legitimate transfers to shield an investment from premise liability is legitimate.

I have seen the due on sale clause used in commercial real estate.

Terry Hall · Answer

I registered and set up the LLC through the state myself. There is no partners. I was using financing through a local bank to fund the MHP. I backed out of the deal after I kept finding undisclosed expenses. I do not plan on switching my current houses to it, because they all have loans and I don't think it will benefit me. But I am looking a other sfh and mobile homes I was considering buying using the LLC.

John Champagne · Answer

Texas requires that fund raising through a crowdfunding portal be done within a company, such as an LLC.  Essentially, your LLC would be the entity raising funds. There are a few Texas companies out there that offer these services, each have their own unique ways of doing business. Just throwing out options for you.

John Champagne · Answer

Real estate crowdfunding allows someone to raise capital to purchase a property by going online to find investors.

So there are two sides to this, the fund raiser and the investors. The fund raiser is like someone initiating a Kickstarter project to raise funds to develop a product. The investor is like the person who contributes money the Kickstarter project in return for some token of appreciation.  However, in real estate crowdfunding the fund raiser uses the money to purchase a property and the people contributing to the effort are investors to have some amount of ownership in that property.

Texas allows for online real estate crowdfunding for accredited and non-accredited investors. I'd be happy to discuss in more detail, send me a PM.

Terry Hall · Answer

What do you mean by crownfunding??

Curt Smith · Answer

Assuming you have bank loans on your rentals I once heard that banks will call the loan due if you retitle into an LLC.  I have since talked to many investors who've re-titled their properties into an LLC and no bank problems.  Just have the closing attorney to give you a letter to mail the lender that asserts you are committed to continued paying on the note and the re-titling was for "estate planning".  You can't say to isolate risk, if there's a slip and fall suit a month after you move the rentals into the LLC any trial lawyer can toss the LLC aside if the purpose was to limit risk (which of course it is).

John Champagne · Answer

As a Texas resident you have real estate crowdfunding as an option for raising funds, or as an investor.

LLC for rentals?

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