Turning your primary residence into a rental

[Chris Pohlson]

Does anyone have any advice on how to turn their primary residence into a rental when upgrading to a new home? I want to keep my first house as a rental but transfer the title to an LLC. I understand that will activate my mortgage's due on sale clause and I would have to refinance that loan? Will I still be able to get a 30 year mortgage? If I had to do a commercial loan and move down to 20 years, cash flow would take a large hit. My mortgage banker suggested a trust. Will that still protect my assets? Anyone have experience with this? Thanks!

[Edward B.]

@Chris Pohlson,

Whether or not you should use an LLC is really dependent on your situation and goals. If you are just starting out or do not have a lot of assets to speak of, an LLC may be a bit premature unless it is part of a strategy other than asset protection. It is a personal choice, though.

The reality of the due on sale clause is that it is highly unlikely that the bank will exercise their right to accelerate the loan. But they may, so you need to be prepared for that. They may just ask you to change the title back into your name, and/or you may have the right to do that. I don't know about the second part, that is lawyer stuff and probably state specific.

If you have less than 4 properties financed then you should have no problem getting a 30yr fixed loan at only slightly higher rates if your DTI will support it if you had to refinance, but that would have to be in your name. Otherwise, there are private lenders that will lend to an LLC at 30yr fixed but at much higher rates (6%-8%) and higher costs for the loan. In that case, or in the case of a commercial loan, the property itself will have to support the mortgage payment in terms of the DSCR.

I would talk to an asset protection attorney in regards to a trust, not a mortgage banker. A trust does offer some protection apparently, but it is highly dependent and assumes the trust is set up and run properly. My understanding is that your standard revocable living trust does not offer nearly as much protection as an LLC, but that may not necessarily be the case and is again, very state and personal situation specific.

You may be able to get some good ideas here, but ultimately you are going to have to shell out some dollars to real subject matter experts that are familiar with your situation and objectives to get the best answer.