Quit Claim to Refinance LLC vs Personal Name

[Mike Stahlman]

Hi, We have 5 SFR rentals currently we have also flipped 5 also. We are actively seeking the next property, but the issue here is... we are working on financing. So far we always purchase our houses in our LLC and we pay cash for them or use an Interest only from our local bank, but to get them financed after the rehab we have to move them using a Quit Claim to our personal name and then we can finance them with 25% down and a 30 year loan for rental BRRRR. If we leave them in the LLC, the option is 20% down but a 3 - 5 year ARM which I do not like, and amortized over 20 years makes the payments higher (we are working on good cash flow still once this is good enough we can work on building more equity). We were going to do a portfolio loan but the best interest rates we can find are about 2 points higher and the fees are really high all around. Our local banker says if we Quit Claim them to our personal name, then get them financed, we can then do what ever we want after they are financed. We have worked with this bank on about 6 houses so far and they have been great. Good rates and very personal. I know we could run in to a bank calling a loan at some point if we Quit Claim it back to the LLC after it is financed. But I would really like some one to let me know if we are getting the right benefits from the LLC. Tax wise I think the LLC (partnership Member managed My wife and I) is better because the houses don't show up on Schedule E. (less chance of an audit) Is all this the wrong way to look at it? What are the strategies other investors use?

Thanks,

P.S.  This business is tough but I am so glad we started three years ago.  I wish we had started 30 years ago.  I can only imagine...

[Scott Smith]

Originally posted by @Mike Stahlman:

Hi, We have 5 SFR rentals currently we have also flipped 5 also. We are actively seeking the next property, but the issue here is... we are working on financing. So far we always purchase our houses in our LLC and we pay cash for them or use an Interest only from our local bank, but to get them financed after the rehab we have to move them using a Quit Claim to our personal name and then we can finance them with 25% down and a 30 year loan for rental BRRRR. If we leave them in the LLC, the option is 20% down but a 3 - 5 year ARM which I do not like, and amortized over 20 years makes the payments higher (we are working on good cash flow still once this is good enough we can work on building more equity). We were going to do a portfolio loan but the best interest rates we can find are about 2 points higher and the fees are really high all around. Our local banker says if we Quit Claim them to our personal name, then get them financed, we can then do what ever we want after they are financed. We have worked with this bank on about 6 houses so far and they have been great. Good rates and very personal. I know we could run in to a bank calling a loan at some point if we Quit Claim it back to the LLC after it is financed. But I would really like some one to let me know if we are getting the right benefits from the LLC. Tax wise I think the LLC (partnership Member managed My wife and I) is better because the houses don't show up on Schedule E. (less chance of an audit) Is all this the wrong way to look at it? What are the strategies other investors use?

Thanks,

P.S.  This business is tough but I am so glad we started three years ago.  I wish we had started 30 years ago.  I can only imagine...

Hey Mike, great questions! I have a few thoughts I would share in regards to this type of setup.

It may be worth looking into the potential of using a Warranty Deed, as opposed to a Quit Claim Deed, in order to maintain Title Insurance. A transfer with warranties has preserved the title insurance protections in every policy I have reviewed, but you should always check. Most Title Insurance companies will cease to offer insurance if a Quit Claim Deed is used for the transfer as the Quit Claim Deed offers no warranties as to clean title. 

In regards to the financing and the transfers - there is always a potential the lender can exercise the Due on Sale Clause. A transfer to an LLC will trigger the clause and should therefore be avoided, even though banks are hesitant to ever foreclose as long as the note is being paid. Even with the note being paid, the banks will still send threatening letters. Sounds like you have a great relationship with your lender, so you are in a better position than many of the clients I have worked with; however, they still have they right to exercise this clause on you. The issue can be avoided completely by transferring the property into a land trust.

• While a transfer to an LLC will cause alarms at the bank and prompt them to send you a letter, a transfer to a trust will not. A transfer to a trust is exempt from due on sale violations since banks will view transfers to a trust as an estate planning tool. You should not even receive a letter from the bank.
• This article can explain the general process of taking a property into your own name and transferring it into the Land Trust before assigning it to the LLC. The added benefit of this process is that you can also have your attorney sign the public records as "Nominee Trustee" before assigning yourself as the "Trustee" once the trust has been established. This means your name does not appear on public record for that property, your attorney and their address is the only thing that appears. You always have control and nobody else, not even your attorney, can manage or sell your property except for you.

Also, considering you have that many properties you may want to look into an entity that will help separate liability between your properties. If you have all the properties in a single LLC, then a single legal judgment against one property gives the plaintiff access to all of those properties until the judgment has been satisfied. A Series LLC is a strong option for this type of situation.

In regards to the tax questions, I am not a CPA. I will send a recommendation via DM for the CPA I use, if you have questions that you might want him to answer.

This is not legal advice, just my opinion as a real estate investor.