Am I protected by an LLC if the mortgage is in my personal name?

Question

I currently have 1 rental property but looking for 2 more in 2014.  I have a conventional mortgage on my current rental.  I was urged by my RE lawyer to start an LLC for this property for protection.  I live 2 hours away and I have a management company managing this rental.

From what I've read it has become very difficult to transfer a property into your LLC with keeping the mortgage conventional.

If I leave the mortgage where it is, and flow everything through the LLC, am I still protected?  Or do I have to sell the property to the LLC and get a commercial loan to be fully protected?

Bill Gulley · Answer

As to transferring property into an LLC, first, let's do a little estate planning. Form your LLC. Consider a simple family trust and have the trust as a member of the LLC, or simply make a Will and set aside other transfers to the LLC with your LLC naming a member as TOD if your state allows admittance of a member at death. So, get with your attorney! (Another reason I don't care for internet LLC form stores, BTW). Also, check with your tax advisor.

Now, get a letter from your attorney describing the property being set aside as part of your estate planning. Contact the lender, any lender, and inform them of the transfer as part of your estate plan. BINGO, no more due on sale-alienation issues as the law providing the use of the DOS exempts transfers accomplished for the purposes of estate planning. :)

Next issue is the comingling of your funds, which include personal debts made by you personally, with company funds. This can kill your perceived protection as comingling funds is cause for piercing the corporate veil. Guaranteeing a loan is not the same as being the maker (borrower) of that loan. Really, it would be better to have the loan in the name of the LLC and provide your personal guarantee......but, yes, I know.....

Anthony, welcome, I see you are a commercial loan broker so I assume your clients have commercial loans and transfers to a business with a personal guarantee are rather a moot point. A personal guarantee is not the same as making the loan personally for a business purpose.    :)

Dion DePaoli · Answer

@John Horner 
	
	The insurance you carry will be the first line of defense in a law suit, that is one of the reason you carry it.  Now, you may want to make sure you have specific landlord issue coverage which may not always be present in an umbrella policy over both your primary residence and your investment property.  You may need to separate the two for coverage reasons or you may be able to add on specific coverage, depends on your insurance provider.  In most situations, that will be sufficient to protect you.  
	
	Simply placing the property into an LLC does not create a real protection in some instances since the LLC can be pierced, especially when you are the sole owner of said LLC.  For one single property owned by you, I am a bigger fan of simply carry good insurance which covers the spectrum risks.
	
	Check out this thread which had a pretty good discussion around the same idea: HERE

Anthony Vandyke · Answer

Hello John

My understanding is that the LLC will provide you better protection from things such as law suits, etc.

Many of my clients have mortgages in their personal name and then transfer title to their wholly owned LLC. Because you personally guaranteed the loan the LLC will not protect you from the lender coming after you due to a default or foreclosure.

I do not think searching for a commercial loan for your residential property would be a good idea. If you can find one the interest rate and terms will be much worse than your current mortgage and it will not make sense to do.

Hope this helps.

Anthony VanDyke

Dion DePaoli · Answer

The mortgage can stay in your natural name while you title the property and operations of business into the name of your LLC. The LLC will afford some liability protection but you should also look to a good insurance policy to carry the brunt of that protection.  The LLC may offer some tax incentives to you depending on other factors and you should consult an accountant as well.  
	
	The mortgage itself is a different type of liability than what is present with land lording and the ownership of the property for investment purposes.  The mortgage is due and payable as long as it is outstanding as a debt.  Events at your property such as a tenant getting hurt or alike are more of the liability concerns you are dealing with.  Placing the asset in the LLC may (or may not depending on your state an other factors) protect your personal assets from being charged in the event someone sues you from something that happened at or around your property.  That, as I mentioned, can also be handled pretty well by a good property insurance policy.  
	
	Within the mortgage documents is likely a clause which is referred to as Due on Sale or Alienation Clause.  This clause gives the mortgagee the right to accelerate the balance due if any interest is granted into the property.  So the conveyance from you as a natural person to your LLC could trigger this event.  In most cases, the mortgagee may not pursue this concept but they can at any time.  
	
	Selling the asset to your LLC can carry tax implications for you personally, so you should discuss with an accountant as well.  I am not in the business of disagreeing with legal counsel, but you may want to simply chat up another attorney to see what their take on the matter is around your specific situation, they may be other opinions.  
	
	There are many threads here on BP around this topic to give you some more insight.

Andy Collins · Answer

John, I was making a general comment on her article, NOT pointed toward you or anyone else in particular.

I have never come out and said the 'cool' factor before, but I think a lot of the guru's use it for that very reason....

John Horner · Answer

Thanks @Andy Collins , but I think you read into this a bit much.  I would disagree that sounding cool is the primary reason for most people starting out.  It is a simple matter of the best and most efficient way to protect my personal assets.  I have a family to protect and in no way does "being cool" matter to me in this situation.

Also, I am not letting this paralyze me, I am continuing business as usually.  Just looking forward to protecting my assets in 2014 :)

Andy Collins · Answer

@AliBoone  I liked your article, you were very straight forward with the idea that people do it to sound cool, I think for the average starting investor, thats the primary reason.

I've been in media sales and sales management my entire life, when you have a new sales person, they normally fall into or close to one of two catagories.

1.  wants to learn more about radio than anyone else in the industry before making the first call, thinks the  more they study the better, and puts off making the first calls and making the first mistakes.

2.  They are ready to start calling on accounts when they don't even know how to read a rate card,,they want to go see people, you have to hold them back a little so they have the basics down,,they want to start selling.

The sales reps in #1 have little chance for success,,they confuse activity with accomplishment.  People in the second group have a much higher success rate.

I think spending days or weeks studying what entity to use is something like that,,,what will make you money is to get out and learn real estate, and start putting in offers on your first investment,,you need to be held back some, so you don't make a mistake, but you need to be ready to go start working on deals...you make money investing in real estate by putting together good deals,,,,,,you have to go 'get your feet wet",,,and thats how to succeed (again, with someone keeping you from making too big a mistake)

Don't get paralized you will make a mistake,,we all make mistakes

Ali Boone · Answer

Hi John. I wrote an article about this a few months ago if you want to check it out. More than what I wrote, check out the comments from everyone as they are extremely informative. Hope it helps!

http://www.biggerpockets.com/renewsblog/2013/08/17/rental-properties-llc/

John Horner · Answer

Thanks both of you.  I am not looking to protection from the mortgage.  My main goal is protection from lawsuits regarding my property.

@Dion DePaoli , I already have a $1 Mil Liability Insurance policy on my rental property that also covers my cars and primary residence.

I am also concerned with the Due on Sale Clause.  I know this isn't likely, but I don't have the capital to cover the full amount if it is called due.

Am I protected by an LLC if the mortgage is in my personal name?

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