Are there other ways to purchase Investment Properties?

Question

Hey BP,I am a landlord looking to expand in rental properties. I've done it the traditional way of using my credentials; credit, job/salary, personal info. to getting a FHA loan. Although, initially the property was for personal use then things happened were I wasn't comfortable with the area and the extra space so I decided to rent it out, now its on section 8. After making that decision I later created a LLC but did not switch the property over to the LLC.

My 2 questions are:1. Is there a way to purchase a property as a business move with your LLC instead of doing it the conventional way?

2. Would switching the property to my LLC help for looking for future investment properties?Thanks!

Nathan Gesner · Answer

Putting property under an LLC complicates matters. It doesn't provide as much protection as most people think, it's not as easy as they think, protection isn't as necessary as you think, and it may actually hurt you by complicating your life.

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney, and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State's website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appear on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your primary insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 14 years of experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require extra, on-going effort to maintain.

Deborah Pyburn · Answer

Hi Avery. I would HIGHLY recommend acquiring all future properties under your LLC or business to protect your personal assets. It will also make year end accounting and reconciliation so much easier and showing your assets vs liabilities for future lenders - whether traditional or hard money.

Brendan Harrison · Answer

Hey!

Congrats on expanding your rental portfolio! To address your questions:

1.Purchasing with an LLC: Yes, you can buy properties under your LLC. However, financing can be different from the conventional route. Traditional loans (like FHA) are for individuals, not LLCs, so you'd typically need a commercial or portfolio loan when buying through your LLC. These loans usually consider the property's cash flow more than your personal income/credit.

2.Switching to an LLC: Transferring your property into your LLC can offer asset protection, but it won’t necessarily make it easier to get future properties unless you're using LLC-friendly financing. Keep in mind that transferring the property could trigger a due-on-sale clause from your current lender, so you'll want to check the details of your loan before making the switch.

Hope this helps!

Ashish Acharya · Answer

@Avery Moore

From a tax perspective, purchasing properties through your LLC won’t necessarily change your tax liability, as the IRS often treats single-member LLCs as “disregarded entities,” meaning the income and expenses flow through to your personal tax return. However, using an LLC can help separate business and personal finances, making it easier to track deductions like mortgage interest, depreciation, and operating expenses. Transferring your current property to an LLC typically won’t result in a tax gain or loss but could trigger transfer taxes depending on your state. Ultimately, structuring future purchases under the LLC can streamline tax reporting and potentially allow for more deductions and tax benefits if the LLC grows and qualifies as a separate business entity.

The lender will not directly finance property in the LLC most of the time. Talk to your lender before making any moves.

If you are doing seller financing/Wrap, you have more freedom to buy property inside the LLC if you want to.

*This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Mike Tamulevich · Answer

For a commercial loan at 7% over 15 years, you can use an online loan calculator to estimate your monthly payments. A good option is Bankrate’s Loan Calculator. Just input the loan amount, interest rate, and term to clearly understand your costs. Remember, while these loans are based on potential income from the property, your employment and personal income will still be factors in the lender's decision.

Regarding switching the property to an LLC for liability protection, a quitclaim deed can transfer ownership, but it's important to check with your mortgage company first. They may have specific requirements for such a transfer to ensure you comply with your loan agreement.

If you have any more questions, feel free to ask!

Mike Tamulevich · Answer

Great questions! Let me break them down for you:

Purchasing a Property through Your LLC:Yes, you can definitely purchase properties under your LLC, and it’s actually a common strategy for investors looking to grow their portfolio. The key difference is that when buying as an LLC, you won’t typically qualify for traditional FHA or conventional mortgages. Instead, you’d likely look at commercial loans or portfolio loans. These loans are based more on the property's income potential rather than your personal financials, though your personal credit might still play a role, especially if your LLC is newer. Keep in mind that these loans can come with slightly higher interest rates and shorter terms, but they do allow you to keep your investment separate from your personal finances.

Switching the Property to Your LLC:Transferring the property to your LLC can be beneficial for a couple of reasons. First, it offers liability protection—keeping your personal assets separate from your business assets. Second, it can help when it comes to future investments, as building a strong rental portfolio under your LLC can make it easier to secure loans for future purchases. However, before making the switch, it’s important to check with your current lender. Transferring a property with an existing mortgage to your LLC can sometimes trigger a “due-on-sale” clause, which could require you to pay off the loan immediately.

If you’re thinking about expanding your rental portfolio, switching to an LLC could give you more flexibility and protection as you grow. If you want more personalized advice or help managing your properties, feel free to reach out—we’d love to help!

Brittany Minocchi · Answer

Hey Avery!

1. Yep, you can use a product like a debt service loan to close in an LLC.

2. If you're asking for tax purposes, talking to a CPA would be your best bet. If you're talking about available financing options, there are business purpose loans (like the debt service loan I mentioned) that sometimes ONLY allow you to close as an entity, like an LLC.

If you have any other financing questions, I'm happy to chat! Feel free to reach out.

Avery Moore · Answer

Thanks for your response. The mortgage company did mention the "due-on-sale clause" being that the loan is a FHA loan which I plan to keep it for the loan debt has decreased from making payments.

Avery Moore · Answer

Thanks for your response you were right. The mortgage company stated that if I were to get the loan switched to my LLC, being that it was under FHA I'd have to restructure the loan basically start over. A quitclaim deed wouldn't be honored. Moving forward my future investment property will be under a commercial loan.

Are there other ways to purchase Investment Properties?

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