Mtg Due-on-Sale? - Any strategies for moving rentals in to LLC?

[Bhaskar Pandey]

I own two SF rentals in San Antonio, Texas and before I buy a third one, as per the popular suggestion, I wanted to move both homes in to an LLC for asset protection and minimizing personal liability. However, as I started researching the process, I came across the terms 'due-on-sale' in this blog post (https://www.legalzoom.com/articles/how-do-i-transfer-title-of-a-property-from-a-person-to-an-llc) which I understood as the remainder of loan would be due in full if I attempted to transfer the deed over to the LLC. What I've read so far is that not many (or none of the) lenders would be willing to let me transfer the deed over to the LLC without calling it due. I'd like to hear from you successful RE investors who have been able to do this and find out what my options are?

So far, I've come up with the following as my options:

1. Continue to keep the properties in my name and get a large umbrella policy (dwelling policy) to cover any liability that I may be subjected to.

2. Refinance as a commercial loan (higher interest rate, larger payments, points etc.) - more expensive overall.

3. Land Trust with myself as trustee and LLC as beneficiary (http://clintcoonsblog.com/2011/01/26/transferring-real-estate-into-your-llc/).

Can anyone having done this before provide their experience?

Thanks!

[Caleb Heimsoth]

Jack B. Yeah they can probably still get your original address but should help some

[Matt K.]

I've gotten one phone call from a wholesaler and one postcard but the post card wasn't even to buy it was telling me about stuff for sale lol. I must have terrible properties haha..

[Jack B.]

Originally posted by @Caleb Heimsoth:

Jack B. Yeah they can probably still get your original address but should help some

I'm still not sure what your point about a PO Box really is...My post that you responded to was about LLC's and charging orders. It had absolutely nothing to do with wholesalers or junk mail.....

[Eric Adobo]

My take. Mortgage in personal name of property placed in LLC . Before tenant sues Llc shield already has been pierced.

Personal name on mortgage means intermingling personal n LLC dealings.

[Bjorn Ahlblad]

In some states transferring property from your name to an LLC will trigger Excise tax as well. For me, if it is in my name I leave it there, significant new properties go into an LLC. We keep lots of liability insurance and lots of separation between personal stuff and the LLC's. For what it is worth our lawyer said to only keep properties of a similar size in the same LLC and limit of three properties per LLC.

[Account Closed]

Originally posted by @Chelsea Cowgur:

we have 2 rental properties and I called the mortgage holder in both of them, and both told me that I could move them to a LLC and it wouldn't cause any problems.

 Did you get it in writing? Those people won't be with the company when the time comes to call Due on Sale Clauses.

[Jason Smith]

@Bhaskar Pandey While they can always call it due if you move it to an LLC most often they won't even bother to check as long as the loan is in good standing. I'm here in Texas and have had done multIple "quit claim" deeds on multiple properties to move them back under my LLC. You can find examples of these deeds online they normally require a notary and a small fee from the courthouse. While the LLC does provide some asset protection I would highly recommend a solid business insurance policy as another line of defense.

[Ashish Acharya]

Originally posted by @Bhaskar Pandey:

I own two SF rentals in San Antonio, Texas and before I buy a third one, as per the popular suggestion, I wanted to move both homes in to an LLC for asset protection and minimizing personal liability. However, as I started researching the process, I came across the terms 'due-on-sale' in this blog post (https://www.legalzoom.com/articles/how-do-i-transfer-title-of-a-property-from-a-person-to-an-llc) which I understood as the remainder of loan would be due in full if I attempted to transfer the deed over to the LLC. What I've read so far is that not many (or none of the) lenders would be willing to let me transfer the deed over to the LLC without calling it due. I'd like to hear from you successful RE investors who have been able to do this and find out what my options are?

So far, I've come up with the following as my options:

1. Continue to keep the properties in my name and get a large umbrella policy (dwelling policy) to cover any liability that I may be subjected to.

2. Refinance as a commercial loan (higher interest rate, larger payments, points etc.) - more expensive overall.

3. Land Trust with myself as trustee and LLC as beneficiary (http://clintcoonsblog.com/2011/01/26/transferring-real-estate-into-your-llc/).

Can anyone having done this before provide their experience?

Thanks!

 Bhaskar, 
LLC are important but not absolutely necessary. You will eventually need them when the time is right. Just to help you decide if you really want to move these properties into LLC, let me tell you if there are any other benefits.

1) If this LLC is going to be SMLLC, you have no tax savings. If it were MMLLC, with your significant other as another member, you could save money on the taxes if one of you have a W-2 wage that is above 129k. If not, there is no tax saving.

2) You can have the exact same tax savings such as hiring a child to shift your income to the lower bracket without LLC, and other tax saving strategies.

Bottom line is, besides asset protection, there are few tax savings. You can get the same asset protection as insurance. You do need LLC once you have enough equity, and you will know when that is :)

If you decide to use LLC now, you have to follow strict rules to actually benefit from the LLC. 
o get the desired asset protection, you need to treat LLC/Scorp as a separate entity. The entity needs to maintain its own books. Don't pierce the corporate Veil:

1. The veil can occur if the entity either is poorly capitalized. Inadequate Initial funding of the entity. LLCs that are thinly capitalized are more likely to be viewed as “shells,” thereby losing their capacity to shield the members from liability.
2. or fails to maintain a separate identity from its owners ( using the business bank account for business purchases, maintaining separate books)
3. Conversion of entities Assets for Personal Benefit:
4. Another factor that poses a risk of piercing the corporate veil is the draining of entities assets (such as payments of large salaries to shareholder-employees) that leaves the entity with inadequate resources to pay its debts.
5. Do not commingle personal and LLC assets.
6. Maintain a separate LLC bank account.
7. Execute an operating agreement.
8. Follow the provisions of an operating agreement.
9. Have LLC member meetings according to the operating agreement.
10. Title property in the name of the LLC.
11. Maintain insurance on LLC property in the LLC's name.
12. Sign all LLC documents in the LLC's name, not the members' names.
13. b. Ensure that any borrowing from the LLC is at arm's length. While an LLC can lend money to its members, such action must be approved as set forth in the operating agreement and should be documented by a written note that pays adequate interest and is subject to commercially reasonable terms.

These steps will also provide a better defense against other creditors attempting to pierce the LLC veil.
Good Luck 

[Dave DeMarinis]

Originally posted by @Costin I.:

@Bhaskar Pandey Do you have substantial equity and/or cash flow from these properties already? FYI, the mortgage note itself is a form of protection.

Why risk the DOS or refinance commercial with a higher rate if not needed?

You still need to worry about insurance, maintenance, property management, etc. regardless. Umbrella insurance is supplemental to regular insurance. Maintenance and proper property management is another form of asset protection. Same with LLC, trusts and other legal asset protection structures/strategies which are a form of insurance against litigation. None give you everything and you still need to learn how to employ them all in your RE investing toolbox, how and when (!) they complement each other and work in conjunction with the rest of tools (like marketing, financing, rehabbing, hiring, etc.).

With an LLC you need to proper maintain the LLC.

And I see you mention "the LLC it would be two partner/owners and I would feel safer" - can you elaborate on that? If you are talking about partnering with someone, that would have its own set of problems and you might want to be careful before forming an LLC with partners and putting assets into it.

 Seriously - a CYA Flowchart? Costin - if I start investing in Austin, you will be my first call for property management based on this chart only! I love the creativity, tongue and cheek approach as well as the usefulness. Well done.

Regarding the topic - Umbrella policy whether you are doing an LLC or a personal property. I have another loop in my flow chart. Will/Can I use one of my 10 mortgages on this property? Yes - then purchase in my name and get permission from lender to move to LLC (have received this every time) No - purchase in LLC and then get commercial financing.

How do I decide which financing I want to use? 

1. Value of property - California OOS investors likely have a 20 to 30X range on their investment values ($50K to $1.5M as an example) in their portfolio. 

2. Planned holding period - the longer the planned hold, the more valuable the 30 yr fixed rate is ...

3. Interest rate environment - in the still low historical interest rate environment, locking in as many 30 year fixed terms as possible is wise I believe. 

Obviously 2 and 3 are based on forecast so #1 is the dominant criteria.

[Charles Kao]

@Bhaskar Pandey  Just quit claim deed the properties into business name, if the banks threatens to due on sale clause then QCD it back.  Your chances of having the bank call the loan due it as likely as your home getting destroyed by a natural disaster, but in my opinion it's a risk worth taking.

[Jason Waldo]

@Bhaskar Pandey my wife and I just transferred our rental into an LLC we created 3 months ago. There was no issues. The chances are very very slim that they would call the note due. There is no one sitting at the recording desks going through all the properties to see what property is in what name. As long as you have made all your payments and are in great standing with your lender you should be just fine. Also since you have a 15 unit I am surprised it was purchased in an LLC to begin with. With a property of that size it definitely needs to be ASAP in case a dumb tenants wants to sue you for slipping on a blade of grass and spraining their ankle. Just do it and don’t worry about if they will call the note. If they do just sell the property and take that money and buy another property in your LLC with that 178k. Hope that helps! Jason

[John Clark]

Rather than guessing, call the lender and see what it says.

[Leon Li]

@Bhaskar Pandey Umbrella is your best bet and safest route. If you do decide to go with LLC, you need strong documentation. Everything has to be documented or it's useless also much weaker than a umbrella. For example in the LLC you need to document how money will be distributed and the responsibilities of each members/owner. A professional attorney will easily do this for you. And yearly renew time you need to put in meeting minutes for everything you have done, if you opened a business checking or changing to different business checking all need to be in the meeting minutes. If you miss any of those things or accidently mixed personal bank with business checking, then that LLC provides no protection. Without an umbrella you be done. Doing it professional with an attorney can be expensive 400 a year and initial cost to setup.

[Eduardo Rodriguez]

@Robert Gilstrap Please drop names I am looking for banking options to do this and most said this can’t be done Only security service federal credit union (over the phone) indicated that it did not matter

[Robert Gilstrap]

@Jack B. A charging order is a remedy for a creditor to collect against the debtors assets through their LLC interests and has nothing to do with piercing the corporate veil. If the veil were "pierced" then they would be able to go after you personally. I will agree that single member LLC's are much more vulnerable than multi-member LLC's but I assure you there is nothing "easy" about collecting from someone who has set up their affairs properly in advance and understands the world of civil litigation.

Also thinking that insurance of any type is fine on it's own is just fantasy (and I'm also a licensed insurance broker). Insurance can refuse to cover or flat just doesn't cover lots of things (intentional acts, criminal acts, etc.) and even when they do cover the policy limits can be well below what you are being sued for leaving you exposed for the rest. So feeling safe and secure because you have a million dollar umbrella liability policy is not so great when you get sued for 10 million. You need both in my opinion; a good entity setup utilizing trusts/LLC's and good insurance.

@Eduardo Rodriguez Not sure what you mean by drop names? I said if you want to transfer into an LLC or trust just go do it and forget about asking for permission.

@Leon Li When you assert that one small misstep and the LLC is worthless because of a technicality you are forgetting one major thing; the other side has to prove that and get a judge to agree in court. If you've ever been in a major suit then you realize that court can be your best friend. It can take many years and lots of $$ for the plaintiffs to try and pierce that corporate veil and even then it's a very uncertain thing. This is why having an entity in the first place is huge for asset protection. There is no magic bullet but the goal in utilizing entities such as LLC's in asset protection is to place time, effort and expense stumbling blocks in front of your opponent such that it drives them to the negotiating table or they flat just give up.