SFR Investor · Bloomfield, NJ · Member since 2012 · 6 posts · 7 votes
I am preparing to purchase my first rental property and have a question for the community. Asking the same to my accountant and will post his answer as well.
Should I: 1) Purchase in my name using a personal bank loan then transfer title to the LLC
or
2) Purchase in the LLC name using a commercial loan?
Background: - I need financing for the purchase.
- I have a registered LLC.
- I have pre-qual for a personal loan and getting the actual mortgage approval should not be a problem.
- I have not talked to a commercial lender yet.
I don't recommend doing the LLC route, especially for only one property. Definitely get an umbrella insurance company, but that's it. A lot of people are fooled into thinking they need the LLC when in reality it just ends up costing a lot of money, lenders rarely lend to LLCs anyway, and the umbrella insurance policy will give you the same asset protection as the LLC.
I thought I needed one for my properties and did tons of research and asking around, and all I came up with is that there is no benefit to it. At least not in the beginning stages. As a beginner, it's tempting to over-think throuhg everything. LLCs being one of those things. Just worry about learning the ropes of rental properties first.
If it is a residential property, you do not need a commercial lender for a LLC purchase. No doubt the bank will need you to cosign the loan and it will be based on your credit rating.
If you get a personal loan, you cannot simply title the property in your LLC without changing the ownership on the loan and refinancing. Refinancing that quickly will come with added costs.
If you want the property in your LLC, then you should buy and finance the property in your LLC. Of course, I am not a CPA so there may be other considerations.l
It sounds like buying it in the LLC's name is the way to go. But if that isn't possible for some reason, for right now, since you'll only have one investment property I'd suggest an umbrella liability policy. A million dollars in additional coverage would probably run you $250 annually... At least it does around here. That coverage would extend to anything else you have liability coverage on: primary residence, investment property, car, etc.
I don't recommend doing the LLC route, especially for only one property. Definitely get an umbrella insurance company, but that's it. A lot of people are fooled into thinking they need the LLC when in reality it just ends up costing a lot of money, lenders rarely lend to LLCs anyway, and the umbrella insurance policy will give you the same asset protection as the LLC.
I thought I needed one for my properties and did tons of research and asking around, and all I came up with is that there is no benefit to it. At least not in the beginning stages. As a beginner, it's tempting to over-think throuhg everything. LLCs being one of those things. Just worry about learning the ropes of rental properties first.
all depends if he manages the property himself or not. if yes then LLC does not offer asset protection. if he hires out property management than its entirely different story and there is benefit in setting up LLC
Both my attorney and lawyer advised to buy in the LLC's name.
Tough getting financing through the LLC these days. Some banks will no longer lend to a LLC with personal guarantee, some will only give variable rate loans and others will give fixed rate but much higher than conventional.
I've decided to purchase in my name with extra liability insurance. Thanks everyone for your input!
More information on getting (or not) a traditional mortgage in the name of an LLC:
Closing in the name of an LLC is not allowed by Fannie Mae or Freddie Mac for conventional mortgages. For the last 4-5 years, essentially all conventional mortgages (about 90%) must meet Fannie Mae or Freddie Mac guidelines. Prior to that, Alt-A loans were available. Some Alt-A programs would allow for the closing in the name of an LLC.
Only if the mortgage company is going to portfolio the loan, could one be done today. Very few banks today are willing to do a portfolio loan.
Here's one way to get where I think you want to go. You alread have the LLC, so...
Buy/close in "your name", but have your attorney put the property into the LLC. Talk to your attorney. Tell him to prepare two deeds for closing, one for the transfer from the seller to you, then one to transfer from you to your LLC. Two deeds will be in the closing package. There is no rule violation regarding underwriting. If the bank gives you grief, then have your attorney let the underwriter know it is the closing attorney's idea to protect the overall interest of his closing client.
Chris Martin, I was under the impression that if a deed transferred ownership then the mortgage on the "seller" would need to be paid in full or it would be a violation of your mortgage agreement. You may get away with it for a while but what happens when the mortgage company sees the property taxes and insurance coming in the LLC's name? Sounds like trouble to me.
Chris Martin, I was under the impression that if a deed transferred ownership then the mortgage on the "seller" would need to be paid in full or it would be a violation of your mortgage agreement. You may get away with it for a while but what happens when the mortgage company sees the property taxes and insurance coming in the LLC's name? Sounds like trouble to me.
The deed transfer was agreed to by the mortgage company by the act of the mortgage company approving the loan package. Keep in mind what I said, "Two deeds will be in the closing package". No trouble. The text of the mortgage or deed of trust says " If all or any part of the Property or any interest in it is sold or transferred (or if a beneficial interest in Borrower is sold or transferred and Borrower is not a natural person) without Lender's prior written consent... " (emphasis added). Approving a loan package is written consent.
David Clark you'll have to check with your closing attorney and (maybe) the VA loan underwriters. I've never been on the originating side of a VA loan and am not familiar with their guidelines.
Is having a closing attorney part of closing or do you need to hire am attorney in addition to closing? How much extra does doing something like this cost?
We are in the process of buying our first rental prop personally and trying to figure all of this out.
I am very curious to find out how this process works with the "double closing" with the transfer to the LLC. Would this be the same if you were doing small MF or Mixed Use properties?
I think you are ok buying jnder your own name instead of LLC. You need to have proper insurance as noted. For financing purposes you should be able to get better amitorization and interest rate terms going personally as well as you will be able to get a low rate locked in for a long term, improving cash flow.
I have 2 properties in an LLC and I am now planning to buy under my own name until I hit the financing ceiling personally. then will go back to commercial.
Have also consulted w insurance agent, accountant, and lawyer to make sure I feel comfortable with the risks from a liability standpoint.
Thanks John. That's my plan as well. The double closing may be possible but at the end of the day my mortgage will most likely be federally secured and Fannie Mae doesn't do so for LLCs.
Just to clarify, I never suggested a "double closing". What I suggested, and other members in my LLC and other LLCs, have done on multiple occasions (although not recently for me), is way simpler. It is simply a deed transfer, on the HUD-1, that is paid for at closing. I think the total cost was $42.50.
Chris Martin, so if I understand your concept, then the mortgage and final deed would end up being in the LLC's name but the purchase agreement would be in the individual's name. In this case, then you will be looking at a higher interest rate and a possible inability to sell to the second since Fannie Mae does not buy LLC loans.
If the loan remains under the individual's name but the deed is in a LLC, I still do not see how a lender would approve this.
Another option would be to buy in your personal name and then transfer title to a trust. Outside of escrow you can then transfer the beneficial interest of the trust to your LLC. From my understanding the due on sale clause does not apply when transferring property into a trust. Yes, changing the beneficial interest could trigger the due on sale clause, but there is no way the bank would see that and in my opinion it's none of their business. You could also change the beneficial interest back into your name in about five minutes.
I'm in the camp that believes in the added protection of an LLC. Although lawsuits above a million are rare, they do happen and I want to be protected against them. Even if your net worth is not that high, I wouldn't want my wages garnished for the rest of my life either.
Chris Martin, so if I understand your concept, then the mortgage and final deed would end up being in the LLC's name but the purchase agreement would be in the individual's name. In this case, then you will be looking at a higher interest rate and a possible inability to sell to the second since Fannie Mae does not buy LLC loans.
If the loan remains under the individual's name but the deed is in a LLC, I still do not see how a lender would approve this.
Then you shouldn't try it. Others may want to, but it's clear this creative idea isn't for you. If you don't ask, I can guarantee it won't happen.
No, we were not looking at a higher rate. And no, the loan was sold to Fannie Mae. The facts are the transfer was approved, de facto and in writing, by the underwriter. This 'solution' was suggested by the company attorney after a consultation regarding a private mortgage tranche.
Just my two cents of a slightly different way to approach this issue. I'm assuming you want to protect personal assets? What are they? Stocks, bonds, cash, real estate?
Rather than forming an LLC for the property, you might look into moving the personal assets you wish to protect into another legal entity, i.e. a Trust with you as the beneficiary. Just an idea.
Or just get a ballon that covers your personal assets...
I've been deeding into a trust with the LLC as the bene. In Mass the LLC fee per year is 500 bucks so it adds up quick. So with this method you can have a trust setup for each property and then have one LLC be the bene for them all.