Transferring rental to an LLC

[Robert Malan]

I have a partner who is interested in rolling my only current rental into our LLC. How would you handle this and what would be a fair buy in for him? Also, any experience or suggestions on transferring the title and loan to an LLC are welcome. Thank you!

[Justin Kay]

@Robert Malan - I'm assuming you already have your LLC set up properly, with a lock solid Operating Agreement. If not, this is obviously the first place you need to go.

Transferring the rental into an LLC is easy. Write up a basic bill of sale between you and the LLC, where you sell the rental to the LLC. Prepare a simple Deed (either a Warranty Deed, or a Quitclaim Deed most likely), file it with your state's appropriate office (usually a County Register of Deeds), and you're done.

The loan is a little more challenging though. Transferring the rental from your name to the LLC is typically a term of default under the loan documents (read through them to make sure). Usually, provided the payments remain current, a bank won't care. Although it's an easy default for them to claim in the event the bank wants to clear their books later. So you can go to the bank and see if they'll waive the default (get it in writing). It isn't the preferred option though, as the LLC now owns the home but you're legally responsible for the payments, which could leave you holding the bag (even more reason to have a lock solid operating agreement that resolves these sort of issues). The preferred option would be to get a new loan in the LLC's name, shortly after you deed the property. You'll likely need to personally guarantee the loan, so you're still on the hook, but as a guarantor and not an obligor (honestly though not much difference).

As far as the other partner's buy in, look at the operating agreement and see what it says. Beyond that, you're selling the home to the LLC, so you should get some form of reasonable compensation based on the equity level, cash flow, and projected investment potential. How much the LLC takes from you as a "cash infusion" or transfer of member interests, and how much the LLC takes from your partner as a purchase of the member interest depends not only on the asset being transferred in, but who's doing the work moving forward, are you taking salaries, is there recourse, is he getting a full member interest or just an economic (profits) interest . . . In the end, it's all open to negotiation.