Issue Transferring a Rental Property to our LLC

[Ryan Hansen]

Hi Everyone,

We have been planning to move the ownership of our rental property into our LLC for tax reasons and to protect our personal assets. However, our lawyer has informed us that it could be problematic because transferring a mortgaged property to an LLC can trigger a "due on sale" clause in the mortgage documents, which basically states that if the property is transferred the lender can deem that a default, which is an event that allows the lender to call the mortgage (i.e., require it be paid off in 30 days).

Has anyone else come across this issue in NY State? I thought having a rental property owned by an LLC was fairly common for investors. Any advice would be helpful.

Thanks!

Ryan

[Addam Driver]

HI @Ryan Hansen,

What @Mark Bookhagen said is completely true.  It is common for investors to have their properties in LLCs, however there are some steps to be taken before that can happen.  

Example:

1) If the LLC is an already established business (filed at least 1-2 years of taxes, making money, assets, etc.), it is easier for that LLC to purchase property as it would be for an individual.

2) If you are purchasing a property cash, you can do it through an LLC because there are no income requirements other than the monies to pay it off.

3) If you are starting out for the first time and the LLC is new, you would need to find a lender (I used BB&T for this) who will allow you to purchase the property under your name and do a limited warranty deed to the LLC at closing without triggering the "Due on sale" clause.

In scenario #3, you would own the loan, but your LLC would own the property. You'd still have the standard LLC protections but NOT from the lender as you are responsible for the payments. The GOOD NEWS is that after a year or two of showing your LLC was the one making the payments, some lenders will allow you to move that loan into the LLC as they have been honoring the agreement. At that point, your LLC is established and your DTO and credit are freed up of that debt.

I'm currently doing this with 2 of my properties. It's a good way to get your LLC established.

I hope this helps!

-Addam