Individual owner vs LLC vs Corporation

[Nicholas Mahon]

Hi BP Carebears!

My girlfriend and I are looking into buying the first of many income properties. We'll be taking it slow to start by doing the House Hack technique, but we would like to eventually build a nice portfolio of passive income. We want to start things off correctly though. Like many of you, we read Rich Dad and were very inspired. He recommends buying all assets through a company to minimize taxes and liability. However, I know that most lenders will not give mortgages to LLCs or Corporations. I could be wrong about this though. 

What do you all do? Is there a way to transfer ownership to an LLC/corporation after I buy a house? Or does this limit me to alternative lenders? What is the best approach to this?

Just want to be as smart as I can in going down this road.

Thanks so much in advance for any thoughts you have.

Nicholas

[Jeffrey S. Breglio]

I've been in RE investment personally and as an attorney for 15 years and for over 1000 clients. Always hold real estate investments in an LLC for very long list of reasons. (**See note at the end of this post**). Never hold an investment in your personal name! And despite comments to the contrary, you can put the property into an LLC at any time, and the sooner you do so the better. Anonymity is only one reason (and LLCs really aren't all that private in most states--use trusts for privacy). Using an entity and insurance is a great two-pronged approach. If available, a series LLC is a very convenient tool as well.

That said, if you are going to also live in the property, general recommendation is to NOT put into an entity. It does become, to at least some degree, a "primary residence." You could lose the cap gains tax break from the sale of primary residence and possible other issues. This is an exception to the rule because it's not fully an investment property.

Also, every conventional lender requires that you close the property in your personal name at the time you get the loan. There is no way around this, so your personal name will always be associated with the property (try seller financing to get around this!!). Standard procedure is to immediately (at the same closing in fact!), deed the property over to the LLC. There is no need to notify the bank, and my recommendation is to not say anything. This has been standard investing practices for as long as LLCs have been around.

Yep, this does, technically, violate the due on sale clause (the acceleration clause referenced above). I've posted a lot on this topic. Transfer to an LLC is not an exception to the Garn-St Germain Act. Most banks will not care, however, as long as you are still the, or even one of, the owners. I've heard "rumors" that banks are starting to call these out and call the note due, but I have not yet seen that in practice or even heard of it actually happening anywhere in the country.

Use an LLC and find a local attorney who KNOWS real estate investing, not just a corporate attorney who does entities!!!

Jeff

Note: Never put a long term hold in an INC (a corporation) or into an LLC that has filed an "S-election" with the IRS!! Always have multiple owners (if possible) of the LLC and have it taxed as a partnership. Use the Inc, or preferably an "s-elected" LLC for flips and other types of real estate investing. This is for tax savings, not asset protection. You'll thank me some day :)