Protecting Your Assets with an LLC
When it comes to investing in real estate, protecting your personal assets is a top priority for property owners. If someone is injured on another person’s property, the property owner may be held liable for the injured party’s damages. While there are several strategies for property owners when it comes to protecting their assets, one of the most common methods is to hold the property in a Limited Liability Company (LLC).
What is an LLC?
An LLC is a business structure that provides personal liability protection to its members. When property is held in an LLC, the liability associated with the property is generally limited to the assets of the LLC.
Should I hold my investment property in an LLC?
It depends. Holding a property in an LLC has many advantages, such as personal liability protection and possibly tax benefits, there are also some disadvantages, including costs associated with creating and maintaining an LLC, and financing challenges if the property owner has Conventional or FHA loans.
When should I start an LLC?
Again, it depends. Ideally, an LLC should be established before purchasing a property and you won’t face complications when transferring the ownership to the LLC later. If you are purchasing a property cash, the best strategy is to start the LLC pre-closing and purchase the property in the LLC.
What are the steps to transfer a property into an LLC post-closing?
Transferring your property to an LLC is relatively simple. First, you must form the LLC by filing the necessary documents with the state. It is important to confirm that the name of your LLC is not already taken by another entity. In addition to filing your Articles of Organization, it is also a good idea to have an Operating Agreement drafted.
The next step is to draft a deed transferring the property to your LLC and record it with the City/Town Clerk.
However, there are some risks involved in transferring your property to an LLC that you must consider before transferring your property to an LLC.
What are the risks to transferring a property into an LLC?
- 1. Due on Sale Clause
- It is important to understand that if you have a Conventional or FHA mortgage on the property, your mortgage likely contains a Due on Sale/Acceleration Clause. This clause allows the lender to call the loan due in full if the property is transferred to a different owner. While there are exceptions to this clause, transferring your property to and LLC is something that could trigger this clause. If this clause is triggered and the lender decides to enforce it, you must pay the loan in full. If you cannot do so, you may default on your loan, which puts you at risk of foreclosure.
- 2. Impact on future refinances
- Transferring your property to an LLC can also complicate any future refinancing of the property if you decide to go with a conventional or FHA loan. Your lender will likely require that you transfer the property from your LLC to yourself individually. If you work with a lender who allows you to hold the property in an LLC, you may have a higher interest rate.
Are there any other ways to protect your personal assets?
Another common method of asset protection is to take out an umbrella insurance policy. An umbrella policy may include coverage for liability claims that your homeowner’s insurance policy may not cover. Additionally, it may offer coverage beyond the limits of your homeowner’s insurance policy. Umbrella insurance policies are relatively inexpensive and can be as little as a couple hundred dollars per year.
If you are contemplating transferring your property into an LLC, it’s important to reach out to an attorney to help you navigate the complexities and fully assess any risk. Please be aware that this is not intended as legal advice and if you have any questions you should seek the advice of counsel.
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