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All Forum Posts by: Luis Alvarez

Luis Alvarez has started 0 posts and replied 81 times.

Post: LLC versus personal umbrella policy for Indianapolis SFH rental

Luis AlvarezPosted
  • Real Estate Consultant
  • Colorado Springs, CO
  • Posts 86
  • Votes 63

Hi @Tyler Bolton I hope I can help clarify given I see a lot of muddled points of view on these matters online.  I will preface this with the fact that I have a legal background, specifically with estate planning and asset protection. However, this is not specific legal advice to you, just an opinion based on the circumstances described.

Do I Need an LLC to Invest in Real Estate?

The short answer is No, you don't need it. A better question is "Should I have a rental property in an LLC?", the answer there (to me) is Yes. I would never own rental properties in my personal name. Yes, there are many out there that do it and nothing bad has ever happened, and I say kudos to that, I just would never do that. Second, in terms of asset protection, LLCs are not invincible, but I think what many don't understand is that they are not designed to completely shield your assets from liabilities, on the contrary they are designed to contain and isolate liabilities. They keep inside liabilities inside and outside liabilities outside.

Location of LLC?

Typically, we set up entities in the state in which the property resides. The reason is that one wants to be able to properly avail themselves to the laws and protection of the corresponding state where the property lies. If a person owns a rental property in IN and if something happens on that property, the cause of action (lawsuit) would go before a court in IN, with an IN judge, citing IN law. Therefore, one would want a IN LLC to have title to that property.

>>For purposes of taxes, consult with a CPA to confirm this would work for your situation, but you could have the LLC be treated as a "disregarded entity" and thus, even if you and your wife are members, any profits/losses would "disregard" the LLC and go directly on your personal returns. In other words, in the eyes of the IRS, the LLC would be non-existent. The point of it is to shield that asset from outside liabilities and keep inside liabilities within. LLCs are a legal tool, not a tax one.

Transfer from personal name to LLC/Due On Sale Clause

If one is transferring property title from personal name, a Grant/Warranty Deed would be drafted/recorded to transfer title. NOT a Quitclaim Deed, as you may often see online, because Quitclaim Deeds do not fully warrant the rights and covenants of property as does a Grant and/or Warranty (or equivalent depending on state) does. Most purposes that people on the BP forums are transferring properties to an LLC, would be exempt of the Due On Sale Clause. There is statutory, and Fannie/Freddie guidelines, that explicitly exempt these transfers from being subject to the Due On Sale Clause...asset protection/estate planning purposes are covered.

Why Use LLC when an Umbrella Policy Does the Same?

Umbrella Policies are good, but they are not an asset protection tool, they only cover litigation/damages after you're already in litigation or found personally liable. Also, most Umbrella Policies only pay out if your underlying policy pays out, and the underlying policy will do everything they can to find an exclusion or that you were negligent (which you probably were) in the cause of action to get out of paying the claim. And yes, attorneys make money from forming LLCs, but they make way more when you were negligent and didn't know what you didn't know and end up in a lawsuit. It shouldn't be a question of this versus that, both an LLC and an Umbrella Policy are good to CYA. You would also want to add the LLC entity as an "Additional Insured" party onto the landlord insurance for the property.

Post: When to transfer title to LLC

Luis AlvarezPosted
  • Real Estate Consultant
  • Colorado Springs, CO
  • Posts 86
  • Votes 63

@Ryan Daniel  I will preface this with the fact that I have a legal background, specifically with estate planning and asset protection in relation to real estate investments. However, this is not specific legal advice to you, just an opinion based on the circumstances described.  

I know this is a differing topic on the forums, and online in general, but having the legal background/education and knowing estate planning concepts you'll realize it shouldn't be. If one is transferring property title from personal name, a Grant/Warranty Deed would be drafted/recorded to transfer title. NOT a Quitclaim Deed, as you may often see online, because Quitclaim Deeds do not fully warrant the rights and covenants of property as does a Grant and/or Warranty (or equivalent depending on state) does. Most purposes that people on the BP forums are transferring properties to an LLC, would be exempt of the Due On Sale Clause. There is statutory, and Fannie/Freddie guidelines, that explicitly exempt these transfers from being subject to the Due On Sale Clause...asset protection/estate planning purposes are covered.

There's always the question of "Do I Need an LLC to Invest in Real Estate?  The short answer is No, you don't need it.  A better question is "Should I have a rental property in an LLC?", the answer there (to me) is Yes. I would never own rental properties in my personal name. Yes, there are many out there that do it and nothing bad has ever happened, and that's great, but I just would never do that. Relying on that logic is to rely on resulting. Second, in terms of asset protection, LLCs are not invincible, but I think what many don't understand is that they are not designed to completely shield your assets from liabilities, on the contrary they are designed to contain and isolate liabilities.

Post: LLC or Umbrella policy

Luis AlvarezPosted
  • Real Estate Consultant
  • Colorado Springs, CO
  • Posts 86
  • Votes 63

Hi @Kenzer Hodgson to @Sarah Kensinger's point above, I'm not a fan of so many people spreading legal advice/insight on the forums, but at least it's better than Instagram/Facebook and YouTube.  That being said, I will preface this with the fact that I have a legal background, specifically with estate planning and asset protection as it relates to real estate. However, this is not specific legal advice to you, just an opinion based on the circumstances described in this thread.  

Do I Need an LLC to Invest in Real Estate?

The short answer is No, you don't need it. A better question is "Should I have a rental property in an LLC?", the answer there (to me) is Yes. I would never own rental properties in my personal name. Yes, there are many out there that do it and nothing bad has ever happened, and I say kudos to that, I just would never do that. Second, in terms of asset protection, LLCs are not invincible, but I think what many don't understand is that they are not designed to completely shield your assets from liabilities, on the contrary they are designed to contain and isolate liabilities. They keep inside liabilities inside and outside liabilities outside. Read that again. The reason you see a person's name and all their entities listed in a lawsuit is because Plaintiff (the suing party) attorneys have to list everyone and every entity that can be remotely tied to a cause of action, otherwise, if enough time passes and through the legal process discover that a separate entity or just a person was truly liable and they didn't name them in the lawsuit, they are out of luck. Basically, they name everyone because they're hoping and counting on the fact that people set up their own LLCs and didn't adhere to basic entity maintenance and kept things separate (like bookkeeping and separate bank accounts).

Transfer from personal name to LLC/Due On Sale Clause

If one is transferring property title from personal name, a Grant/Warranty Deed would be drafted/recorded to transfer title. NOT a Quitclaim Deed, because Quitclaim Deeds do not fully warrant the rights and covenants of property as does a Grant and/or Warranty (or equivalent depending on state) does. Most purposes that people on the BP forums are transferring properties to an LLC, would be exempt of the Due On Sale Clause. There is statutory, and now Fannie/Freddie guidelines, that exempt many transfers from being subject to the Due On Sale Clause...asset protection/estate planning purposes are covered.

Why Use LLC when an Umbrella Policy Does the Same?

Umbrella Policies are good, but they are not an asset protection tool, they only cover litigation/damages after you’re already in litigation or found personally liable. Also, most Umbrella Policies only pay out if your underlying policy pays out, and the underlying policy will do everything they can to find an exclusion or that you were negligent (which you probably were) in the cause of action to get out of paying the claim. And yes, attorneys make money from forming LLCs, but they make way more when you were negligent and didn’t know what you didn’t know and end up in a lawsuit.

Post: PennyMac Loan Transfer to LLC

Luis AlvarezPosted
  • Real Estate Consultant
  • Colorado Springs, CO
  • Posts 86
  • Votes 63

@Cristal Ochoa @Leiah Dotlich

I will preface this with the fact that I have a legal background, specifically with estate planning and asset protection. However, this is not specific legal advice to you, just an opinion based on the circumstances described.  

Our experience is that many lenders/servicer customer representatives may not know the protections that exist for those that want to put asset protection steps in place.  What I've seen is that when asked to provide an assurance that a loan wouldn't be called because of a due on sale clause being triggered, the lender customer service typically just outright says it's not allowed, or default to a "no", because they see it as a black and white question, and miss why the due on sale clause is actually written into the mortgage document to begin with.

If one is transferring property title from personal name, a Grant/Warranty Deed would be drafted/recorded to transfer title. NOT a Quitclaim Deed, because Quitclaim Deeds do not fully warrant the rights and covenants of property as does a Grant and/or Warranty (or equivalent depending on state) does. Most purposes that people on the BP forums are transferring properties to an LLC, would be exempt of the Due On Sale Clause. There is statutory, and as you pointed out, now Fannie/Freddie guidelines, that exempt many transfers from being subject to the Due On Sale Clause...asset protection/estate planning purposes are covered.

Post: Quick Claim deeds: Moving Rentals to an LLC

Luis AlvarezPosted
  • Real Estate Consultant
  • Colorado Springs, CO
  • Posts 86
  • Votes 63

@Wesley Mullen I see a bit more now where you're coming from with your brother/SIL.  Going back to the deed type, usually when you're transferring from personal name to an entity, you're still in the mix, so it's not as if Party B (the entity) would be potentially receiving clouded title from Party A (the individual[s]), but if down the line there's a change on the property, they'll go back and look at that transfer and wonder why the full covenants may not necessarily be represented from that transfer.  You can certainly speak to someone who practices on title stuff daily if you're more curious...it's been a while since my property law courses. In any case, there's no difference in costs or prep time between a Quitclaim vs. Warranty (or there shouldn't be), so that's why we use those rather than Quitclaim.  Somewhere along the line between Facebook, Instagram, and forums I think Quitclaims became the norm because people pitched them as if they are quicker or easier to record...there's no effective difference.

To your other point, I would think that if your brother/SIL are on the mortgage and if they transfer to an equally owned LLC among 3 people (33.33%), and IF they are in a community property state, the argument would be that the "community" still has a controlling interest (66.66%) and thus a real change of ownership would not take place even if transferring that property to an LLC. However, I see you're in OK...which if they are also in, is not a CP state. But to that same effect, the ownership interests of the LLC can be creative in a way that if their lender looks, they can still say that they (as co-borrowers) are still majority holders and the transfer was for their estate planning/asset protection purposes, which is a strong rationale for allowing an LLC transfer (which can then be easily owned in parts by people's trusts).

Post: Will transferring ownership into an LLC cause issues if I try to complete a 1031?

Luis AlvarezPosted
  • Real Estate Consultant
  • Colorado Springs, CO
  • Posts 86
  • Votes 63

@Nick SansiveroI will preface this with the fact that I have a legal background, specifically with estate planning and asset protection. However, this is not specific legal advice to you, just an opinion based on the circumstances described.

Do I Need an LLC to Invest in Real Estate?

The short answer is No, you don't need it. A better question is "Should I have a rental property in an LLC?", the answer there (to me) is Yes. I would never own rental properties in my personal name. Yes, there are many out there that do it and nothing bad has ever happened, and I say kudos to that, I just would never do that. Second, in terms of asset protection, LLCs are not invincible, but I think what many don’t understand is that they are not designed to completely shield your assets from liabilities, on the contrary they are designed to contain and isolate liabilities. They keep inside liabilities inside and outside liabilities outside. Read that again. The reason you see a person’s name and all their entities listed in a lawsuit is because Plaintiff (the suing party) attorneys have to list everyone and every entity that can be remotely tied to a cause of action, otherwise, if enough time passes and through the legal process discover that a separate entity or just a person was truly liable and they didn’t name them in the lawsuit, they are out of luck. Basically, they name everyone because they’re hoping and counting on the fact that people set up their own LLCs and didn’t adhere to basic entity maintenance (operating agreement) and kept things separate (like bookkeeping and separate bank accounts).

Transfer from personal name to LLC/Due On Sale Clause

If one is transferring property title from personal name, a Grant/Warranty Deed would be drafted/recorded to transfer title. NOT a Quitclaim Deed, because Quitclaim Deeds do not fully warrant the rights and covenants of property as does a Grant and/or Warranty (or equivalent depending on state) does. Most purposes that people on the BP forums are transferring properties to an LLC, would be exempt of the Due On Sale Clause. There is statutory, and now Fannie/Freddie guidelines, that exempt many transfers from being subject to the Due On Sale Clause...asset protection/estate planning purposes are typically covered.

Why Use LLC when an Umbrella Policy Does the Same?

Umbrella Policies are good, but they are not an asset protection tool, they only cover litigation/damages after you’re already in litigation or found personally liable. Also, most Umbrella Policies only pay out if your underlying policy pays out, and the underlying policy will do everything they can to find an exclusion or that you were negligent (which you probably were) in the cause of action to get out of paying the claim. And yes, attorneys make money from forming LLCs, but they make way more when you were negligent and didn’t know what you didn’t know and end up in a lawsuit.

All this being said, LLCs confuse lenders because they don't understand that most of the time they are disregarded entities (for tax purposes) and rather than try to go another level to understand what the borrower is doing, they just outright give unfavorable lending terms. Which is why I avoid involving an LLC on my property until all the dust settles. Once the transaction is done, I transfer my property to an LLC (on its own) and sleep good at night that any liability that happens will remain within that LLC.

Post: Quick Claim deeds: Moving Rentals to an LLC

Luis AlvarezPosted
  • Real Estate Consultant
  • Colorado Springs, CO
  • Posts 86
  • Votes 63

@Wesley MullenI will preface this with the fact that I have a legal background, specifically with estate planning and asset protection. However, this is not specific legal advice to you, just an opinion based on the circumstances described.

@Wesley Mullen
If one is transferring property title from your personal name, a Grant/Warranty Deed would be drafted/recorded to transfer title. NOT a Quitclaim Deed, because Quitclaim Deeds do not fully warrant the rights and covenants of property as does a Grant and/or Warranty (or equivalent depending on state) does. Most purposes for which people on the BP forums are transferring properties to an LLC, would be exempt of the Due On Sale Clause. There is statutory, and now Fannie/Freddie guidelines, that exempt many transfers from being subject to the Due On Sale Clause...asset protection/estate planning purposes are typically covered.

We prep the deed along with the assessor forms, and on there one would also indicate the reason for the transfer (typically to an LLC for asset protection) so that you don't have a reassessment issue. Other acceptable transfers are marriage, divorce, death, etc.

Lastly, unless a lender is pulling title reports periodically, they would not be made aware that a transfer has taken place.  Typically, we have seen lenders notice when the payments aren't made and then they go to see what remedies they have.  

Post: New to BiggerPockets

Luis AlvarezPosted
  • Real Estate Consultant
  • Colorado Springs, CO
  • Posts 86
  • Votes 63

@Pradeep Velugubantla I'll preface this with the fact that I have a legal background, specifically with estate planning and asset protection. However, this is not specific legal advice to you, just an opinion based on the circumstances described.

Do I Need LLC?

Short answer is no, you don't need it.  A better question is "Should I have a rental property in an LLC?", the answer there (to me) is Yes. I would never own rental properties in my personal name. Yes, there are many out there that do it and nothing bad has ever happened, and I say kudos to that, I just would never do that. Second, in terms of asset protection, LLCs are not invincible, but I think what many don't understand is that they are not designed to completely shield your assets from liabilities, on the contrary they are designed to contain and isolate liabilities. They keep inside liabilities inside and outside liabilities outside. Read that again. The reason you see a person’s name and all their entities listed in a lawsuit is because Plaintiff (the suing party) attorneys have to list everyone and every entity that can be remotely tied to a cause of action, otherwise, if enough time passes and through the legal process discover that a separate entity or just a person was truly liable and they didn’t name them in the lawsuit, they are out of luck. Basically, they name everyone because they’re hoping and counting on the fact that people set up their own LLCs and didn’t adhere to basic entity maintenance and kept things separate (like bookkeeping and separate bank accounts). 

Location of LLC?

Typically, we set up entities in the state in which the property resides. The reason is that one wants to be able to properly avail themselves to the laws and protection of the corresponding state where the property lies. If a person owns a rental property in PA and if something happens on that property, the cause of action (lawsuit) would go before a court in PA, with a PA judge, citing PA law. Therefore, one would want a PA LLC to have title to that property.

Transfer from personal name to LLC/Due On Sale Clause

If one is transferring property title from personal name, a Grant/Warranty Deed would be drafted/recorded to transfer title. NOT a Quitclaim Deed, because Quitclaim Deeds do not fully warrant the rights and covenants of property as does a Grant and/or Warranty (or equivalent depending on state) does. Most purposes that people on the BP forums are transferring properties to an LLC, would be exempt of the Due On Sale Clause. There is statutory, and now Fannie/Freddie guidelines, that exempt many transfers from being subject to the Due On Sale Clause...asset protection/estate planning purposes are typically covered.

Why Use LLC when an Umbrella Policy Does the Same?

Umbrella Policies are good, but they are not an asset protection tool, they only cover litigation/damages after you’re already in litigation or found personally liable. Also, most Umbrella Policies only pay out if your underlying policy pays out, and the underlying policy will do everything they can to find an exclusion or that you were negligent (which you probably were) in the cause of action to get out of paying the claim. And yes, attorneys make money from forming LLCs, but they make way more when you were negligent and didn’t know what you didn’t know and end up in a lawsuit.

Post: Avoid prop 19 tax reassessment

Luis AlvarezPosted
  • Real Estate Consultant
  • Colorado Springs, CO
  • Posts 86
  • Votes 63

@Amanda By To echo Joe's comment, when a Deed is prepped to be recorded (to transfer title from a personal name to an LLC) a County Assessor Change In Ownership Form accompanies the Deed to the Recorder's office. On that form, one can indicate that the controlling interest does not change in the truansfer and it is done for estate planning/asset protection purposes, thus, exempting it from reassessment. This is also the same logic that exempts most transfers asked about on BP about the "Due On Sale Clause", it's usually a non-issue if prepped correctly.

We prep Grant Deeds and Change In Ownership forms to make sure that folks understand the statutory provisions that exempt these feared consequences, so that investors can properly set up their estate plans.

Post: Transferring RE to LLC

Luis AlvarezPosted
  • Real Estate Consultant
  • Colorado Springs, CO
  • Posts 86
  • Votes 63

@John Philip Eugenio  I'm going to preface this with saying that I have a legal background in estate planning and asset protection, however, this is not specific legal advice, just my opinion.

Not sure if you got your answer already, but in short, this situation would hypothetically present an option to transfer to an LLC without having to refinance/obtain a new loan. Having legal title of a rental property in an LLC limits (read: contains) liability from a potential cause of action within that same LLC. So long as it is set up properly and truly treated as a separate legal entity (separate bank accounts, proper capitalization, corporate formalities, etc.) Many will say "why go through all that?" But personally, that's really not a lot to do...after all, all of us here are running a business. This "admin" is what running a business looks like.

Due On Sale
Most modern mortgages have a due on sale clause in there to trigger when a property is sold or transferred to another party, this is so that the lienholder (the mortgagee/lender) has recourse in collecting what's due on the loan from the original borrower.

However, there is a slew of exemptions for transfers of legal title on a property that can be made without triggering the due on sale clause. The majority of times I see this come up on BP or the internet usually falls under one of the exemptions, which basically makes the Due on Sale Clause a non-concern. These exemptions were put forth by statutory law and (a few years ago) in the guidelines set forth by Fannie/Freddie. Exemptions include divorce, marriage, death of a family member, estate planning/asset protection, and others.

In a hypothetical scenario, as long as a person is transferring the property to an LLC in which they still have a controlling interest, the Due on Sale Clause is typically a moot concern. Additionally, the mortgagee would have no indication that such a transfer took place unless they are told or they pull periodic title searches on all the properties they have liens on. When preparing a Deed to transfer title to the property, there is usually a County form that accompanies the Deed when it goes for recording with the County Recorder. One must know to indicate on those forms that the transfer is exempt of assessment tax because it is basically you passing title from one's self (individually) to an LLC (which the person controls).

Also, I have used full Grant or Warranty Deeds and not Quitclaim Deeds, as Grant/Warranty Deeds are a sure way to confirm that true owner of a property has the legal right to convey their interest in the property, while a Quitclaim Deed does not have any such warranties or assurances.