Transfer newly acquired investment property into my existing LLC? Why or why not?

[Paul Malandrinos]

I have an existing LLC that was used for a couple of fix and flips in the past. A week ago I closed on my first investment property. It's a single-family condo purchased by me the individual with conventional financing. I anticipate that it will be rented in a few weeks. I have not established an insurance policy - yet - to supplement the condo's master policy. Is there any specific value - or downside/risks - to deeding the property to the LLC? I assume that as long as the mortgage is kept current, the lender will not be an issue.

I sense that since I already have the LLC, why not move the property under the LLC's ownership...?  And if true, does it matter what order I do the following?  Establish insurance, rent, transfer to LLC, make first mortgage payment...?

[John Mocker]

Paul,

You have exposure due to the purchase. It will be greater once it is rented. I would contact your agent and see if they can write it under your name now and then change it to an LLC if you do make that move. Many Insurance companies will insure rental units that are in an LLC. Most want to know if the LLC has any other operations and who the owners are.

Some things to do/watch in your condo policy:

1. Building (additions & alterations) - review your condo declarations and bylaws.  There should be a description of the unit giving boundaries.  From that, you can determine what parts of the Building you own and have to insure (ie. drywall, fixtures, cabinets,....)

2. Loss of Rents - make sure the limit is enough for 12 mos. rental

3. Loss Assessment - pays for amounts you are assessed by the Association for a loss that would be covered under your policy.  (ie. there is a Liability loss that exceeds the limits of the Association policy and each owner gets assessed.  There is no exact limit.  I would not get less than the Associations property deductible.  Another estimate might be $1,000,000 divided by the total number of units

There are other discussions you should have with your agent.  Coverage like Water Backup, Equipment Breakdown, ... may be advisable to purchase.

[David M.]

@Paul Malandrinos Well, I'm guessing you have a conforming loan under your name... if you want the limited liability protection of the LLC, you should have gotten the loan under the LLC's name. Yes, that would require commercial lending. There is no free lunch. So, that gives you some exposure..

Its normally not advisable to mix business lines.  You would keep your flips separate from your long term rentals.  It just increases your exposure.

Not sure how you do NOT have an insurance policy and still have a mortgage...

We've got plenty of threads, pretty much daily, about the LLC question...

Good luck.

[Paul Malandrinos]

Thank you John and David for your inputs. As I think you gathered, my unit is one in a building of several others. The lender deemed the master policy provided by the condo association to be sufficient for their purposes. My insurance policy, once established, will cover me/the LLC from the "studs in," loss of rents, etc.

[David M.]

@Paul Malandrinos yup, i just find it odd...  Of course, congrats on getting it through.

back to the llc, just as an example, just be sure to figure out which bank account you make the mortgage payments...

[Stuart Udis]

It would have made most sense to purchase the property in the LLC. I expect you will have to pay transfer taxes based on the assessed value of the condo unit in order to transfer the deed at this juncture. I am a strong proponent of owning property in LLC's as long as the member(s) understands the importance of operating business functions of the the LLC correctly.

You will be in violation of your loan if the title is transferred. I have long wondered if transferrring title to an LLC while keeping the loan in the borrower's name personally could open the door to a piercing the corporate veil situation. I have not personally researced this but suspect it will be something an plantiff's attorney may take interest in. Curious if anyone has come across this or conducted any research? Also, the lenders mortgagee clause should be added to the certificate of insurance. When they see the insurance certificate with the LLC as the deed holder won't they become aware of the transfer anyway?

I am also surprised your lender is satisfied with solely the master policy. The master policy of condominum associations will not cover the interior of your unit. For instances if there's a leak that were to occur within your unit while vacant, I do not beleive the master policy will cover this. You should have insurance in place effective the day of purchase but at this juncture as soon as possible. Tenancy and LLC transfer are not relevant or the order as you questioned.

[Chris Seveney]

@Paul Malandrinos

There are 2,334,543 posts about this on BP. You can spend a year reading them all to tell you not to do it as there is zero benefit.

[John Underwood]

@Paul Malandrinos

I would create a new clean LLC for this.

What if someone sues the LLC where a flip was owned? Better for that old LLC to not own anything.

[Crystal Smith]

Quote from @Paul Malandrinos:

I have an existing LLC that was used for a couple of fix and flips in the past. A week ago I closed on my first investment property. It's a single-family condo purchased by me the individual with conventional financing. I anticipate that it will be rented in a few weeks. I have not established an insurance policy - yet - to supplement the condo's master policy. Is there any specific value - or downside/risks - to deeding the property to the LLC? I assume that as long as the mortgage is kept current, the lender will not be an issue.

I sense that since I already have the LLC, why not move the property under the LLC's ownership...?  And if true, does it matter what order I do the following?  Establish insurance, rent, transfer to LLC, make first mortgage payment...?

The first thing you need to do is sit down with your accountant to discuss the proper entity for holding properties. I mention this because we designated the entities we used for flips as S-Corps. Our long-term holds are not however inside on an S-Corp. If the LLC you used for flips is an S-Corp have the conversation with your accountant about whether or not you should use it for long-term holds.

Since I'm a proponent of not having our names on a public record I support purchasing inside of LLC and even better inside of Land Trusts. But the cat's out of the bag for you because the public record shows you made the purchase & even if you quit deed the property to your LLC you're still not protected. If your accountant can show you a financial benefit then do the transfer. Make sure the due on sale clause does not apply if you do such a transfer.

[Paul Malandrinos]

Thanks for all the input. Lesson learned: for the next property I will validate whether the higher financing costs inside the LLC are worth the benefit, and proceed from there.