Real Estate Investor · Cary, NC · Member since 2010 · 6 posts · 0 votes
Hello everyone,
I am a new investor and am trying to set up my business entity before I dive into the game. I have talked with 2 attorneys and both have given me the opposite advice. One said to create a LLC (single-member) and the other said an LLC is not necessary when first starting out if you have good insurance with an umbrella policy.
I am still leaning towards the LLC at this point because of the asset protection it offers. My concerns about LLCs are the following:
1. If I buy a property and transfer title to the LLC and the lender finds out, will the lender call the loan? Should I even notify the lender?
2. If I want to later refinance the property, should I transfer the property back to my personal name?
3. Let's say I transfer the property to my LLC, the lender finds out and gets pissed. Will transferring it back to my name satiate him or will I get in some kind of trouble?
4. Are there any LLC-friendly lenders that will allow me to take title cleanly into the LLC?
4. Lastly, if transferring title to an LLC is so much trouble, is it truly worth it?
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
Received a reply from one of my attorney's regarding the insurance (and mortgage) issue.
First off, the more names you can place on your insurance policy, the better. So no problems there. Having your name appear along side your entity does not prove "alter ego".
Regarding the other issue, which is actually discussed in another thread (hey, why not kill two birds with one stone?), I asked about transferring a rental property into an LLC while keeping the mortgage in your own name. He advised to keep it quiet. There is no reason to inform the lender because they may exercise the "due on sale" clause. As long as the LLC is on title and the deed has been recorded as a public record, it shouldn't matter who holds the note.
He also went on to say the courts look at a wide spectrum of factors when trying to determine "alter ego". The important thing is to maintain your entity as best you can, observing as many policies, practices, and formalities as possible. He said some attorney's may try and build a huge case out of several trivial matters, but all that usually results in is a large legal bill for their client. :mrgreen:
Another law firm, Drosman & Percival, LLP (Irvine, CA) state that setting aside the corporate veil and enforcing the Alter Ego doctrine has been regarded as an "extreme remedy" by the courts and rarely used. Even my own father, who attempted to have corporate shields set aside in court while working for the State of California, said it was a very difficult thing to accomplish.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
Originally posted by Gulzar Singh:
One said to create a LLC (single-member) and the other said an LLC is not necessary when first starting out if you have good insurance with an umbrella policy.
There are many threads covering this topic. Make sure you do a thorough search so you get all the information available. That said, I would hazard to say most investors start out without an entity and set one up later in the game. For instance, I rented out my condo for over a decade before I formed my LLC.
However, I don't see any harm in starting one right away so long as the expenses aren't prohibitive (like California's $800 annual franchise fee). If you're only making about $100/month to start, your LLC will eat up all your money.
In addition to the liability protection, I like the privacy that comes with an LLC. IOW, my tenants don't know I own the property, they think some company owns it. They signed their lease with and send their rent checks to a company, not a person.
1. If I buy a property and transfer title to the LLC and the lender finds out, will the lender call the loan? Should I even notify the lender?
Can they? Possibly. Will they? Probably not. As long as you're making the payments on time, most lenders probably won't care. After all, they have enough on their plates right now. But I wouldn't go out of my way to alert them. Even if they did find out, your attorney could probably send them a letter stating you still retain 100% interest in the property, etc., etc., and that should chill them out.
2. If I want to later refinance the property, should I transfer the property back to my personal name?
That's a good question since I haven't done that yet. I believe it does need to be transferred back, especially if held in trust.
3. Let's say I transfer the property to my LLC, the lender finds out and gets pissed. Will transferring it back to my name satiate him or will I get in some kind of trouble?
Again, I haven't heard of this problem coming up except in very rare occasions and it was usually handled by an attorney's letter as stated above.
4. Are there any LLC-friendly lenders that will allow me to take title cleanly into the LLC?
Title is one thing. The lender doesn't need to be in the loop. But the note/mortgage is another thing. I doubt you'll find many lenders willing to rewrite the loan in the LLC's name, especially if it's new.
4. Lastly, if transferring title to an LLC is so much trouble, is it truly worth it?
It's not that much trouble. There's a few concerns and if those are going to keep you up at night, don't do it. But I think you'll find many investors who have done precisely this without any problems.
Real Estate Investor · Cary, NC · Member since 2010 · 6 posts · 0 votes
15y
Mitch,
Thanks for your detailed response. I appreciate that.
My only outstanding question is whether or not you have to put the title back in your personal name if you want to refinance the property. And if you do that, will you get "busted" by the lender and face objections?
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
15y
My bank manager said that it does not make any difference to him whether I did it in an LLC or in my personal name. I am not an average client so I do not know whether this is something that is generally true or was something they were willing to do for me specifically. He did not give me any reason to think that this was a special consideration, though, so I suspect it should work for others as well. In any event, you will need to check with lenders in your area because it is their policies that will determine your options.
Investor · DFW, TX · Member since 2011 · 13 posts · 3 votes
15y
I've been reading various forum articles on about a quit claim to transfer a personally held property into an LLC.
My question is this: When you do the quit claim, how do you handle the insurance on the property?
If I change the property insurance from my name to the LLC's, the insurance company is under obligation to notify the lender of the change. If I don't change the insurance and keep it in my personal name, then the insurance company could claim that the property wasn't covered.
Riverside, CA · Member since 2010 · 92 posts · 28 votes
15y
Your concerns are all very valid. If you are just starting out, you will be blown away by the answers you will get, some very contradictory. Attorneys will not always be right, keep in mind they really like LLC's. They will probably suggest one LLC per each property you own; that may be the best way to protect your assets, but is it practical?
When you are starting out, whatever you think is the correct entity structure for your business model WILL probably change as you experience the in and outs of RE Investing, so I wouldn't worry too much about that at this stage, I would put all of the emphasis in learning how to buy low. It is amazing how it will all fall into place as you dive into the game. Why not buy your first property in your name, refinance, etc. then record a grant deed into your new entity, one you have that figured out, which it could even be a land trust.
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
15y
Originally posted by Gulzar Singh:
Hello everyone,
I am a new investor and am trying to set up my business entity before I dive into the game. I have talked with 2 attorneys and both have given me the opposite advice. One said to create a LLC (single-member) and the other said an LLC is not necessary when first starting out if you have good insurance with an umbrella policy.
The best advice comes from attorneys who are active in closing real estate deals and who have a working legal history in the RE business (e.g. worked as trustee for foreclosure firms, etc.)
Originally posted by Gulzar Singh:
I am still leaning towards the LLC at this point because of the asset protection it offers. My concerns about LLCs are the following:
1. If I buy a property and transfer title to the LLC and the lender finds out, will the lender call the loan? Should I even notify the lender?
The way I suggest to do this is in my Aug. 31 post on this Bigger Pockets thread. This method provides constructive notice to the lender and makes transfer to the LLC a non-issue.
Originally posted by Gulzar Singh:
2. If I want to later refinance the property, should I transfer the property back to my personal name?
You can do this in one or more ways. If you are trying to get cheap government backed loans, then You'll need to deal with a Government Sponsored Entity (Fannie Mae, Freddie Mac, ... or FHA). Getting an GSE-backed loan in an LLC is a virtual impossibility in today's underwriting. For FNMA underwritten loans, a long time ago, I was able to do a 'deed out', sign, 'deed in' maneuver to legally get the personal guarantee and (legally, per loan documents) keep the property in the LLC. I do not know if this will work today or not. I think it will. If you are using a local lender who keeps the note in-house, they don't care who holds the property, but they will want a personal guarantee. See also my July 28 post on this other BP topic.
Originally posted by Gulzar Singh:
3. Let's say I transfer the property to my LLC, the lender finds out and gets pissed. Will transferring it back to my name satiate him or will I get in some kind of trouble?
Most likely this will not be an issue for a performing loan. If the bank does not allow your remedy (transfer back to your name), file an appeal with the N.C. Office of the Commissioner of Banks.
Originally posted by Gulzar Singh:
4. Are there any LLC-friendly lenders that will allow me to take title cleanly into the LLC?
There are many. They are the smaller local community commercial banks. Four Oaks Bank, Capital Bank, Crescent State Bank, North State Bank... all have made many loans to various LLCs this year.
Originally posted by Gulzar Singh:
4. Lastly, if transferring title to an LLC is so much trouble, is it truly worth it?
Thanks so much for your time.
-Ash
For multi-member LLCs, I don't see a viable option. For single member LLCs... I think it depends on your tolerance for risk/liability.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
Originally posted by Don K.:
... how do you handle the insurance on the property?
If I change the property insurance from my name to the LLC's, the insurance company is under obligation to notify the lender of the change. If I don't change the insurance and keep it in my personal name, then the insurance company could claim that the property wasn't covered.
Is there a way around this?
It's simple. Just have your insurance company ADD your LLC as an additional name insured, but do NOT remove yours. That's what I did with my insurer. Now, when I read the policy, it has both my name and my LLC's name listed. The cost was ZERO.
Investor · DFW, TX · Member since 2011 · 13 posts · 3 votes
15y
Hi Mitch,
Thanks for the response. I was wondering if simply adding the LLC as an other insured would be possible. Have you ever had to file claim with the LLC listed as an other insured and if so, were there any problems?
Investor · DFW, TX · Member since 2011 · 13 posts · 3 votes
15y
Hi Mitch,
Something else that comes to mind re. having the insurance for a rental still in your personal name with your LLC holding title and being listed as an other insured. I understand that keeping the rental property insurance under your own personal name with the LLC as an other insured opens up your own assets to liability exposure because now your business interest is intermixed with your personal. This creates an opportunity for an attorney to make an argument that your LLC isn't operating as a separate entity.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
Originally posted by Don K.:
Have you ever had to file claim with the LLC listed as an other insured and if so, were there any problems?
Not yet. All I can add is I was completely open and frank with my insurer and this is how they set it up. I'm been with them for 2 decades now and they've never let me down.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
Originally posted by Don K.:
... keeping the rental property insurance under your own personal name with the LLC as an other insured opens up your own assets to liability exposure because now your business interest is intermixed with your personal. This creates an opportunity for an attorney to make an argument that your LLC isn't operating as a separate entity.
Good question and another one for me to run by my attorneys (boy, are they ever going to rue the day they got me as a client). :wink:
They never cautioned me against adding my LLC to my existing insurance policy. I can respect the consideration everybody is giving towards maintaining a separation between themselves and their entity, but let's step back a second and look at just how much space can exist between the two. If you are the member and/or the manager of your LLC, is that a violation of the "alter ego" principle? Of course not. A corporation or LLC may be considered another person in the eyes of the law, but it cannot think for itself. We, personally, are intertwined in these entities, like it or not.
That being said, I don't see a problem. Can two or more people be named insured on an insurance policy? Of course. I was once on a policy with several hundred other people. Did that make us all one entity? Not in the least.
Investor · DFW, TX · Member since 2011 · 13 posts · 3 votes
15y
Understood on the different entities being on the insurance policy and the possible comingling of personal and business. There is definitely a balance that must be struck between being reckless and being overly cautious- that's where we get into opinions and preferences- land of the attorneys. I'm going to talk with my attorney about this and see what he recommends in my circumstances.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
Received a reply from one of my attorney's regarding the insurance (and mortgage) issue.
First off, the more names you can place on your insurance policy, the better. So no problems there. Having your name appear along side your entity does not prove "alter ego".
Regarding the other issue, which is actually discussed in another thread (hey, why not kill two birds with one stone?), I asked about transferring a rental property into an LLC while keeping the mortgage in your own name. He advised to keep it quiet. There is no reason to inform the lender because they may exercise the "due on sale" clause. As long as the LLC is on title and the deed has been recorded as a public record, it shouldn't matter who holds the note.
He also went on to say the courts look at a wide spectrum of factors when trying to determine "alter ego". The important thing is to maintain your entity as best you can, observing as many policies, practices, and formalities as possible. He said some attorney's may try and build a huge case out of several trivial matters, but all that usually results in is a large legal bill for their client. :mrgreen:
Another law firm, Drosman & Percival, LLP (Irvine, CA) state that setting aside the corporate veil and enforcing the Alter Ego doctrine has been regarded as an "extreme remedy" by the courts and rarely used. Even my own father, who attempted to have corporate shields set aside in court while working for the State of California, said it was a very difficult thing to accomplish.
Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
15y
I think the decision to take title has much to do with your financing decision. If you are looking for a conventional loan, then take title in your name and then move to an LLC afterward. I like the option of adding your LLC to the policy as additional insured, I never heard that one before. I'll be interested to watch this thread play out.
If you are seeking hard money for a flip, check with your hard money lender first - I require that the borrower take title in an entity due to Safe act considerations.
SFR Investor · York, PA · Member since 2011 · 11 posts · 1 vote
15y
I actually met with both my accountant and two lawyers (one specializing in real estate and the other in business). I posed the same question you asked. I do not know if it is state-specific but keep in mind, you may pay additional transfer tax if you transfer the property into or out of your name or your llc. In PA, any time a property changes hands whether an individual owns it or not, a llc owns it or not, you must pay a transfer tax. So if I chose to transfer it into my name then an llc then another llc before into someone else' name, that's four transfer taxes to pay right there.
Isn't the goal to make the most profit possible?
What I did find out was very interesting. I set up a single member LLC because after talking with both lawyers, I found out it is possible to convert from a single to regular LLC and still hold the property in the same name of the LLC. I am not changing names, just merely expanding the LLC to more than one member. And best of all, no additional transfer tax.
You have to figure out how you want to exit the property. If you die tmw, who pays for the transfer?
Just a thought based on my experience and I only started after 5 years of reading, networking, asking questions, blah blah blah and putting the pieces to the puzzle together so I could see the bigger picture (ahem, bigger pocket, maybe?).
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
Originally posted by Mark M.:
I do not know if it is state-specific but keep in mind, you may pay additional transfer tax if you transfer the property into or out of your name or your llc. In PA, any time a property changes hands whether an individual owns it or not, a llc owns it or not, you must pay a transfer tax.
Yes, it is state-specific. I've seen this brought up a few times before, and each time "Pennsylvania" was involved! :wink:
Here in California, I did NOT pay a documentary transfer tax when I moved my rentals into my LLC. Only once, when I transferred my wife's "sole and separate" property into my LLC, did we trigger a tax reassessment, which was no big deal as the transfer was made shortly after the close, so the assessed value didn't change any.
I actually met with both my accountant and two lawyers (one specializing in real estate and the other in business). I posed the same question you asked. I do not know if it is state-specific but keep in mind, you may pay additional transfer tax if you transfer the property into or out of your name or your llc. In PA, any time a property changes hands whether an individual owns it or not, a llc owns it or not, you must pay a transfer tax. So if I chose to transfer it into my name then an llc then another llc before into someone else' name, that's four transfer taxes to pay right there.
Isn't the goal to make the most profit possible?
What I did find out was very interesting. I set up a single member LLC because after talking with both lawyers, I found out it is possible to convert from a single to regular LLC and still hold the property in the same name of the LLC. I am not changing names, just merely expanding the LLC to more than one member. And best of all, no additional transfer tax.
You have to figure out how you want to exit the property. If you die tmw, who pays for the transfer?
Just a thought based on my experience and I only started after 5 years of reading, networking, asking questions, blah blah blah and putting the pieces to the puzzle together so I could see the bigger picture (ahem, bigger pocket, maybe?).
these are good responses
so how about proctetion of privacy do you hold in your own name for LLC? do you use your own address or another address
and what about insurance do you have to change the insurance when you get LLC?
I do not know if it is state-specific but keep in mind, you may pay additional transfer tax if you transfer the property into or out of your name or your llc. In PA, any time a property changes hands whether an individual owns it or not, a llc owns it or not, you must pay a transfer tax.
Yes, it is state-specific. I've seen this brought up a few times before, and each time "Pennsylvania" was involved! :wink:
Here in California, I did NOT pay a documentary transfer tax when I moved my rentals into my LLC. Only once, when I transferred my wife's "sole and separate" property into my LLC, did we trigger a tax reassessment, which was no big deal as the transfer was made shortly after the close, so the assessed value didn't change any.
Would you know or anyone know if when you transfer or QUITCLAIM to LLC in Florida whether you have to pay a transfer tax or if the property gets "reassessed" for property taxes? for transfering title from the owner tenants in common into an llc
Received a reply from one of my attorney's regarding the insurance (and mortgage) issue.
First off, the more names you can place on your insurance policy, the better. So no problems there. Having your name appear along side your entity does not prove "alter ego".
Regarding the other issue, which is actually discussed in another thread (hey, why not kill two birds with one stone?), I asked about transferring a rental property into an LLC while keeping the mortgage in your own name. He advised to keep it quiet. There is no reason to inform the lender because they may exercise the "due on sale" clause. As long as the LLC is on title and the deed has been recorded as a public record, it shouldn't matter who holds the note.
He also went on to say the courts look at a wide spectrum of factors when trying to determine "alter ego". The important thing is to maintain your entity as best you can, observing as many policies, practices, and formalities as possible. He said some attorney's may try and build a huge case out of several trivial matters, but all that usually results in is a large legal bill for their client. :mrgreen:
Another law firm, Drosman & Percival, LLP (Irvine, CA) state that setting aside the corporate veil and enforcing the Alter Ego doctrine has been regarded as an "extreme remedy" by the courts and rarely used. Even my own father, who attempted to have corporate shields set aside in court while working for the State of California, said it was a very difficult thing to accomplish.
The one thing I learned is this due on sale clause will not occur if,
phase one: you buy property title and loan in your name.
phase two: you transfer title to Single Member LLC own by you