BiggerPockets

I have a rental property that I paid cash to purchase and rehab and now have tenants in the property. I want to refinance out and get a 1st mortgage on the property. I also want to put the property in the name of an LLC to protect my personal assets from any liability. Do I get the mortgage in my name personally and then form the LLC? And if I do that, by changing the ownership of the house, aren't I in default of the loan? Just trying to figure out how to do this right, any help would be greatly appreciated...

No your are not in "default of the loan"... You "may" have potentially violated the "Due on Sale" clause. But with what you are doing, I wouldn't worry though...

And, yes... In order to get the most favorable loan terms, you will need to get the loan in your name personally. After the loan funds and records, then you would deed the property to the newly formed LLC.

Also, if you want... some say you should call and send a certified letter notifying the mortgage company that you did this for "personal protection reasons"... Since the property is a rental unit.

Personally, I just do it... I am kind of the "just do it"... and if need be, "apologize" later person.

The proper way or " business way" to do it in this economic time would be as follows.

Form the LLC and obtain a loan by the LLC subject to the assets (rental property) in the LLC. The lender will look at the proforma or historical revenues & expenses of the property and provide a loan that will fall into its guidelines of LTV and the ability of the assets to cover the debt service. The lender will analyze all of this with the business operation and will not look into your personal credit side. It is of my opinion that the credit market on the personal side for real estate mortgages are much tougher to obtain and have lower %LTV, especially for non-owner occupied property than the commercial lending market. You need to speak with a banker that you have a good personal relationship with or a good financial lender that has access to commercial lenders. The mortgage market in today's business world has taken its toll on the guidelines and programs available and those guidelines and programs are changing daily.

I can give you a referral to a personal financial broker that has access to consumer and commercial creditors if you wish, just PM me.

Joe

The only assets in the LLC would be the property and some cash from operations. These are the only assets at risk if you are able to get a true commercial Non-Recourse loan without any personal guarantee and I believe that is the intent of the original poster, sheltering risk and liability of his personal assets.

If you take out the loan personally and then put it into an LLC and have some credit issues popping up while you are putting it into the LLC, then there is a possibility that the creditors can unwind that transaction and get to the real estate property's equity to cover their debt to you. In another scenario, if there is a liability occuring while the transfer is occuring, then there could be some nexus or connection made by attorneys to put your personal assets at risk. If the LLC takes out the loan in an arms length transaction, then you have more protection against the creditors and individuals involved in the liability in that situation limited to those assets in the LLC.

Having a good attorney, banker/financial advisor & CPA are excellent individuals to have in your contact list to help grow your investments and returns on investments. You will have to use each one interdependent of each other in all situations because each will have a special knowledge of a different piece of the puzzle and help put the puzzle together in the proper way. Don't put yourself out on an island.

Joe

right, sure. but having the assets held personally and getting a personal loan is giving any lender the unlimited liability against " everything" you personally own. Why do you think the banks want a persnal net worth statement? To determine if there are enough assets that you personally own to cover the loan in the event that it is not covered by the property's operation or value due from sale.

Banks get this " unlimited" collateral by requiring personal guarantees when financing operations in LLCs. That is why I mentioned true commercial lenders that provide 'Non-recourse' loans where the only satisfaction of the loan is the property itself and there is no other recourse available to the lender. You would never obtain one of those loans with a 100% financing, especially in a declining market.

I think we have hijacked this thread enough.

See ya,
Joe

I have heard that it could be possible to get a loan in the name of the LLC with a personal guarantee. I'm curious to know the opinions of the group of that scenario. (It is something I'm likely to be investigating for myself soon.)

You really need to talk to a LAWYER before you jump on the LLC or Corp bandwagon.

The BIGGEST mistake the layman makes in forming either is assuming that their assets are automatically protected. The fact is that a court can AND WILL declare your assets ripe for picking in a lawsuit if the plaintiff can prove that you manage the day to day operation of the business. The judge in the case will declare that your business is, in fact, a sole-proprietorship and make your assets available to liquidation in judgement.

The thing to protect your assets in that case isn't a LLC or Corp, but LIABILITY INSURANCE. When you purchase a policy, though, make sure it not only covers the investment directly involved, but the value of all your other assets as well.

[Edit] Forgot to add this little most commonly unknown fact about LLC's and Corps...

Think you might have to go to small claims court or municipal court to get a judgement against a tenant or file an eviction? In most states, you can't represent a LLC or Corp in any court unless you are an attorney. Expect to pay handsome fees for these simple filings in which a sole-proprietor can do himself.

You are speaking about " piercing the corporate viel" and this will happen in situations when you have a company that is clearly only a shell and not an operating entity on its own right. If you use the company as it is to be used, as a separate entity, then you will be able to protect your self from litigation and liability. You have to represent yourself as managing director of the company when you sign documents or represent yourself as the work on behalf of the company. If you comingle and otherwise mix the actions and income and money of yourself and the business, then you will have a problem. If you run the company as a business with a business checking account and pay for the expenses of the business with the business checking account and simply pay yourself distributions to your personal accounts and handle all of your personal activity separatly, then you have a very good case to be excluded from liability.

Personal case. One of my businesses was being sued and it had my business named (an LLC) and me personally on the papers, because I signed the contract for the company. During pre-trial, a motion to dismiss for me personally was granted because this was an issue of the business, which is a separate entity from me personally and I was acting as a director of the business and not acting as personal business. BTW, the business won its suit as well. I only had a sh!t load of lawyer fees, but it was cheaper than anything else.

Liability insurance. Definitely a good idea and you should have it, but it is limited to the amount of liability insurance you take out on yourself. If the amount of the award from a suit is greater than your limits, then you would personally liable for that award. Insurance is just one means to help protect your assets, not the only one and you should not use only one means to protect your assets.

Joe

True. You can achieve that by just getting a commercial loan at a bank in your personal name. It will not show up either. I have two commercial loans at big national banks in my name that are not showing up on my credit report. Good point.

Wow, thanks for all of the helpful advice, everyone. I've got a much better grasp on this, now. I've found a lender who is willing to to the mortgage in the name of the LLC, and after weighing the pros and the cons of the situation, I think that's what I'm going to try to do.
Thanks again for the help!