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LLC will own the property - what kind of mortgage do I get?

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Niall O'Malley

Real Estate Investor from Oak Lawn, Illinois

Jan 23 '08, 06:59 AM
1 vote


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...


Edited Jun 26 2010, 04:35


Richard Warren

Real Estate Investor from Las Vegas, Nevada

Jan 23 '08, 07:07 AM


See my reply to your other post.

8)


Edited Jun 26 2010, 04:35


Eric Foster

Real Estate Investor from Portland, Oregon

Jan 23 '08, 07:16 AM


Originally posted by "nialltom":
...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?

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.


Edited Jun 26 2010, 04:35


Richard Warren

Real Estate Investor from Las Vegas, Nevada

Jan 23 '08, 07:19 AM


I’ve done this with full disclosure. I had to sign an addendum and provide LLC docs. But it was no big deal.

8)


Edited Jun 26 2010, 04:35


Joe Wilson

Accountant from Newtown, Connecticut

Jan 23 '08, 07:04 PM


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


Edited Jun 26 2010, 04:35


Eric Foster

Real Estate Investor from Portland, Oregon

Jan 23 '08, 09:03 PM


Well... There are two ways to look at what you have described...

Take the loan out personally, and put it in the LLC but risk your own credit...

Or...

Take out a loan as an LLC and risk all the assets of the LLC...

Hummm... I guess it would take more info to make the best decision here... Personally, the less people in my business.... The better!


Edited Jun 26 2010, 04:35


Joe Wilson

Accountant from Newtown, Connecticut

Jan 23 '08, 09:55 PM


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


Edited Jun 26 2010, 04:35


Eric Foster

Real Estate Investor from Portland, Oregon

Jan 23 '08, 10:07 PM


I understand your points....

And yes, if this 1 property was what the LLC had as its only asset... Then I agree...

What I was simply saying is that I would not want to risk “everything” by having a bank (that had given me a loan) have my LLC and it's assets as collateral….

Good points...


Edited Jun 26 2010, 04:35


Joe Wilson

Accountant from Newtown, Connecticut

Jan 23 '08, 10:21 PM


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


Edited Jun 26 2010, 04:35


Eric Foster

Real Estate Investor from Portland, Oregon

Jan 24 '08, 01:31 AM


I agree....

All good points you have made!...

Take care!


Edited Jun 26 2010, 04:35


Matthew Mucker

Ft. Worth, Texas

Jan 31 '08, 11:40 PM


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.)


Edited Jun 26 2010, 04:38


Joe Wilson

Accountant from Newtown, Connecticut

Feb 01 '08, 12:48 AM


getting a loan in the LLC with a personal guarantee is the same as getting a loan personally. You are personally liable for the loan if the value of the property can not repay the loan upon foreclosure sale.

If you get a loan from a bank, then you will sign a guarantee. There's nothing wrong with that.

The more important reason to have your investment property in an LLC is that the LLC protects your personal assets from danger in the event an accident occurs at the property. It is also easier to gift percentages of LLC interest to children without going over the annual gift tax exclusion, but that is for estate purposes.


Edited Jun 26 2010, 04:38


Daniel Stewart

Real Estate Investor from Terrell, Texas

Feb 02 '08, 04:16 AM


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.


Edited Jun 26 2010, 04:38


Anthony Stokes

Real Estate Investor from Auburn Hills, Michigan

Feb 02 '08, 04:54 AM


Originally posted by "nialltom":
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...

I am glad that you asked this question because I am in the process of doing the exact same thing. The responses on this thread gave me all the answers and information I needed. Good job to everyone who replied.


Edited Jun 26 2010, 04:38


Joe Wilson

Accountant from Newtown, Connecticut

Feb 03 '08, 07:17 PM


Originally posted by "DStewart":
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


Edited Jun 26 2010, 04:38


Michael Shadow

Multi-family Investor from Bellefonte, Pennsylvania

Feb 04 '08, 03:31 AM


Originally posted by "RECPATAXMAN":
getting a loan in the LLC with a personal guarantee is the same as getting a loan personally. You are personally liable for the loan if the value of the property can not repay the loan upon foreclosure sale.

It's not entirely the same. When you get a loan in the LLC name it does not show up on your credit report because the loan is not in your name. It's in the entities name. Getting the loan in the name of the LLC is a good way to keep your personal credit score from dropping because of having too many mortgages.


Edited Jun 26 2010, 04:38


Joe Wilson

Accountant from Newtown, Connecticut

Feb 04 '08, 05:46 PM


Originally posted by "dafly":
Originally posted by "RECPATAXMAN":
getting a loan in the LLC with a personal guarantee is the same as getting a loan personally. You are personally liable for the loan if the value of the property can not repay the loan upon foreclosure sale.

It's not entirely the same. When you get a loan in the LLC name it does not show up on your credit report because the loan is not in your name. It's in the entities name. Getting the loan in the name of the LLC is a good way to keep your personal credit score from dropping because of having too many mortgages.

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.


Edited Jun 26 2010, 04:39


Dustin Callahan

Real Estate Investor from Anniston, AL

Feb 08 '08, 02:24 PM


What about using business credit? Wouldn't that enable you to put a commercial loan into the name of your LLC without bringing your personal credit score into the picture? I know it takes time to build business credit but it seems to make more sense in the long run.

I'm in a situation where I have two partners going in on a deal with me and we've setup an LLC (as a partnership) but can't get the loan in the name of the LLC like so many others in this thread who want a good rate without personal liability. We're actually all three co-signing on the loan in order to get the best rate possible. Our plan is to get the loan in our names now and then refinance down the road (no pre-penalty) and put it in the name of the LLC. Would it just be better to not worry about the DOS clause and quitclaim deed the property into the LLC's name without refinancing? It sounds like the odds are in our favor with banks calling loans due. Like many have said I can just transfer it back into our names if there is a problem with the lender. One person mentioned having full disclosure with his lender and presenting all docs (LLC registration etc.) and getting away with having the loan in his LLC's name.

Another concern of mine is having the loan in our names is regarding record/book keeping for taxes. If the loan is not in the name of the LLC than technically it can't be a liability of the LLC's, right? Isn't that a tax issue? Say we have a business account setup and we're paying the mortgage out of our business account in the name of our LLC for a loan that's not in the company name. Does anyone have any comments or solutions regarding that?

thank you,

Dustin C.


Edited Jun 26 2010, 04:40


Niall O'Malley

Real Estate Investor from Oak Lawn, Illinois

Feb 21 '08, 06:24 AM


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!


Edited Jun 26 2010, 04:44


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