Loan implications of putting your property in an LLC

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Loan implications of putting your property in an LLC

Justin Li
Member since 2023 · 13 posts · 1 vote

Reposting this here because I got no love in the Starting Out forum!

By way of brief introduction - my name is Justin and I'm an out-of-state real estate investor, currently focusing on single-family and small multi-family properties. Mostly long-term rentals, but I'm dabbling with STRs as well and have been fortunate to have experienced a successful first 2 months of owning my STR property. I currently own 2 properties and am closing on a 3rd. My goal is to acquire 15 doors in the next three years. Of course, I'm still just starting out my real estate portfolio and have some questions for you experts!

I've always been taught to put investment properties under an LLC for liability reasons. My plan was to have 3 to 5 properties per LLC to keep filing costs lower and bundle risk.

After talking with my lender today, I realized that moving properties to LLCs affects your ability to REFI. Apparently it's harder for banks to foreclose on LLCs, even if they're 100% owned by you, so they upgrade the risk and treat it like a business loan rather than a personal loan, which makes sense. I'm told the rates are close to 2-2.5% higher for an LLC.

This throws a wrench in my strategy which is to:

1) find and buy properties that are cash flow neutral to positive in the current "high" (relatively-speaking) interest rate environment
2) refinance when interest rates drop to increase cash-on-cash ROI to 10%+.

Curious to hear other's experiences on this. Do you hold the properties under your personal name until you REFI to a good rate, and then transfer it to the LLC? And accept the legal risk in the meantime? This also makes taking equity out harder in the future?

Best,
Justin

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  • Devin PetersonBusiness Member
    Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 667 votes
    3y

    Hi Justin,

    There are lenders out there that are strictly commercial-based banks that will lend to the business. however, 2 to 2.5% seems a bit high. Are you speaking with a direct lender or a broker? For example, I know a few private lenders who lend to LLCs, and their rates are roughly only .5-1.00% higher than conventional on average. What would that do to your numbers?

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  • Luis Alvarez
    Real Estate Consultant · Colorado Springs, CO · Member since 2014 · 86 posts · 64 votes
    3y

    @Justin Li I'm late to this one, but good on you for knowing to place an investment property out of your personal name and into a business entity.

    The following is not to be taken as specific legal, tax, or financial advice applicable to you or your set of circumstances, but simply my opinion from years of experience in estate planning and asset protection.

    I would begin with talking to the lender (you may end up refi'ing with) and explain what you are looking to set up and ask what their parameters are. Presuming you are referring to unseasoned an unseasoned LLC, the lender won't really take the LLC into account and the lending will be based on your personal financials. I would ask my lender if I can close in an LLC, but if not, when time to refi comes, I would transfer the property out of the LLC and into my personal name, then close the refi in my personal name. After the dust settles, have a Grant Deed executed to transfer ownership of the asset from your personal name to the LLC's name.

    Due on Sale Clause

    You will find many, many posts on here and in the internet in general that warn you not to do this because of the Due on Sale Clause found in mortgages which provide that a Lender can call the entire mortgage if a transfer is made out of the original borrowers' names. This is partly true, but the true intent of that language is to prevent undisclosed sales/transfers that would leave the Lender without an easy recourse in case the note is then not being paid. There are statutory exemptions for transfers that will NOT trigger the due on sale clause (E.G. death, marriage/divorce, estate planning/asset protection, and a few others). Bottom line: the purposes for which many real estate investors on BP would transfer ownership of an asset to a LLC, would likely fall under the exempted transfers, and as such, NOT trigger the Due on Sale Clause. Which makes the Due on Sale Clause (in most instances) an irrelevant issue to worry about.  Unfortunately, many folks out there, many of whom were real estate attorneys I've worked with in the past, were unaware of how the Due on Sale Clause truly works.  Feel free to chime if you'd like more clarification.

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