Hello all... I'm a bit confused on how best to
My wife and I own two LLCs now taxed as S-Corps. So, I understand the purpose.
However, I'm confused how when, and how, to put/transfer a title to property into the LLC.
I'm in Washington state.
If I buy a property at a foreclosure auction, and use a combination of my money and hard money, I've been told by my real estate broker to:
- 1. If flipping, do nothing.
- 2. If buy-and-hold, immediately refinance, then transfer title to LLC.
This seems to go against my basic understanding of an LLC. It seems the LLC needs to make the purchase.
- Also, if conventional lenders will make loans on up to four properties, and the mortgages are in my name, how do these transfer to an LLC?
- Doesn't transferring title trigger a 'due on sale' clause in most mortgages?
Anyway... I'm preparing to bid on several properties very soon, but am concerned I'm going to do so in the wrong entity.
I've ordered @Mark Ferguson "Real Estate Blueprint". It's FANTASTIC. Yet, I'm not clear on the entity form on a per transaction basic. And I've ordered @J Scott's flip and repair books, but haven't received yet.
THANK YOU VERY MUCH in advance for reading this... and replying if you can help. I really do appreciate it.
Have a great week!
Tommy, Seattle, WA
@Thomas Coburn When I buy houses, I purchase them with my LLC right away therefore no need to make any transfer. Using hard money is not a problem as they simply place a lien on the title and only remove it when you pay them back. I am currently do not buy-and-hold any of the properties and do not refinance them with conventional loans, so I cannot advise on that.
Unfortunately, you can't transfer title to LLC if these properties has financing under your personal name.
Why do you want these properties under LLC?
@Thomas Coburn I read the flip book by J Scott. Great book to get a lot of info.
First, thank you.
If you are using conventional financing there most likely is a due on sale clause if you buy in your name and them transfer to an LLC. Many investors still do this hoping the bank never finds out, but it is risky. Most conventional banks will not lend to an LLC at all, but many portfolio lenders will. My portfolio lender lets me buy in my personal name and then transfer to an LLC.I can buy or refinance in an LLCs name as well.
@Thomas Coburn I would suggest you find a good CPA familiar with real estate as well as a good entity attorney. In virtually any situation for a US citizen you do NOT want to hold real estate in a corp such as the S Corps you have in place. Rather they would suggest pass through entities. They would also suggest a separate entity for a fix & flip business. All the reasons are a bit too lengthy for a post but please get a CPA on board.
Nice to meet another local Seattle investor. Good luck!
The advantage to the LLC taxed as an S corp, is to avoid the self employment tax that would be due from fix and flip profits. Not sure if I read your post wrong, but I'd certainly be using the LLC when buying the fix and flip properties. I'm one of those that thinks the LLC for buy and hold is a bit over rated.
I am in Washington state and agree with Sean. A good CPA and corporate attorney working together on your behalf can assist you with establishing and organizing your investment in a way that protects your personal assets and gives you flexibility as your investment portfolio matures.
Hi everyone! THANKS A LOT for all of your replies! I REALLY appreciate the help. We were 'unplugged' for a long-weekend, so I'm replying now.
Also, I don't know the appropriate blog etiquette on replying... so I'm going to list everyone in one reply so people don't get pinged a bunch of times if they're following this thread!
Vlad, thank you for the explanation. This is exactly what the real estate agent/broker and hard money lender told me regarding flips. Thanks for confirming.
Hi Dominic, thank you for verifying this. THIS is what I thought, and what I learned @Mark Ferguson was talking about in his Blueprint course. That, conventional lenders will only lend on up to 4 properties, and it's in your personal name. Makes sense as you're using your credit, along with down payment equity, as the backing. In my situation, this pretty much eliminates traditional lenders as my wife and I W-2 very low incomes.
Why I wanted these properties under an LLC? Primarily for legal/asset protection. Keep the investment stuff in the 'business' bucket, like we have for our current businesses. While we have a personal umbrella policy and the maximum limits on the rental property insurance, I was hoping to create more of a buffer, if that makes sense. Plus, I believed there to be tax advantages as well. Thanks again.
@Cole Walker - Thanks for the endorsement on the book. I'm looking forward to getting into it!
@Mark Ferguson - thanks for explaining, which you did in your Blueprint as well. I'm now looking for a portfolio lender. I've found a few 'non-conventional' mortgage lenders who don't have 'seasoning requirements' on converting hard money loans into mortgages. But I need to see if these loans are still backed by personal assets/guarantee, or by the equity in the property.
@Sean Leone - Sean, thanks a lot for explaining. Yes, we had a business attorney setup our current corporation forms, retirements plans, etc several years ago. He then referred us to our CPA, who also has real estate holdings. However, I've learned quickly, through helpful info like yours, that our current corporate forms aren't the best for holding real estate. (The primary is actually a PLLC taxed as an S-Corp).
So, it sounds like I need two companies:
1. One for the buy-and-holds that are being personally financed/guaranteed through conventional financing.
2. One for the fix-and-flip business.
I've also had several people explain "Land Trusts" to me. Again, I get the concept. But it seems, especially for personally held property, that it might trigger a flag with the lender on the property. All that written, I'm GOING TO TAKE YOUR ADVICE AND ACT ON IT! Have a call scheduled with my accountant for Thursday!
And thanks for the welcome! Looking forward to getting rolling. I look forward to about your successes... and learning from them!!!
@Wayne Brooks - Hi Wayne... thanks for the info. Yes, you have it correct. Our current companies are a PLLC (wife is a medical professional) and an LLC, both taxed as S-Corps.
Question: In your opinion, for buy-and-holds, do you hold personally or in a different entity than an LLC? If personally held, I'm very interested in your thoughts and experiences about potential of increased personal liability. Thanks a lot!
@Kathleen Wilcox - Hi again, Kathleen! Thanks for replying! I'm acting on yours and Sean's advice above... talking with the accountant this week! Have a great week... and enjoy all the sun we're getting here!!!
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