I'm a newbie around here, and I'm honing in on my first investment property purchase. I already know that an LLC is a good way to setup a rental business as a means of insulating my personal assets from potential litigation, but I'm not really sure HOW I can go about obtaining financing through a newly formed LLC.
My personal credit is stellar, and my personal home is owned free-and-clear. I've got sufficient money in the bank for a downpayment on any of the properties I'm considering (mostly under $300K). What I don't have is an LLC with any kind of history, nor do I have the cash to buy all of the potential properties outright. I'm assuming that most banks will require me to guarantee the new loan personally, even if I form an LLC tomorrow.
I'm also concerned that if I've already found the perfect property, I might not have time to establish an LLC before making an offer. Along those same lines, I know most lenders won't allow you to transfer the title of a property into an LLC while the loan is still in existence.
So, aside from accepting bad terms on a hard money style loan, what are my options here?
1) Do I put a place under contract, then quickly form an LLC, and then buy in the name of the LLC backed by my own signature? In that instance I imagine I'd need to carry a significant amount of liability insurance to protect my existing assets.
2) Do I buy in my own name, carry a significant amount of liability insurance, and later change ownership to an LLC once the place is paid off?
3) Am I missing some other obvious options here?
Any assistance would be greatly appreciated! I'm excited to get into this business, but I sure don't want to put myself in a bad spot given the litigious nature of today's society… it only takes that one tenant to make your life a living nightmare, and risking everything I already have is not part of my business model!
#1. You dont need an LLC to start out with. Make sure you have an umbrella insurance policy in addition to the normal insurance you will have on the home. LLC's are not 100% effective should you get sued.
#2. You can purchase under your name and then about 60-90days after being the owner you can quit claim the homes to your LLC. You will still be the owner but they will be in your LLC.
Umbrella insurance will serve you better then an LLC. LLC's are nice to have though no one really knows why exactly you need one. Its just another entity you pay taxes and yearly renewal fees on.
Thanks for the reply, Curt. If I quit-claimed the property to my LLC wouldn't I find myself in a situation where my mortgage holder could call the note due? That's always been my understanding of the problem with trying to give ownership of the property to an LLC, at least when it's mortgaged.
Obviously this isn't something I'm very familiar with, hence the question.
Curt, I'm in a very similar situation except I have an LLC formed and own 2 rental properties in my personal name. I have paid for a consultation with a good real estate attorney tomorrow afternoon and will pass along anything meaningful I learn there. I would suggest you do the same, of course, since the laws in your home state are likely different.
I respectfully disagree with Curt on an LLC's purpose, which is clear, and tax libility. Our LLC was formed as a "disregarded entity" in the eyes of the IRS, with all income passing through to my wife and myself on our personal tax returns. You have several options when applying for an EIN which will determine the tax structure of the LLC. The purpose of the LLC is to segregate assets with potential liability from your personal name. That requires deliberate work and record keeping and likely help from professionals (CPA, attorneys, bankers, insurance agents), but is not impossible. I'm working on it now myself, but I'm far from done.
One of my clients once said the following about LLCs: "you can form endless new LLCs but you can't easily change your name". The likely best course of action is to take an "all of the above approach" if possible, including holding properties in individual LLCs when possible, purchasing personal umbrella and liability insurance for the LLCs. How to get the LLC protection without violating any terms of a mortgage in your personal name? That's what I'm paying the attorney to tell me, if it is even possible.
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