Doing business under an LLC
I was speaking to a friend who owns a few single family rentals. He has an LLC for his business but he stated that he does not have his properties in the LLC, he financed them and holds them in his name. I hear all about the LLC issue, due on sale clause etc. Can someone shed some light on this for me? I have read about this issue and used the search function but I am still confused. I get that moving your properties to an LLC can potentially violate the due on sale clause. What about holding your properties in your personal name and doing business through an LLC?
Most lenders have a due on sale clause if you try to deed single family homes in an LLC. I have heard of investors who set up Property Management companies under an LLC and manage their properties that way.
Moving the property into an LLC will violate the due on sale clause if your mortgage had one, which all newer loans will. The clause is rarely enforced, but it does happen so you need to be prepared to resolve it if the lender chooses to exercise their right to accelerate the loan.
Simply put, whom ever holds the beneficial interest in the property, typically the owner, has the liability. If the properties are in your name, you are liable.
I just reread the second part of your question and I'm not sure I understand what you are asking. If you are asking if keeping the properties in your name but doing business in the LLC violates the due on sale, then no it doesn't. The clause is triggered when you transfer the beneficial interest in the property out of your name. Usually by deed but they are other ways. However, not putting the properties into the LLC defeats the main purpose most people use them, which is for asset protection.
Thanks @Edward B. you answered my question, sorry if it wasn't clear. What I was wondering was why or how someone would have an LLC to manage their rentals if the rentals were not held by the LLC. So some people do manage their rentals under an LLC and they do not transfer the ownership of the properties.
@Edward B.undefined
You are getting out of my area here a little bit. I use LLCs primarily for the asset protection. There are certainly benefits to using an entity from a tax and professional stand point if you are doing enough business and generating enough earned income from those activities. I'm not sure it would be worth it to just manage a few of your own properties. It could provide some anonymity I suppose but there are probably easier less expensive ways to accomplish that.
** Not giving legal advice **
Holding any asset and especially real estate in your personal name puts a big fat bullseye on your back. NEVER would I EVER own ANYTHING in my personal name.
Having a separate LLC for a management co. may help if you have liability in your duties as manager but the main liability is asset ownership. Either transfer to an LLC or even better to a trust with LLC as beneficiary and don't worry about due on sale clause bc it will never happen.
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What you need is adequate insurance coverage to protect your properties in your name. Even a LLC can have situations where suites can hold liable the principals of the LLC. For full protection the only answer is insurance.
There are also other issues with a LLC, higher taxes implications, requirement of corporate mortgages etc.
A Structure where you own the property own name and also own a management company which is an LLC does virtually nothing for you. You are personally liable as the owner of the property AND the property management company is liable.
If you won the property in your own name and hire a totally unrelated management company the same situation exists. You are personally liable because you hired the management company and the management company is liable for their own mistakes.
If you own the property in an LLC, you could still be personally liable if it was your action or decision that led to the situation cussing the liability.
I am not an attorney and the above is not intended as legal advice for your specific situation. The devil is in the details and there are a LOT of details in these situations.
I would think that most lenders will consider a request for transferring title to an LLC if you agree to provide them with a personal guarantee for the mortgage. The reason conventional lenders don't want title transferred to an entity is because there is no (individual person) 'on the hook' for the loan. However, many lenders allow entity vesting. Check to see if your lender does, and if you provide them with a way to have recourse for the loan through a personal guarantee, then it may fit their lending guidelines. Discuss it with them before taking action that could be counterproductive.
Thank you everyone for the replies. @Brent Myotte I did not know that, very valuable information that I will look into.
Entity investing is a portfolio loan from the bank/credit union. It does exist but I personally have never had any luck finding that unicorn. And if you do the rates and terms will not be nearly as favorable. There are a lot of private lenders catering to investors. Better terms than commercial loans but higher rates.
Insurance does not replace using an entity for asset protection. Neither is perfect and nothing is bullet proof, but they accomplish different things. One separates and shields your assets and the other pays if you get sued. The best way I've heard the difference described is that you wouldn't remove your bumper, windshield, and seat belts just because you have auto insurance.
Finally, you signed the promissory note and are liable for the balance even if you transfer the property. The issue the lender has is that you no longer own the asset that secures his money. Even if you fully own the entity, you can now transfer the interest without the lender knowing. They don't like that and justifiably so. You can transfer a property into a trust without triggering the due on sale clause if done correctly. I am pretty sure that is protected by federal law. The problem is you have to be the beneficiary of the trust and thus are still liable. If you transfer the beneficial interest then you trigger the clause. At least in my opinion.
For those who have been around long enough, this is reminiscent of World Savings, a true portolio home loan bank that operated in the Southwest. If you are willing to refinance, you can try BofI bank wholesale (through a mortgage broker) for entity vesting at rates that rival conventional lenders underwriting for sale in secondary markets. Side note, BofI has a competitive pricing matrix, so although they're a portfolio lender they have the technology platform to deliver low rates and flexible loan terms. However, as with any lender that allows you to hold title in the name of an entity, you will be required to sign a personal guarantee for the loan.