Converting loan from personal to LLC?

12 Replies

Hi All, I am 2 weeks away from closing on a 4 plex and need some guidance on setting it up under and LLC. So far I have used my personal information to get the loan and do all paperwork. Would it be too late to convert them to own the property under a business entity?

@Imthiaz Ahmed

You might want to talk to your lender if it's too late to put the property in the name of the LLC with you personally guaranteeing the loan. I don't think that would be a problem as I have a friend who has syndicated deals and personally signed for the loan. You will definitely want to get started on the LLC though, as it can take upwards of 2 weeks to establish one depending on the state.

I can’t imagine a traditional lender allowing you to change the holder from you to an LLC. I mean, it doesn’t hurt to ask, but it’s rare/impossible for a conventional mortgage to be in an LLC these days.

You’d have to change to a portfolio or commercial loan, which has different rates, terms, and underwriting requirements

I wouldn’t worry about it. LLCs are overrated in small-scale buy and hold real estate anyway (in my opinion)

Originally posted by @Mike McCarthy :

I can't imagine a traditional lender allowing you to change the holder from you to an LLC. I mean, it doesn't hurt to ask, but it's rare/impossible for a conventional mortgage to be in an LLC these days.

You’d have to change to a portfolio or commercial loan, which has different rates, terms, and underwriting requirements

I wouldn’t worry about it. LLCs are overrated in small-scale buy and hold real estate anyway (in my opinion)

Most conventional lenders don't care if you transfer title to LLC post close. This is what I've done with all of my rental properties where the loan was personally guaranteed by me.

The only complication is if you refinance, you have to transfer title twice (out of LLC, refinance, then transfer back). There is a ton of information on this available on the interwebs. But point is that banks are completely OK with this as this is a common practice with estate planning - moving assets into trust that is LLC. That way when you just have to change the members of the LLC and not incur any tax penalties.

Speak with your lawyer to get more details.  

@Imthiaz Ahmed are you creating a CA LLC? There is an option to file articles with the state on a rush basis but it will be expensive to do so. Is the loan with a conventional large lender? Because most of them will have due on sale clauses that if you transfer the loan it becomes due immediately, and a transfer to an LLC can trigger that. Check with the lender if they will allow you to do that and just personally guarantee the loan. If there weren't a loan involved, transferring property from an individual to an LLC is fairly easy and is something that is done somewhat regularly for estate planning. But you being so far into the process now, you will have to ask the lender.

*this post does not constitute legal advice and is not to be relied upon. Readers are advised to seek professional advice. This post does not create an attorney-client or cpa-client relationship.

@Kon Zel , I mis-spoke. I can't imagine a traditional lender allowing you to change from a personal mortgage to an LLC BEFORE CLOSING.

There are a lot of people who close the mortgage documentation as a personal loan, then afterwards transfer to an LLC. There's a 'Due on Sale' clause that could be invoked, but sounds like it rarely is. As Kon mentioned, there are a lot of posts here about this process.

@Imthiaz Ahmed there is no way to convert the loan without delaying closing. Most likely you are getting a conventional mortgage, so you will need to change financing types. Talk to your lender.

Putting the property in an LLC while holding the mortgage in your personal name does nothing to protect you. I know lots of people recommend this, but I have yet to find anyone with real world examples of how this could protect you. It just creates extra paperwork.

Your better option is to get good liability insurance and most importantly manage risk to avoid problems in the first place.

YOu can set up your LLC in any state....and this way you could find one that only takes 24 hours to set up and that doesn't cost a lot of money. Michigan is $50.00 a year. Illinois is 150.00 a year.... find the one that is the best for you taxwise too. You need to research that

Florida is maybe the best for taxes.

Originally posted by @Michele B. :

YOu can set up your LLC in any state....and this way you could find one that only takes 24 hours to set up and that doesn't cost a lot of money. Michigan is $50.00 a year. Illinois is 150.00 a year.... find the one that is the best for you taxwise too. You need to research that

Florida is maybe the best for taxes.

Don't forget the foreign entity tax return due when you set up your business entity in another state. Also get ready to pay a fee to the Secretary of State for the privilege of doing business with an out of state entity. Then registered agent fees for the state you set up in. https://www.cyberdriveillinois.com/publications/pdf_publications/c216.pdf

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