Changing ownership from self to LLC

29 Replies

I'm wondering if the group can point me in the right direction. I recently purchased my first rental with a traditional loan in my name. I recently got it rented and wanted to put it in the name of my LLC, so I filed and submitted a quit claim deed, and was wondering what else is needed to have it under the LLC? Thanks in advance for any pointers.

Why are you putting it into an LLC? Id say leave it in your name. Get a $1M liability policy. Save yourself some money.

I started a company where I'm buying houses and renting them. I already have the LLC and want to build tangible assets under the LLC for future loans/lines of credit/etc.

The llc doesn't show in your debt to income ratio, Great move. I just got our of a litigation. LLC protected the assets. I now am starting another to do the leasing. I haven't changed one over though. I just started buying under LLC after the first mistake.

Congrats on your purchase.  And good luck with your growth plans.

Even if you want for this to be your company, I'd shy away from LLC's for three reasons:

1- Cost

2- I have heard of several cases in the last few months where banks are calling loans due when a deed was moved from the owner to their LLC (due on sale clause).

3- A lot of LLCs are not set up correctly to protect their owner. This may require such things like bylaws, annual meetings/minutes, separate financials, etc. It is quite common for the LLC veal to be pierced by either internal or external lawsuits.

I personally prefer offensively high liability coverage, and I sleep just fine at nights.

Happy hunting.

@Rod F.

I've never talked with someone who had the LLC protect them. That's actually pretty cool. Without getting into specifics, can I ask some questions?

I'm assuming the litigation was from a tenant (or someone else who was harmed at/by the property) and that the plaintiff was awarded a settlement by a court. I'm also assuming that the court awarded damaged that exceeded the value of the property and that the property was awarded to the tenant, along with debt to the LLC which is unlikely to be collected. If so:

1- Would liability insurance have covered you here (either on the property or in an umbrella plan)?

2- Beyond filing the LLC papers and paying the fees, what have you done to keep the LLC solvent?

3- I don't need specifics, but was the award significantly higher than the value of the house?

I don't mean to pry - I'm just very interested. 

a lot of people have a lot of confidence in an offensively high umbrella policy they have never actual utilized or know anybody that has employed successfully. We all know how great insurance is on playing claims especially when they exceed a million dollars

Thank you all for the feedback. I have been burned in the past by insurance companies (as Steve B eludes to) and the LLC upfront costs were minimal going through LegalZoom and then having my attorney review the paperwork to make sure it was good to go.

@Jeremiah B. are you really telling someone not to file a LLC because most don't file them correctly? Seems to me, the advice should be "Yes this a business and should be treated as such. With that being said, this means you must TREAT it as such. File the paperwork correctly, do not co-mingle funds, keep the paperwork for meetings, minutes, annual filings, etc up to date. Get the proper EIN for the entity, etc.

To say an insurance policy will protect you is absurd. @Steve B.  nails it . do you believe that an insurance company will actually not find a loop hole to leave you high and dry? They aren't in the business of paying claims, but charging premiums!

But yes, sure you can get insurance and it might pay out on small claims. With that said, real estate investors that rely solely on insurance as a means of protection from personal liability take a significant risk. Liability policies typically have limits, exceptions and carve-outs. While the chance of a loss that exceeds policy limits may be remote, if it happens, the consequences can be devastating.

@Eric Schneider  as you stated, this is a business. Get a proper attorney's advice to protect yourself correctly! If the attorney believes you shoudl keep it in your own name and use an insurance policy, I would be shocked, but they are the ones that know the laws.

@Dale Stevens it gets worse than that. We have one very regular senior poster who has worked in government his whole life, and is so in love with big stateism he posted on one of these ubiquitous "LLC vs. Umbrella policy" threads that you shouldn't ever create an LLC for liability protection as they are inappropriate for that use and we should let the state be the moral and fiscal avatar of our culpability.

Let me say again, the Umbrella vs. LLC isn't a mutually exclusive choice. Umbrellas are so cheap that you should use one of those as a minimum, just don't get your hopes up that it is going to actually work as intended.

Lastly since this exact same topic keeps coming up every week it may be best to search for the most experienced and intelligent poster ive ever read on this exact subject. If you can find the older posts by @Jonathan Twombly related to LLC's and Umbrella policy's you will find a goldmine of erudite, concise, and abstruse knowledge he shares related to his experience. He is the only person I know on these forums who has actually litigated these cases as a Harvard trained lawyer for both umbrellas and LLC's.

@Steve B.

 I will have to do a search on that. Yes. Most on here are investors and haven't had the wonderful experience of having litigation. I have. I have witnessed in others (when I was in court for mine). 

LLC protection is important (when handled correctly). Just like we don't think about car insurance until we need it. THen we have to battle over what is covered, etc. Just ask anyone that has put in a claim of any type on insurance. You want to be sure your personal home as well as many other properties are protected. I have several LLCs. I keep them all separated, file the paperwork, keep minutes. keep the finances separate, etc.

I am not an attorney, but have experienced the need for entity protection personally.

Yes you need insurance, in the name of the entity that owns the property. Maybe name yourself (manager) as additional insured. We live in a world where people want something for nothing. They would rather sue, than take responsibility for being stupid themselves. So protect yourself. 

Hey everyone, I was just about to post on this subject and then I saw that this forum had already been created. I just purchased three rental properties and financed them in my personal name. My plan was to use a quit claim or capital contribution to transfer the title into my LLC. However, one of the title companies just sent me this message.

"I was going to tell you that since the loan is in your personal name, the property needs to remain in your personal name as well. Otherwise, you have an outstanding debt with your lender under your individual name but would not actually own the property individually. For legal purpose, title and mortgage needs to remain in the same name.

So, unless you are going to pay off that mortgage with your lender, title needs to remain the same.

I would not advise it….as by doing this, you are mixing personal and business owned property/assets. Your business would own this property, but you would be individually/personally be responsible for the debt. Also, during foreclosure or bankruptcy,  both sides could become liable."

Now I'm not sure if transferring the title into my LLC is such a good idea. The loan officer said he has no problem with it, but the bank he represents is going to sell my loan to Wells Fargo, so they may have an issue with it. Any advice would be appreciated.

I'm also wondering if this would effect my ability to refinance the rental property down the road if the title is in my LLC's name, but the loan is in my name? Thanks

Originally posted by @Steve B. :

@Dale Stevens it gets worse than that. We have one very regular senior poster who has worked in government his whole life, and is so in love with big stateism he posted on one of these ubiquitous "LLC vs. Umbrella policy" threads that you shouldn't ever create an LLC for liability protection as they are inappropriate for that use and we should let the state be the moral and fiscal avatar of our culpability.

Let me say again, the Umbrella vs. LLC isn't a mutually exclusive choice. Umbrellas are so cheap that you should use one of those as a minimum, just don't get your hopes up that it is going to actually work as intended.

Lastly since this exact same topic keeps coming up every week it may be best to search for the most experienced and intelligent poster ive ever read on this exact subject. If you can find the older posts by @Jonathan Twombly related to LLC's and Umbrella policy's you will find a goldmine of erudite, concise, and abstruse knowledge he shares related to his experience. He is the only person I know on these forums who has actually litigated these cases as a Harvard trained lawyer for both umbrellas and LLC's.

The problem is everyone either focuses on whether or not an LLC provides better protection that insurance, OR how difficult it is to do everything via an LLC, but it's rare that there is a discussion on here with addresses BOTH issues.

There have been numerous cases recently, where investors have received a due on sale notification from their mortgage bank as a result of quit-claiming the deed from their name to an LLC. So be aware, that can happen.

I found that while creating an LLC isn't that complicated, getting financing through one IS VERY COMPLICATED. I talked to about a dozen banks and they all refuse to allow this unless you do a commercial loan. That means crappy interest rate, shorter terms, shorter amortization, higher closing costs, etc... you will eat a large portion out of your profit by these factors alone. And, you will be 100% vulnerable to the mercy of the prime rate, since commercial loans typically have to be re-written or refinanced EVERY 5 YEARS.

Insuring the property when it is in an LLC gets trickier and more expensive as well.

I think the bigger issue about LLCs, is not whether or not they provide additional protection - it's whether or not they are even practical to use for real estate investment.

If you're going to buy everything with cash then a lot of the complications go away (insurance is still expensive though.) However, remember that if you don't use the extra leverage of a mortgage, your actual profit/return on your investments will be dramatically lower...

Once you have an established relationship with a lender, it is quite easy to get financing for the LLC and the rates for insurance are NOT that much more expensive. But you know what is incredibly expensive?

LOSING EVERYTHING YOU HAVE because you didn't treat this as a business. Sort of like renting a commercial kitchen for a catering business. It is more expensive, but it is a BUSINESS, you can't cook out of your own kitchen for obvious reasons, let alone it isn't zoned for a business, etc.

You can get away with it for a while, but it will eventually catch up with you. I get slightly higher rates, yes. But it is WORTH IT, because I am a business person not a rookie/amateur that is rolling the dice. Further, Fannie/Freddie will only back 10 loans in your name if your Debt to income allows it. 

Dale, I have heard several people say that lenders will allow you to buy property in an LLC once you have "a relationship" with the lender. However, every lender I have asked about this has stalwartly denied it.

Are you talking about commercial loans, or residential loans?

@Rod F.

could you share some specifics about how the LLC protected your assets? Inquiring minds want to know.

A few thoughts about LLCs...

LLC debt doesn't show on your debt to income ratio @Rod F. ? It won't if you don't include it. Do you know what is illegal? Not including it...

LLCs and asset protection...

How many properties do you own? Let's say 10 properties valued at $100K each. $1M in real estate assets! You're rich! Now deduct your mortgages at 60% to be conservative. You have $400K in equity over 10 properties. That is your exposure in the event of a lawsuit. Add a $1M liability policy. You're covered. Say 10 properties at $300K each = $3M in assets less 60% in mortgages = $1.2M in equity is your exposure. Get a $1.5M liability policy policy. 

Do you have a business partner? Set up an LLC.

Are there rare circumstances that warrant an LLC? Sure...set it up.

90+% of people here on BP...don't need an LLC. They set one up because somebody said it was necessary and without one you aren't a real business.

Anyone have any thoughts on my two posts?

@Fred Stevenson generally speaking it doesnt matter if your property is in your name personally or an LLC. If its financed to you personally you and you deed it to the LLC the bank can call the mortgage. You should read your mortgage for a due on sale clause. Nearly all mortgages have that clause but it is rarely enforced as long as you stay current. If you hold real estate in an LLC you will have to use a commercial lender. They wont care who has the mortgage and who holds title since you and your LLC are essentially one in the same. By going the LLC route you no longer qualify for standard loan programs. Rates may be higher but only a point or so if at all. Rates are so low these days it wont make much of a difference. For tax purposes it doesn't matter as the IRS doesn't recognize a SMLLC as a business entity. All income and expenses of the LLC flow through to your personal return anyways.

@Rob Beland Thanks so much for the information.  I really appreciate it. 

Originally posted by @Rob Beland :

@Rod Fisher

could you share some specifics about how the LLC protected your assets? Inquiring minds want to know.

 Rob I have been on both sides of the legal system.  

1st worked for contractor, he didnt pay us. we sued his llc and him personally.  judge threw out personal suit. Only allowed the llc suit. Got judgement on llc. it owned nothing but a couple of old trucks. I was out 20k. He walked away personally and started a new llc and is back to working again. LLc protected his personal assets. by the way I was our 5K on lawyers to get nothing.

2nd. I was sued personally . propertys are in partnership llc. Protected my interest in property's.  Properties weren't even a consideration in suit. Partnership llc.  This one cost me abut 25K in legals. Sorry I can't go into it  further info but there is a gag order.

It's like they say on here. it's not if your sued. it's when. The more you accumulate the bigger target you are. 

My attorney told me to do nothing unless I was in a llc to protect my personal assets. I have an expensive education in learning that one.  

Before you give legal advise you should check with your attorneys. I am NOT a attorney.

and I Don't claim to be one. But I sure have paid them a lot of money to build the asset protection's I have in place now. 

trust, multiple llcs. all different areas that have to be pierced to get to me.

       

Originally posted by @Rob Beland :

A few thoughts about LLCs...

LLC debt doesn't show on your debt to income ratio @Rod Fisher? It won't if you don't include it. Do you know what is illegal? Not including it...

LLCs and asset protection...

How many properties do you own? Let's say 10 properties valued at $100K each. $1M in real estate assets! You're rich! Now deduct your mortgages at 60% to be conservative. You have $400K in equity over 10 properties. That is your exposure in the event of a lawsuit. Add a $1M liability policy. You're covered. Say 10 properties at $300K each = $3M in assets less 60% in mortgages = $1.2M in equity is your exposure. Get a $1.5M liability policy policy. 

Do you have a business partner? Set up an LLC.

Are there rare circumstances that warrant an LLC? Sure...set it up.

90+% of people here on BP...don't need an LLC. They set one up because somebody said it was necessary and without one you aren't a real business.

Rob everything is transparent. LLc files taxes, LLc income and losses are included personal taxes. We have a CPA that owns apartment complexes.  When your a partner in a llc . the debt is not yours it's the business's.  Llc's are businesses, they have their own identity.  Nothing going on illegal here.  You need to talk to an attorney and CPA you might find your really exposed personally.   

To answer your question.  44 properties now, after this week. 1 trust and 3 llc's .  

You go ahead and keep on trying to buy under your name, you can get up to 10 loans. your exposed to litigation to save $50 bucks in my state. the cost of forming an LLC. and a $150 franchise tax annually.

Originally posted by @Rod F. :

To answer your question.  44 properties now, after this week. 1 trust and 3 llc's .  

You go ahead and keep on trying to buy under your name, you can get up to 10 loans. your exposed to litigation to save $50 bucks in my state. the cost of forming an LLC. and a $150 franchise tax annually.

Rod, my question is not about the fee to set up and maintain an LLC (or multiple LLCs,) but rather the cost and feasibility of acquiring properties in one. Do you use commercial financing for all of your properties? Did you start out that way? In my experience, commercial loans castrate a lot of deals. I also don't love the idea of being completely vulnerable to rising interest rates (most if not all commercial loans seem to reset every 5 years.)

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