Sell to partner then transfer to LLC?

Question

Hello everyone! I had this idea a while ago but I'm wondering if it would be plausible. If I purchased a home that needed renovating and did the BRRR strategy, would I be able to sell that to my business partner or vice versa then transfer it into an LLC? If possible this could allow us to rapidly increase our portfolio when we are ready to invest. I'm not sure if there would be any legal implications for doing so and I assume capital gains taxes would apply unless we do a 1031 exchange. I appreciate any feedback I can get on this! I am currently in Springfield, Illinois but I plan to invest in the Nashville area.

Ben Thomas · Answer

Account Closed Thank you for the feedback. I am aware of the due on sale clause and I've been told that some smaller banks will work with you and overlook that once you create a good relationship with them. It seems that purchasing the properties throught the LLC after we reach the mortgage limit will be the best route to go.

Ben Thomas · Answer

@Mark Gallagher I may not have clarified my idea but it was to actually sell the property to him in order to avoid the waiting period to refinance. That way we could pull our equity out immediately after we are done with the renovation and apply it to our next investment. I am aware of the due on sale clause when transferring to an LLC.

Dave Foster · Answer

@Ben Thomas Depending on the nature of your business relationship and the structure of the proposed LLC you may have some related party issues to be aware of with a potential 1031. But they don't have to quash the deal.

Mark Gallagher · Answer

@Ben Thomas

Unfortunately that's too easy. You would still have a mortgage in your name, due on sale clause aside. So even if you deeded 123 Main to your partner, you would still be the mortgagor of 123 Main and would never get past Fannie/Freddie limits of 4 mortgages.

Mark Douglas · Answer

@Ben Thomas   If you purchase it all cash, or through the LLC upfront (with a 20-25% commercial loan, through a portfolio lender) you should be ok.  If it's a residential loan, the due on sale clause is something to watch out for, as John Anderson mentioned.  I would consult with the lender you plan on working with beforehand, just to be on the safe side.