Asset protection and difficulty in loan acquisition

5 Replies

Hey BP, I have been constantly scouring the podcasts taking notes and educating myself as much as possible. One of the podcasts with Scott Smith #109 he recommends having your properties in an LLC or a trust for anonymity and asset protection. In another podcast Brandon had mentioned that banks tend to be a bit more fussy when looking to lend to a property in an LLC versus a property in the owner's name.

I am wondering why this is the case and what can you do proactively to ensure that this will not be an issue when trying to acquire funding? 

Thank you in advance!!

Buy a property (get a mortgage) under your name, and then, if needed, transfer the property to LLC.

LLC's are great for asset protection when flipping, and/or when you own a property free and clear.

However, if you want to take advantage of traditional residential mortgage financing (and the great rates, low closing costs, and 15 to 30 year fixed terms that come with them), then the financed properties generally need to be in your own name. 

Residential mortgage products are for individuals, not LLCs and corporations, and commercial loan products (which are intended for LLCs and corporations), and not all that attractive compared to residential. 

Those who would suggest nonchalantly that you can just transfer the property to your LLC after closing are not giving you the entire picture. Residential mortgages also generally come with a "due on sale" clause - meaning if you transfer title to the property, the lender can (and in many cases, will) call the entire loan balance due imediately.

This is a constant source of debate here on BP - with many people indicating they get away with it for years and lenders don't care as long as you make your payments...but do a quick search on here for "due on sale clause called by bank" and you'll see it's not all that unusual for the banks to call your bluff. 

One common way the bank finds out is via your insurance company, if you transfer ownership of your property to an LLC, you need to update your insurance (otherwise you leave the property uninsured if you no longer have an insurable interest in it). Your mortgage company is a named insured on the policy, so your insurance carrier/agent is supposed to notify them of any changes or cancellations.

If you look at it from the lender's perspective, you'll see why this matters so much to them: They loaned you a large sum of money, and you pledged your property as collateral for the loan. Then you sold the collateral! That's an obvious problem.  

From a legal perspective, it doesn't matter if you transferred it to your LLC, or sold it outright to a stranger...your LLC is not you, and is not legally responsible for your debts or tied to your personal finances (that's actually the very reason you wanted to use it for asset protection, remember? You can't have it both ways.).

So...in order to take advantage of residential fixed rate financing, you generally have to hold title in your own name, and use insurance coverage (rather than an LLC or corporation) for asset protection. Note that in this scenarios, your insurance carrier doesn't just pay out claims up to your coverage limits...it also has a "duty to defend" and will fight to minimize and settle any claims at the lowest amount possible to protect your (and their) financial interests.

Jeff Copeland, Broker in FL (#BK3326487)
727-235-7988

@Jeff Copeland thank you for your response!

The due on sale clause is something that I have come across in many of the podcasts and I can definitely see where the grand debate derives from. Very difficult to distinguish between when a bank will exercise the due on sale when looking state to state let alone distinguish between the US and Canada. I think it is better that I go one route or the other especially in Canada as we have a very tight system in my opinion, which has its benefits and its downfalls. I just want to protect myself the best I can. 

So if I were to say jump to a 5-plex or more right away that would resolve my concerns and issues with funding acquisition because I would then be in the commercial realm of lending and does that mean an LLC would be the route to take?

Originally posted by @Graeme Ford :

@Jeff Copeland thank you for your response!

The due on sale clause is something that I have come across in many of the podcasts and I can definitely see where the grand debate derives from. Very difficult to distinguish between when a bank will exercise the due on sale when looking state to state let alone distinguish between the US and Canada. I think it is better that I go one route or the other especially in Canada as we have a very tight system in my opinion, which has its benefits and its downfalls. I just want to protect myself the best I can. 

So if I were to say jump to a 5-plex or more right away that would resolve my concerns and issues with funding acquisition because I would then be in the commercial realm of lending and does that mean an LLC would be the route to take?

Graeme:

If you planning to acquire property in Canada, an LLC is not an option - we don't have them here. You have a choice between holding property in your personal name or within a corporation - there are pros and cons to both. Depending upon your personal situation (other assets, personal income tax bracket, partners, etc), a corporation (along with its extra overhead) may make sense, but holding in your own name is often simpler. I would suggest you sketch out your (near, mid, long-term) plans for real estate and sit down with an accountant to figure out what ownership structure best fits.

When it comes to financing, things are a littler different here than in the U.S.A.  First, qualification for residential mortgages is a little more rigorous, but in many ways its still easier to place residential mortgage than a commercial one (with the possible exception of credit unions which frequently treat all rental property as commercial).

Each lender has their own in-house guidelines about whether, and under what conditions, they will lend (residentially) to a corporation and such loans will require a personal guarantee (frequently all shareowners and/or officers of the corporation will need to provide personal guarantees). 

if you are looking at 5-6 unit (residential apartment) properties, keep in mind that though these are technically commercial properties, a couple of the Big-5 will underwrite 5-unit (CIBC, RBC) or 6-unit (RBC) under their residential lending practice - for you this would mean better interest rates and no originating/administrative fees.

1(506) 471-4126

@Roy N. thank you for clarifying for me. 

I know there are many differences between the US and Canada when it comes to real estate. The problem is I don't know what I don't know so I truly appreciate your guidance. I would have had all these questions lined up for my prospective lawyers and CPAs and they probably would have looked at me like I have nine heads haha. Great insight as well to distinguish considerations between residential and commercial properties by the Big-5 beyond the "standard" cut off of 1-4 units and 5+. 

Are there any other notable differences that you think I should be aware between investing in Canada and the US? 

Thank you in advance!

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