Should I get an LLC for my first investment property?

Question

Hello all,

I am currently in the search for a multi family investment property in Atlanta, GA and have just gotten pre-approved by my own bank (Bank of America) and a few other big lenders. However, I have been considering obtaining an LLC for my protection, but I do realize that big banks will not loan out to me if I have an LLC.

I was wondering what your thoughts were on whether I should get an LLC and find a new lender or hold off on the LLC? What lenders are best for people with an LLC?

I also was wondering if anyone has any experience or knows the process of contractually agreeing with the bank to switch the ownership of the house from ones name to ones LLC?

Thanks!

Miles

Wes S. · Answer

@Miles Robinson this question is debated a lot, and you'll hear positives and negatives on both sides. Things to consider:

1) Depending on the state you live in, an LLC may not provide as much protection.

2) If you don't keep your finances perfectly separated (and even then it's not a guarantee), an LLC may not provide you protection.

3) You'll end up paying more in your mortgage and your LLC costs.

For those reasons, especially for your first one, it's generally fine to just get a lot of coverage in umbrella insurance (or a lot of personal liability coverage in the property insurance that you'll carry).

However, I'd be very interested to know if any BP member can say that an LLC did prevent them from losing money or getting personally sued at some point -- I haven't seen that posted.

Jason Clarke · Answer

Hi Miles. Depending on your personal assets (i.e. what your willing to risk), in the event a claim is made against your investment property, and how much RE you plan to buy long term, those factors should dictate whether you should get an LLC.  If you don't have much personally now and won't in the future, you're a less appealing target to be party to a lawsuit.  Long term, if that's expected to change, you might as well start in a way that best protects you.

Even though commercial loan terms aren't as favorable, you should be able to find decent ones in your local area. Try getting a list of the local banks and ask to speak to a commercial or small business lender to have multiple data points to get a feel for the terms & rates you may be ok with.  To Tim's point about buying in your own name and transferring later, I've heard the same that banks rary exercise dur on sale clause, but it may be worth asking upfront to get a feel from the banks you're dealing with on whether they'd give you a hard time on it  if there is a local meetup or RE Investing Association, try to attend so you can see who other investors are using for their commercial loans. Good luck!

Tim Griffin · Answer

Hey Miles,

I'm not an attorney, but I wouldn't bother with an LLC on your first property. I'm not sure what size MF property you're looking to acquire, but if it's under 5 units, I think it would be difficult to find someone willing to lend to an LLC at a reasonable rate. You could go with a commercial lender, but you'd most likely be looking at higher rates and fees, and shorter terms. You could also purchase the property and then transfer it to an LLC, but then the lender could call the loan due because of the due on sale clause. My understanding is this is very rare, but it's still a risk.

My advice would be to speak with a good insurance agent and just make sure to purchase the right insurance and enough of it that you're comfortable.