Purchasing LLC to get the portfolio of rentals
Member since 2019 · 2 posts · 0 votes
Looking at buying a small SFR portfolio. 3 properties, all have mortgages to the LLC that owns them. Looking at possibly just buying the LLC with owner financing their "equity" and me(only member of the LLC after purchase) continue making existing mortgage payments. Anyone have insite on possible DOS issues or would the bank even know since title wouldnt change???
There may or may not be language about the change of ownership interest of the llc in the loan docs. More importantly, there will be the unknown potential liabilities of the llc and you will be assuming the llc’s Current basis for depreciation, previous depreciation recapture responsibilities and cap gains basis calculations later.
A transfer to an LLC will trigger the clause and should therefore be avoided, even though banks are hesitant to ever foreclose as long as the note is being paid. Even with the note being paid, the banks will still send threatening letters. This issue can be avoided completely by transferring the property into a land trust.
While a transfer to an LLC will cause alarms at the bank and prompt them to send you a letter, a transfer to a trust will not. A transfer to a trust is exempt from due on sale violations since banks will view transfers to a trust as an estate planning tool. You should not even receive a letter from the bank.
This article can explain the general process of taking a property into your own name and transferring it into the Land Trust before assigning it to the LLC. The added benefit of this process is that you can also have your attorney sign the public records as "Nominee Trustee" before assigning yourself as the "Trustee" once the trust has been established. This means your name does not appear on public record for that property, your attorney and their address is the only thing that appears. You always have control and nobody else, not even your attorney, can manage or sell your property except for you.
If you need to prove ownership for financing or any other reason, you simply produce your company documents as well as your banking and accounting records. Since these disclosures are private, and not part of the public record, it does not violate the anonymity you’re seeking.
When meeting with clients the first order is to discuss (A) their personal assets, (B) break down their current investments portfolio and other business ventures before discussing any (C) future goals. Each of these variables will dramatically change the advice for the individual asking this question. I often break it down into the "five pillars" of protecting your assets. Thought this might also benefit you.
1st pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur.
2nd pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.
3rd pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property they can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE- check out this article to learn more.
4th pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.
5th pillar is owning everything anonymously. If people don't know what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.
@Scott Smith The properties are already in an LLC. I'm looking at purchasing the LLC they are in. While I do understand that comes with some potential liability, depreciation issues etc. I'd like to keep and maintain the LLC and use the relationships it has already built with existing vendors.... Or am I just better off buying property as a trust with a subject to and seller carryback?
@Scott Smith The properties are already in an LLC. I'm looking at purchasing the LLC they are in. While I do understand that comes with some potential liability, depreciation issues etc. I'd like to keep and maintain the LLC and use the relationships it has already built with existing vendors.... Or am I just better off buying property as a trust with a subject to and seller carryback?
It really would come down to the LLC. A lot of people are able to purchase LLCs with many different properties in them without issue, while another investor may get one LLC with a single property under it and acquire a liability nightmare. Ultimately you would want to run your due diligence on the properties, which would include a review of the LLC. Just like inheriting a property with bad plumbing, taking on an LLC in this fashion can POTENTIALLY cause lots of problems. But if you do some good homework prior to the deal you can identify more issues before you inherit them.
This isn't legal advice, just my opinion as a real estate investor.