Question on Turning a Duplex into an LLC
Hello Everyone,
I am currently under contract for a duplex between my father and I. My question is, after closing, is it possible to put the duplex into an LLC. I want to ensure that both my fathers assets and mine are well protected. Will I run the risk of having the loan being called to be paid off immediatly? Any feedback will be great!
Most Popular Reply
@Chris Reyes many people will suggest purchasing a property using a FHA Loan, to reduce your out of pocket money. The other option is a Conventional Loan requiring a 20% Down Payment.
Assuming you have a respectable FICO you can buy, with a FHA Loan (3-5% down, a 30 year amortization schedule, and a residential loan rate). You live in one unit and let your tenants pay the mortgage and other property expenses. This will give you experience as both a Landlord and Property Manager. The downside is you will need to live there, for a minimum of one year (to satisfy FHA Requirements); AND because you closed personally, you will not have Asset Protection, in the form of closing in the name of a LLC. What happens if one of your tenants has a slip and fall, on your property, or something else happens to them? You are on the hook and can be personally sued, for everything you own. Some people will say, "Take out a quality Insurance Policy and you will be protected." Ambulance chasing attorneys know their way around and can legally navigate around Insurance Policies. Another downside is you loose on the advantages, of the Federal Tax Code, by not closing in the name of a LLC.
If you want to close in the name of a LLC, Mortgage Lenders will offer you Commercial Loan Terms (25-30% down, a 15-25 year amortization, and a ballon due in 5-7 years). This is what I am encountering, in the current Mortgage Industry.
If you think you will go FHA or Conventional; and then Quit Claim the property, to a LLC, or a Land Trust you run the risk of the lender discovering a Title Transfer occurred and activating the "Acceleration Clause" or "Due on Sale Clause" that requires the loan to be paid in full, within 'x' number of days. These clauses are contained, in all Promissory Notes nowadays.
You may be asking yourself what can I do? My suggestion is you consider Seller Financing. You may have to put more money down (10-15%), but you can close, in a LLC, with no worries about banks. I have a lengthy Legal Opinion, from my seasoned Legal Team regarding this matter.
Don't bother with an LLC if you worth less than a few millions. Just get a umbrella policy.
Always have the possibility of loan being called in. I have an umbrella through my car insurance provider.
@Chris Reyes
For asset protection, landlord insurance and umbrella insurance ahould be enough for a single duplex
For business purposes, you might want a LLC. But the cleanest and "correct "way to do it would be to purchase the property with the LLC. I'm guessing you aren't because of needing commercial lending??
Also, investing with a non-spousal partner usually warrants an entity. I suppose since it’s your father you can get away with it and handle it by how you take Title.
For everything here, definitely talk to a few qualified professionals.
Good luck
@Chris Reyes Can you explain your comment regarding LLC and commercial lending? Are you implying an LLC cannot secure commercial lending?
@Carmen Garza I believe he means you would HAVE to get commercial financing BECAUSE you are an LLC and not a personal loan.
@Mike Menard Thank you that's what I thought!
@Chris Reyes many people will suggest purchasing a property using a FHA Loan, to reduce your out of pocket money. The other option is a Conventional Loan requiring a 20% Down Payment.
Assuming you have a respectable FICO you can buy, with a FHA Loan (3-5% down, a 30 year amortization schedule, and a residential loan rate). You live in one unit and let your tenants pay the mortgage and other property expenses. This will give you experience as both a Landlord and Property Manager. The downside is you will need to live there, for a minimum of one year (to satisfy FHA Requirements); AND because you closed personally, you will not have Asset Protection, in the form of closing in the name of a LLC. What happens if one of your tenants has a slip and fall, on your property, or something else happens to them? You are on the hook and can be personally sued, for everything you own. Some people will say, "Take out a quality Insurance Policy and you will be protected." Ambulance chasing attorneys know their way around and can legally navigate around Insurance Policies. Another downside is you loose on the advantages, of the Federal Tax Code, by not closing in the name of a LLC.
If you want to close in the name of a LLC, Mortgage Lenders will offer you Commercial Loan Terms (25-30% down, a 15-25 year amortization, and a ballon due in 5-7 years). This is what I am encountering, in the current Mortgage Industry.
If you think you will go FHA or Conventional; and then Quit Claim the property, to a LLC, or a Land Trust you run the risk of the lender discovering a Title Transfer occurred and activating the "Acceleration Clause" or "Due on Sale Clause" that requires the loan to be paid in full, within 'x' number of days. These clauses are contained, in all Promissory Notes nowadays.
You may be asking yourself what can I do? My suggestion is you consider Seller Financing. You may have to put more money down (10-15%), but you can close, in a LLC, with no worries about banks. I have a lengthy Legal Opinion, from my seasoned Legal Team regarding this matter.
I think @Thomas Franklin is giving you limited info.
If you are occupying the property, you can get a conventional loan with 5% or even sometime 3% down. Otherwise, non-owner occupied (ie investment) conventional loans are 20% down. Meanwhile, FHA loans (well, really any Gov't backed loan) requires owner occupation. Its not clear what you intentions are with this duplex so its tough to give you any advice. Which loan product applies starts with what are you intentions for owner-occupation, then which product is the cheapest or best option for YOU.
Other than the fact your are investing with a non-spousal partner, there are no tax benefits to using a LLC. That is a commonly presented concept. Regardless of whether you use a legal entity, the deductions allowed are all the same. In your case, you would want the legal entity to handle all the "what-ifs" and to also portion out the profit/losses.
The "LLC or not" issue is discussed in BP daily. Whether you use a LLC or not, you'll need insurance. Neither insurance nor a LLC is foolproof measure to protect your assets. Its a matter of how much "defenses" do you want to setup in case something should happen. As I alluded to in my first post on your thread, you need to maintain/protect your corporate veil otherwise all your effort is useless. At a minimum, this mean no co-mingling of funds and not treating it as your alter-ego. The entity must stand alone as its own separate, entity.
The Due on Sale clause is almost the least of you worries... "Everybody" seems to do it, but nobody seems to address the multiple issues quit claim deeding to your LLC creates with your corporate veil. Furthermore, you really need to have everything, including the mortgage, under the name of the LLC.
Again, make sure you consult with a few qualified professionals (mix of legal and accounting). Good luck.
@Chris Reyes
How is the title held now? As tenants in common?
If the property title is only held in one person's name, you likely want it held in an LLC so both parties interests are protected.
Just be mindful that an LLC with more than 1 member requires the filing of a partnership return.
- Basit Siddiqi
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- 917-280-8544
Just closed on 12 units and we created an LLC with operating agreement for my partner and I. The LLC bought the units. Plus we each have our own LLCs.
For us is was easier to do it this way so it is separated from our personal items.
Out of curiosity, did you use your existing LLC's as the members to the LLC holding Title to the 12 unit property?
Thanks for the advice Mark! That would make things a lot more simple if I just do it under a umbrella policy.
Thanks Sarah for your input! I'm sure I can ask my insurance provider to do the same.
Thank you for explaining the risks and rewards for each of the entities. My main concern for future investments is making sure my fathers and mine personal assets are well protected, especially in the event that something does occur on one of the properties.
I did not plan on living in the investment property, so I believe either the LLC with 25%-30% down and the seller financing would be a more desirable route to take, and sounds like a more safer option rather than keeping it on our names.
Hi David, and thanks for the further explaination in regards to the legal and tax implications on both and LLC and an investment being in my own name! It sounds like either way, the tax advantages are about the same between the two in my case. The biggest difference is the legal veil that I would need to protect myself in case of any legal issues that may pop-up in the future. I will make sure to consult with professionals in either case! Thanks again for the input!
Correct! The taxation is basically the same because all the deductions you can takes the same. However, you are “stuck” with a 50/50 split basically since you both will be in Title.
The corporate veil seems to be a slippery one.
Good luck.
@Chris Reyes
If it were me, I'd deed to a land trust for the anonymity (nominee trustee, since its publicly filed), then assign beneficial interest of land trust to the LLC that you manage (private document).
This way there is separation from you individually and you still control everything.