When to begin owning properties under an LLC?

6 Replies

I'm currently at 5 doors and seeking to add another soon. These first 5 are currently owned by my wife and me, but want to evaluate the pros and cons 

For those that own properties under an LLC, do you have an insight you can provide on the questions below?

1. How do you transfer ownership of a paid-off property from a person to a business, and is this smart to do?

2. I previously had a bank that would not lend to my LLC and required that an individual be the lendee. Is there a reason for this and manner of getting around it?

3. What are the biggest reasons to title under an LLC?

4. What are the biggest reasons to title under your name?

5. What are your personal thoughts and experiences that could help me and others that are still new to this?

Thanks for any help!!

23 years and up to 53 units and I only did an LLC the his year as I was doing a 1031 exchange but needed to combine a few properties in my name with one owned solely by my wife. Cost me 5.25% in January on a 20 year note. Won't be doing that again.

@Chris Redfield

I’ve got a bunch of posts on this... I’ll link some tomorrow or you can read through my post history.

Transferring Title can be tricky if you don’t refi into a commercial loan

Your bank is probably telling you a LLC can t get a loan because you are talking to a residential lender. Legal entities are not eligible for conforming residential loans. You need to talk to a commercial lender. You will still have to guarantee the loan personally, but the LLC will have the loan

When operated correctly, the LLC provided limited liability protection for your assets. What is called inside charging order protections will hinder a lawsuit against the LLC's from going after your personal assets. Outside charger order protection will hinder a lawsuit against you from getting at your LLC's assets. Remember, the LLC isn't foolproof. It's just an extra layer of defense

Most people get tripped up on the LLC regarding maintaining/preserving its corporate veil which is really the whole point of the entity. Also, as mentioned above LLC's are only eligible for commercial loans which are generally more expensive and worse terms than conforming conventional loans.

Holding properties, when they are smaller single or multi family residential properties, is usually handled with insurance. The liability is addressed with an umbrella policy and keeping your properties in good repair. You need to have insurance anyway with your LLC otherwise you'd probably go bankrupt trying to protect your assets instead of letting the insurance company do it. Meanwhile, holding the properties personally allows you to use generally cheaper residential loans, and you don't have the operating overhead of the LLC, as minimal as it might be

There is no tax benefit to the LLC. That is a common misconception. Regardless, the deductions you can take are the the same. An entity, however, would be called for if you were investing with a no spousal partner.

Hope that helps. Good luck

Before I answer these questions I would suggest more that you talk to an experience real estate attorney who does these types of transactions to take care of your properties now and in the future. 

1. How do you transfer ownership of a paid-off property from a person to a business, and is this smart to do?

To transfer ownership for a fully paid off property is mostly changing title of the property from you to the LLC. You will need an attorney though the laws are not the same everywhere.

2. I previously had a bank that would not lend to my LLC and required that an individual be the lendee. Is there a reason for this and manner of getting around it?

Like someone mentioned before buying a property with an LLC is a commercial loan and a residential lender will not be able to let you purchase as an LLC but I have purchased properties and then after the purchase put them under an LLC. But you will still be personally liable.

3. What are the biggest reasons to title under an LLC?

In 2010, I was threaten to be sued by a worker who was working on one of my properties and fell. The property insurance wouldn't cover it because they said it was a lack of maintenance but the house was a rehab. Because that property was in a separate LLC the only thing he could do was sue that property but since I keep every property in a different LLC none of those properties could be touched. The attorney called and offered a measly settlement because there was nothing to go after. If I would have had all of my properties in one LLC I'm sure he would have went for much much more. Also if you have partners, you want an LLC because partners fall into disagreements all the time.

4. What are the biggest reasons to title under your name?

There is no reason to have a property in my name. It's just asking for trouble. 

5. What are your personal thoughts and experiences that could help me and others that are still new to this?

I know a lot of people might think having an LLC is unnecessary and overly complicated (it's not once you understand it) when buying real estate but it's really like insurance. You don't think you need it until you need it, and if you need it and don't have it, it's too late.

Just imagine building up 5, 10, 15 properties just to have it all taken away by a greedy lawyer who wants to build an extra room in their house with your hard earned work that took you years to build. It happens everyday. Lawyers offices are full with clients who never thought they would be there.  

@Chris Redfield

https://www.biggerpockets.com/...

https://www.biggerpockets.com/...

Here are a couple of posts that you might find useful.

If you have a property free and clear, then its much easier on your corporate veil to transfer it into your LLC. Its cleaner if you do it when starting the LLC, but even later is basically capitalizing your LLC or an owner contribution. So, shouldn't be anything taxable, etc. You would deed the property over, either by quit claim or warranty depending on what you need. Then, update all your supporting stuff, e.g. insurance policy(ies), lease, any bills, etc.

I think that basically covers your questions, except maybe your last one. Many investors don't use LLC's because the increased costs. Even the example in the post above is from a rehab situation from a worker that sounds like didn't have their own insurance. Depending on the condition of your property, you'll have a builder's risk policy, vacant house policy, and finally a landlord policy (basically the landlord version of a homeowner's policy). On top of that you can have an umbrella policy (which is pretty cheap since it covers liability above an existing base policy). When owning the properties personally, your landlord insurance and umbrella policy (anywhere from $1M to $5M liabiilty coverage in $1M increments) is generally considered enough coverage. You should have insurance as well for properties in your LLC. Obviously, you need some damage coverage in case of a fire, for example. You need the liability coverage in case of an incident. Also, you need insurance so you can let the insurance company laywers defend against the lawsuit. Otherwise, you'd go broke with legal fees just trying to protect the property in your LLC. Of course, you need to have the correct insurance for your situation.

Again, consult with some qualified professionals to determine what works best for you.  Just realize that there are pros and cons to it all.

Good luck.

Hi David, I have a question for you. I have three rental properties (no mortgages) under my Llc. But, I can't get a cash out loan from a conventional bank. I have contacted a commercial lender and they offered me a variable rate, and 5 years term. I am really scare about that kind of rate and term. what do you think is my best option, I need more money to invest on more rental properties?