Anyone here hold apartment building in personal name?

22 Replies

Hi everyone. It's looking like 2018 is the year I pull the trigger on purchasing a multifamily. I understand the the pros and cons of holding a property in an LLC - better asset protection should there be a lawsuit but also can be more difficult to get financing.

I'm just wondering if there is anyone here who is on the other side of things and have held your apartment building in your name?  It would be interesting to hear your perspective and experience.  Thanks for your input!

Definitely not. That’s why god created LLCs. 

Oh, a lot of people do it, either for ease or just not understanding the benefit of an LLC.

But, you’re dealing with commercial funding anyway, for a little extra work and a few hundred dollars, doesn’t it seem like a good investment?

It’s different with SFH, as conventional funding rates is often too good to pass up.

Since your financing is the same whether you’re an entity or an individual when you’re at 5+ unit properties I don’t think there’s any upside to holding in your personal name.

That being said, years ago I lived in a 15-unit and the checks were made out to our landlord’s family trust.

@Doug Webb Investing in LLC is a risk management (asset protection strategy). Since you are beginning to acquire multifamily properties, you will be taking a loan under your own name i.e. you are the guarantor. These are recourse loans. Eventually, you will work your way up to non-recourse loans.

Unless you are planning on acquiring 2-4 units with FHA financing, it is generally a bad idea to hold an apartment under your personal name. Most lenders require you to hold under a LLC anyway.

One extra step to add to all of the good comments above @Doug Webb , make sure you have 1 additional person in your LLC. If it's just you that owns the LLC, it's considered a Disregarded Entity which means you virtually have no Asset Protection and it's just like you own the property in your own name. Find someone else you can add to the ownership structure and give them a small piece of your deal. Maybe trade with another fellow investor and have them give you a small piece of one of their deals?

@Doug Webb for commercial class residential (5+) units, the general guidance you'll get is that you should be taking possession via an LLC, as there are no real advantages to not doing so besides the minor overhead of forming and maintaining the entity. In my state, owning an LLC is quite expensive (800/year), so the risk/reward calculation is a little more skewed, but still generally makes sense for larger MFR deals.

The debate really heats up if you're talking about residential class (1-4 units) as there are material advantages to owning under your personal name. Search for LLC vs umbrella insurance policy to get an idea of how controversial the topic is. :)

Hope that helps!

James

Thanks everyone.  This is great input.  It reaffirms my thinking.  It does look like the great debate is for 4 units and below as @James Kojo mentioned.

@Doug Webb . I am going through a similar scenario. It sounds like you've done some homework. My recommended next step is to reach out in your local network (probably folks here on BP) and attempt to find a reputable lawyer with specific RE/LLC experience in your state/area.

If you have to apply/guarantee the name in your loan, I'd be honest with your lender and ask their thoughts on you converting to an LLC after. I straight up asked my lender if they would "call" the loan for the due on sale cause and have in writing that nothing will change. Based on where I'm at in the process of being under contract with my 4 unit and 5 unit, I will purchase in my name, but transition to an LLC after, knowing my loan will not be "called."

Good luck.  

Mike

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my husband and I have 2 four units in our names. We used traditional residential financing and are prohibited by the terms of our mortgage from moving the properties into an LLC. We still use an LLC for our managment company and we keep a large personal umbrella policy to protect against any liablility claims.

Originally posted by @Anthony Chara :

One extra step to add to all of the good comments above @Doug Webb , make sure you have 1 additional person in your LLC. If it's just you that owns the LLC, it's considered a Disregarded Entity which means you virtually have no Asset Protection and it's just like you own the property in your own name. Find someone else you can add to the ownership structure and give them a small piece of your deal. Maybe trade with another fellow investor and have them give you a small piece of one of their deals?

I'd love to hear more from others about this part.     Any other single member llc's out there?    I have heard this as well.  But then again, I've heard that as long as you keep everything up to par with the llc's basics  (separate bank acct, current llc status w state,  properly funded,  no co-mingling, etc) it holds up in court even if single member.     

@James Kojo $800/year to have an LLC in California? Can you get away with forming an LLC in a different state and not paying that fee? In MN it's $165 one time - no annual fee

It might depend on if you are needing financing.  Many conventional commercial lenders will require you hold the property in a company entity.  My suggestion would be to call around to find out which commercial lender would allow you to hold the property in an individual name.  Don't forget to ask what the rate and term will be for this exception.  

Good Luck.

The term "disregarded entity" refers to the income tax reporting options for a single member LLC. A single member LLC may elect to be treated as a disregarded entity on the member's federal income tax return and report income and deductions on Schedule E of the 1040 rather than filing a return separately for the company. This election generally will not affect state law asset protection for the member. Of course, normal piercing of the corporate veil analysis applies and you can botch it up by mixing personal and company transactions or by failing to follow legal formalities for the LLC.

@Todd Dexheimer nope, unfortunately there is no way around this $800 tax - at least if you life in California. The tax is due if the LLC is either located in Cali or does any business here. "Doing business" is a very broad term and includes everything business related. So if you are in Cali and are having a phone call with your property manager, that is called "doing business". Of course you can always just hope that they will never find out about it...

@Simon Stahl @Todd Dexheimer The LLC is subject to the franchise tax, but you could use a DST in California and avoid the $800 per year franchise tax and get asset protection. The DST allows for Series Compartmentalization of the assets and can be held anonymously.

Originally posted by @Todd Dexheimer :

@James Kojo $800/year to have an LLC in California? Can you get away with forming an LLC in a different state and not paying that fee? In MN it's $165 one time - no annual fee

There is a franchise tax in MN that has a minimum fee of $800 per year.

I have a 4 plex in my personal name. I am a fan of LLCs however I also like financing properties. The 4 plex was purchased under a conventional loan and if you have a conventional loan they do not allow for the property to be titled in the name of an LLC. The properties I own free and clear are in the LLCs however it isn't merely picking and choosing how to title, sometimes you are limited.

I could have gotten a portfolio loan but would have had to give up 1-1.5% on interest rate to do so and wouldn't have gotten a 30 year amortization.

For residential class (1-4 units) we purchase as individuals and transfer title into the name of our family trust.  This will help avoid (complicated and costly) probate later. Financing is easier in this model. We are protected by a large unbrella insurance policy. You’d be surprised how inexpensive these umbrella policies can be. 

For larger multifamily (5 or more units) we are set up to own in an LLC. California requires an $800/year filing fee, as already discussed.

Good luck!  

I've been following this post the last few days because i do own a small 5 unit building in my name. When I was getting ready to purchase, I did quite a bit of research on holding in own name vs. an LLC, and spoke with a lawyer about it. Based on his advise plus what i had researched, i bought in my name with a good umbrella policy attached to the property. I own the property free and clear, and reading some above posts, sounds like that might not be an option with financing. There is a great article on the llc vs no llc debate on BP with many comments from both sides.

I'm curious if anyone would recommend i tranfer it to an LLC. I plan on buying more in the future, but likely with financing.

Broad insurance should be a prong in every asset protection plan. So, obtain sufficient insurance if you don't have an LLC. The LLC is a steep price to pay here in California for asset protection.

@Doug Webb

I don't know of any operator who would consider holding an asset in their personal name. We own 9 different assets, all in their own LLC with their own operating agreement. It can be a pain and more costly in terms of accounting, but if you can't incur the additional cost, you should not be putting yourself at risk.

Gino

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