Should I set up an LLC now or wait until after refinance?

Question

Hi guys, I have recently closed on my first investment property ever. And just consuming as much information as I can, I initially planned on transferring my asset to an LLC (will reach out to lender before doing so as there is a due on sale clause). My question now is given we are in this high rate environment, I expect the refinance window will kick in say in the next 3-5 years. Would it make sense to transfer my property to the LLC now or do so after my refinance? As I've read on the forums as well as watching videos regarding this, it seems going through the buying/refinance process with the lender as an LLC is not the most beneficial, especially for a relatively new LLC with short length of establishment and history of income streams.

What are some of your thoughts? The last thing I want to do is put myself in a situation where getting a refinance done is harder and leaning towards having the property as my name until after I refinanced it, with the risk of not having the most optimal asset protection in the meantime.

Jack Lee · Answer

Thanks Kyle, did not know some lenders would let a LLC refinance. Will keep this in mind going forward. Appreciate your answer!

Jack Lee · Answer

Appreciate you following up on this and offering some extra thoughts. I will be sure to opt for the latter for now. Keep my property in good repair, have insurance, and maybe an umbrella policy!

David M. · Answer

@Jack Lee

Really, the best thing is have both the TItle and the loan with the LLC.  The "frankenstein" model to me where they are split are just a recipe for piercing your corporate veil in my layman's point of view.  Unless you generate more paper, who pays the mortgage for example?  If the LLC does it, then it should be co-mingling.  Granted, single member LLC's are disregarded entities for tax purposes, but YOU should be itemizing the interest costs in my opinon because your LLC can't be doing it since its not an expense.  Furthermore, since you aren't supposed to treat the entity as an alter-ego, how can you quit claim deed the property to it (without more "paper")?  Since consider if you quit claim deeded to me (I'm another stranger like your LLC), why should I rent out the property?  I'd just sell it and take the money and run...

Anyway, as mentioned, legal entities such as LLC's are NOT eligible for conforming residential loans.  Most investors want the limited liability of the entity but don't want the pay for the generally more expensive Commercial loans that LLC's have to obtain.  Most lenders are "residential lenders."  since you want to conduct business with a LLC (which I'm of the camp you don't really need to), contact commercial lenders, i.e. "non-residential" lenders, for loans for your LLC.

As its discussed many times on BP, just investing in your personal name in residential properties is fine.  Keep the property in good repair, have insurance, and perhaps an umbrella liability policy.  If you'd like to chat, send me a direct message.  Good luck.

Thom MacFarlane · Answer

Refinance in your name(s) as Fannie Mae, Freddie Mac, VA, FHA will lend to natural persons only and title is required to be in the name of the individual client.  The mortgage is considered ineligible if the clients are another type of legal entity including LLC, Corp, LLP or other entity. A lender may allow a refinance in a revocable trust though.

There are lenders, for their own protfolio, that will lend to an LLC or other entity but you will PAY a premium in rate and fees for this program.

David M. · Answer

@Jack Lee

consult a qualified professional or two...  Moving the Title back and forth try for the conforming loans doesn't put the mortgage under the LLC's name, which is kinda the point of the LLC.  Also, in my layman's opinion this makes your LLC look like an alter-ego, just as bad as co-mingling to pierce your corporate veil.  As I tell people, think of the LLC being some sort of stranger, as it basically is as a legal entity that you can't use as your alter-ego.  For example, think of me as your LLC.  In your case, why should I quit claim deed the property to you (with no paper being generated)?  If you quit claim it back to me, why should I rent it out and give you the rent?  If you quit claimed a property to me, personally I'd sell it, take the proceeds, and run....

Remember, you limited liabiliyt "protection" is a legal matter.  Your lender is a salesperson who has no fiduciary to your LLC....

As many of us in BP keep recommending, skip the LLC.  Its really not necessary, but ultimately its up to you.  Good luck.

Kyle Deutschmann · Answer

There are lenders that will let you refinance even with the title in an LLC for 1-4 unit properties. Earlier this year the rates were pretty comparable to conventional Fannie/Freddie. Rates seem to be a bit higher currently for most lenders allowing title to be held in an LLC, but it would save you from having to transfer the title back and forth when you refinance.

Jack Lee · Answer

That’s exactly what I was considering heavily, moving into LLC and then moving out of LLC to my name when it’s time to refinance. After the refinancing, I’ll have to move into LLC again. That said, I feel comfortable moving to LLC if my initial interest rate was 3-4% haha. Unfortunately that’s not the case!

Thom MacFarlane · Answer

I concur with @Nathan G.

I'm myself look at the loan aspect of being in an LLC. One problem holding title in  an LLC is that you can’t get the best loan programs which are Fannie Mae & Freddie Mac. Both Fannie & Freddie state they “lend to natural persons only and title is required to be in the name of the individual client.” Thus no LLC, Corp, partnerships or syndications.

A lender may allow you to switch from an LLC to an individual in order to refinance a property if you prove the individuals on the loan and in the LLC are one of the same.

Nathan Gesner · Answer

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.