Littleton, CO · Member since 2010 · 23 posts · 11 votes
I understand you want to put a piece of rental property into an LLC for personal asset and liability protection, BUT how do you do that without triggering the "Due on Sale or Transfer" Clause if you still have a mortgage on it? Do you have to pay off the property first and then do that? And ALSO if you did transfer the property out of your name would you still be able to borrow against the equity in it? Thank you for your insights.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
10y
If the 'piece of rental property' is a little house, I'd argue an LLC is not the end all be all. While 'protecting your assets', you are negating your title insurance and hazard insurance because you personally are the named insured and you will no longer own it. When you change your insurance, the mortgage co will be notified. DOS violations are a real risk. Now you need to refi into the commercial financing world of higher costs and shorter terms. Doesn't sound like asset protection to me.
All this for an unproven precedent of bullet-proof liability protection. Some place in a Land Trust. Not all areas recognize them. Here a LT is what cities use to protect land from development.
I place my commercial 5+ unit commercial apts in LLCs. My little houses I own personally, I act above board at all times and I carry good insurance. 8 houses for 13 years hasn't been a problem. Not once have I been sued or had any trouble. I've been eligible for excellent insurance and loan terms.
This topic has been debated and blogged about tens of thousands of times here on BP. Search - I've transferred my little residential property into a commercial entity, now I am screwed because.... financing, insurance, title chain problems, can't sell, etc.
Get competent legal and tax advice before acting, of course. Happy research @Robert Ebeling!
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
10y
If the 'piece of rental property' is a little house, I'd argue an LLC is not the end all be all. While 'protecting your assets', you are negating your title insurance and hazard insurance because you personally are the named insured and you will no longer own it. When you change your insurance, the mortgage co will be notified. DOS violations are a real risk. Now you need to refi into the commercial financing world of higher costs and shorter terms. Doesn't sound like asset protection to me.
All this for an unproven precedent of bullet-proof liability protection. Some place in a Land Trust. Not all areas recognize them. Here a LT is what cities use to protect land from development.
I place my commercial 5+ unit commercial apts in LLCs. My little houses I own personally, I act above board at all times and I carry good insurance. 8 houses for 13 years hasn't been a problem. Not once have I been sued or had any trouble. I've been eligible for excellent insurance and loan terms.
This topic has been debated and blogged about tens of thousands of times here on BP. Search - I've transferred my little residential property into a commercial entity, now I am screwed because.... financing, insurance, title chain problems, can't sell, etc.
Get competent legal and tax advice before acting, of course. Happy research @Robert Ebeling!
Rental Property Investor · Volcano, HI · Member since 2016 · 15 posts · 7 votes
10y
I chose my mortgage company because they agreed in writing not to call the Due on Sale Clause when I transferred my property to my LLC. In this way I benefit from the better residential mortgage terms and still have the LLC have some assets (the equity in the property). I transfer the property and insurance at about the same time. Everything is up front agreed upon by all parties. My insurance company and mortgage company were both informed before I even purchased the property. (My lawyer indicated no concern with the Title insurance which he procured - but I'm going to follow-up on that with the title company just to be sure.) The down side is the loan is still on my personal finances and my LLC isn't developing it's own credit rating.
"Due on Sale or Transfer" Clause is a misnomer. The loan is NOT due on sale. The bank has the RIGHT to call the loan due. This does happen but it is relatively rare.
Keep in mind that the LLC will not provide as much asset protection as you might think. Also it is harder and more expensive to get loan in an LLC because it must be a commercial loan.
As already said a ton of this has been written here before. A search will bring up lots of info. Some going into the most minute detail.