LLC Minnesota to get one or now.(mortgage still in personal name)

Saint Cloud, MN · Member since 2017 · 31 posts · 3 votes

curious what people do when they still have a loan and only a SFH. llc or no llc

About to close on my first rental property single family home, purchased in my name. I plan to get umbrella insurance policy to protect against anything crazy. also considering getting an LLC, (Minnesota) and have rent paid to the LLC, (since i'd be the only member it would pass to me) and then have the llc pass money to my bank account to pay for mortgage.

Going to talk to my tax specialist next week (who also has a dozen buildings he rents)

wish you would have gotten a LLC or not needed. ?

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John Woodrich

Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes

First off, if you are getting a personal loan for the property you likely can't put the property into an LLC . Most loans have a due on sale clause that would essentially prohibit the transfer to your LLC.

Using the LLC as a management company can potentially protect you from rental liability but as mentioned it woun't stop you from losing it due to another personal event. Umbrella policies are a good idea, if you have assets to protect.

A single member LLC (in MN) does not cost a lot to operate, in most instances it will not cost anything other than your organizational costs ($155 state fee + labor to setup). MN doesn't have an annual fee like some states have.

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Tim SwierczekPro Member
Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
8y
@Patrick C. My short answer is to make an LLC for your management company but keep the property in your name with the insurance umbrella insurance policy in my opinion what you're more protected and it's much cheaper there are many many expensive reasons not to do an LLC that never get talked about. I'm on mobile now but have posted about it before and can run down the list for you in the future. P.m. me if you're really interested
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Tim Joyce
Minneapolis, MN · Member since 2017 · 44 posts · 29 votes
8y
I'm curious about the notion that forming an LLC mgmt company instead of a RE-owner company would save any money at all. the umbrella insurance protects from losses at your properties, but wouldn't protect your properties from personal judgments unrelated to your REI activities (e.g., if you got into a bad car accident or something). the LLC, assuming you follow the relatively straightforward formalities when operating it, would offer some protection of the property (if not from any cash-flow distributions you'd otherwise get)
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Patrick C.
OP
Saint Cloud, MN · Member since 2017 · 31 posts · 3 votes
8y
i'm just not sure, my original idea was to get an LLC and have tenants pay the LLC, (but the mortgage is in my name)
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Tim Joyce
Minneapolis, MN · Member since 2017 · 44 posts · 29 votes
8y
That plan seems like it loses any benefits of the LLC. Because the mortgage is in your name, the tenants would be leasing from you (the LLC can’t lease out what it doesn’t own, unless you’re making it some kind of property management company). But the liability still stays with you as the owner. If the LLC held the property, and you owned the LLC, you still get all the income and tax treatment of a sole proprietor, but the liability bucks stood at the entity level. An injured tenant can only recover against the company. And an outside claimant against you has limited recourse against the property in that scenario too.
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Tim Joyce
Minneapolis, MN · Member since 2017 · 44 posts · 29 votes
8y
One more thought from another forum post - *if the lender is ok with it* you could lease the property to your company and then the company subleases. I think that still might trigger some due on sale clauses, but it certainly might make them more comfy that you’ll still be personally on the hook for the loan.
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Patrick C.
OP
Saint Cloud, MN · Member since 2017 · 31 posts · 3 votes
8y
Yea, seems like your right @Tim Joyce
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John Woodrich
Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
8y
First off, if you are getting a personal loan for the property you likely can't put the property into an LLC . Most loans have a due on sale clause that would essentially prohibit the transfer to your LLC.
Using the LLC as a management company can potentially protect you from rental liability but as mentioned it woun't stop you from losing it due to another personal event. Umbrella policies are a good idea, if you have assets to protect.
A single member LLC (in MN) does not cost a lot to operate, in most instances it will not cost anything other than your organizational costs ($155 state fee + labor to setup). MN doesn't have an annual fee like some states have.
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Danny Cerecedes
Investor · Glendale, CA · Member since 2015 · 94 posts · 20 votes
8y
Just to chime in. In podcast 259 Mike Anderson speaks about the due on sale clause. He states the lenders don't give a dam. Banks would rather get paid off then foreclose on the property. Brandon Turner mentions that he buys properties in his name and then transfers them into an LLC. He said its important to buy good deals and that they have equity in them so worst case if the bank freaked out he could sell, refinance or go to a hard money lender.
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John Woodrich
Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
8y
Originally posted by @Danny Cerecedes:
Just to chime in. In podcast 259 Mike Anderson speaks about the due on sale clause. He states the lenders don't give a dam. Banks would rather get paid off then foreclose on the property. Brandon Turner mentions that he buys properties in his name and then transfers them into an LLC. He said its important to buy good deals and that they have equity in them so worst case if the bank freaked out he could sell, refinance or go to a hard money lender.
Banks I have talked to have given a dam. Small banks can look past it at times for clients but no way a large bank is going to break policy for you, especially after you just purchased a property.
I recently purchased a 4 plex with 25% down, conventional loan required it in my personal name. They didn't require it in my name because I didn't have enough money down or limited financing options, I assume this is to comply with secondary market standards. They would have no reason to grant me an exception which could make my note less valuable.
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Danny Cerecedes
Investor · Glendale, CA · Member since 2015 · 94 posts · 20 votes
8y
Hey John I was just mentioning what was said in Podcast 259. I know Brandon mentioned he buys all his properties in his own name and then he transfers them to an LLC. At that point the due on sale clause come in if I understand correctly but if you have enough equity in the property you have exit strategies if they call it due. What Mike mentioned was that most banks won’t call them due. I’m by no means and expert just thought I’d mentioned what i heard on the Podcast.

Originally posted by @John Woodrich:

Originally posted by @Danny Cerecedes:

Just to chime in. In podcast 259 Mike Anderson speaks about the due on sale clause. He states the lenders don't give a dam. Banks would rather get paid off then foreclose on the property. Brandon Turner mentions that he buys properties in his name and then transfers them into an LLC. He said its important to buy good deals and that they have equity in them so worst case if the bank freaked out he could sell, refinance or go to a hard money lender.
Banks I have talked to have given a dam. Small banks can look past it at times for clients but no way a large bank is going to break policy for you, especially after you just purchased a property.
I recently purchased a 4 plex with 25% down, conventional loan required it in my personal name. They didn't require it in my name because I didn't have enough money down or limited financing options, I assume this is to comply with secondary market standards. They would have no reason to grant me an exception which could make my note less valuable.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
8y
Banks are in the business of generating income through loan origination fees and interest.

For a bank to initiate the due on sale clause - they would need to foreclose on the property(very costly). Once the property is foreclosed upon - they risk holding the real estate on their books while it gets listed to be resold. During this time - they are not collecting any payments and have to pay for the upkeep(real estate taxes and deterioration of property). Banks also know that owners are known to trash a place if the homeowners are getting foreclosed upon. Once the property is resold - they still lose out because there is a chance the buyer did not obtain a mortgage with the bank resulting them in not getting any loan origination fees/interest income from the new transaction.
Lose/lose for a bank to call a mortgage just because of the owner neglecting the due on sale clause.

Onto your case of whether to LLC or not. It is personally up-to-you. This topic has been discussed many times.
If you do go the LLC route - please make sure title, mortgage, bank account and check payments are made in the name of the LLC. Otherwise you may not be getting the protection you think you have.
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John Woodrich
Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
8y
Originally posted by @Basit Siddiqi:

Banks are in the business of generating income through loan origination fees and interest.

For a bank to initiate the due on sale clause - they would need to foreclose on the property(very costly). Once the property is foreclosed upon - they risk holding the real estate on their books while it gets listed to be resold. During this time - they are not collecting any payments and have to pay for the upkeep(real estate taxes and deterioration of property). Banks also know that owners are known to trash a place if the homeowners are getting foreclosed upon. Once the property is resold - they still lose out because there is a chance the buyer did not obtain a mortgage with the bank resulting them in not getting any loan origination fees/interest income from the new transaction.
Lose/lose for a bank to call a mortgage just because of the owner neglecting the due on sale clause.
The bank has a lien, the due on sale clause requires the bank be paid off before a change in ownership. The bank doesn't have any reason they would need to foreclose in this situation and clearly this is not the goal of the borrower. The mechanics of the foreclosure process are irrelevant if it is not a realistic scenario.
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Patrick C.
OP
Saint Cloud, MN · Member since 2017 · 31 posts · 3 votes
8y
Thanks for all the help, think i might just go and buy some extra Insurance. my luck the bank would call on the loan if i switched the title to an LLC.
Thank's for the input everyone.
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