How and when should I set up an LLC or Family trust?

4 Replies

My market is Utah, but I'm also interested in long distance properties if the numbers work. I understand that setting up an entity is very important to reduce liability and for potential tax benefits. When is the ideal time to set up an LLC? I don't want to set one up prior to having my first deal, unless this is part of the actual deal, because it seems like setting up an entity is a form of procrastinating instead of actually acting on finding a deal. I see the benefit of having the LLC already in place, but I assume that one can be created fairly quickly once a deal is under contract.

@Jeff Lundeen

I guess another question you may need to ask is if you want to purchase your first deal with the new entity on the title, or with you personally on title and then transfer the title to the entity after purchase? The property must be in the name of the entity to have protection. It may be tough to get a loan with a brand new LLC but is possible.

On my properties i bought them in my personal name and then trasferred them to the entity after purchase.  This is a bit more complicated and does carry some risk with the 'due on sale clause' , but some theorize that this may not be a big deal.

If you are in Salt Lake you may want to reach out to the team at Breglio Law.  They helped me with the process.  They also have a lot of info on their website that would answer some questions.

@Jeff Lundeen I think it is good to have an entity available at anytime. I would set it up just to have ready. If you are buying the house with an FHA or conventional loan then it will need to be in your name as they wont likely give that type of loan to a business. Then once it closes you can transfer it to an entity.

If you are going to use an investment loan then you could use the entity. You will likely still be signer of the loan but the liability will be on the entity. 

I would recommend talking to a professional. I am a realtor and not a lawyer! lol

A great investment loan in Utah is the MACU loan which is 10% down and I think 2 points. 

I hope this helps. 

Thanks @Rob Hakes for the law firm recommendation.  I will certainly reach out to them.  Also, thanks @Eric Gardiner for the info about the MACU loan.  I agree that having an entity available at anytime makes sense so that I'm not scrambling after I find a deal to get it set up.

As for the "due on sale clause" I assume most lenders will have this clause in the contract. It seems like it's not an issue until it is. How can I figure out if it is an issue or not? Is this something that I should openly talk to the lender about when making the purchase? If not, I could put myself into a tough situation where the property is 'stuck' in my name because I can't transfer the ownership to the LLC without triggering this clause.

@Jeff Lundeen It seems that the method some attorneys are starting to use is once the property is purchased in your name, then transfer the property into a Trust and list the LLC as the beneficiary. The beneficiary will hold the liability, but beneficiary info is typically not publicly listed.

According the Garn-St Germain Act, a bank cannot trigger 'due on sale' if the change of ownership is into a trust with the beneficiary not changing.  So it is a little gray area, but because of this, if the bank saw the name transferred into a trust and they don't have access to the beneficiary info they may not go down that road. 

This is how I set up a few of my out of state properties and it was pretty slick. More than likely, as long as the mortgage gets paid, it should never be a problem, nor would the bank have any incentive to call a performing note.

Also not a lawyer!

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you