housing hacking and LLC's

14 Replies

Here's a bit of a complicated question - My partner and I are getting into the real estate business together. We plan to create a C-Corp of which we will both be shareholders for all of our wholesaling operations and income. We also plan on opening LLC's for rentals, which will be managed by the C-Corp. However, FIRST I want to house hack, in my own name, with a 3.5% down FHA loan. I am thinking of acquiring this property in a land trust, of which I will be the beneficiary, and later reassigning beneficial interest from myself to an LLC my partner and I will create, so that we can then have this rental as part of OUR portfolio. As I understand it, the reassignment of beneficial interest is a private process, the bank will not be alerted about this, and they can't invoke the due on sale clause since it's in a trust. However, in this case, since the loan will be in my name, will this cause any issues? In general, is this a viable strategy when you want properties to be in an LLC but your LLC does not yet have enough of a track record to be granted loans to buy properties?

I dont know why you would want to put a home that you alone own into a partnership with another person?  I would only do partnership deals with a person whom I am buying the home together. 

If you are able to qualify for loans I dont see the need for a partner at this point in time. 

Also I dont see your LLC ever building up any sort of " credit " to be able to get loans as the LLC as buyer, you would have to personally guarantee it if you by chance found a lender willing to do this.

Good luck

This post has been removed.

@Mike Goikhberg Seems like you are worrying too much about the details.  Focus on deals firsts.  I agree with @Curt Davis . What's the point of a partnership if you are house hacking and putting 3.5% Also, why are you forming an LLC? Do you have a bunch of assets that need to be protected? If you are only putting down 3.5%, I doubt you will have enough equity in the house where an attorney would likely sue. Like @Curt Davis mentioned, you will have to personally guarantee the LLC, so it won't really make a difference if it has a track record.

Originally posted by @Account Closed :

@Mike Goikhberg The lender can find out if you put it in a land trust, and they can call the loan do base on the due on sale clause.

This is not exactly true.  My understanding is the Garn Act of 82' will allow a transfer to a land trust for estate planning purposes.  Below is a link to an article I found.  I am not an attorney, however I spoke with an attorney that told me about the Garn act 2 days ago.  


This post has been removed.

Well we want to build a portfolio of properties that we will equally share the cash flow profits from. It's just the first property we want to acquire with as little $ down as possible, which we can't do unless I occupy it for a year (so it has to be in my name) You're right about the low equity and at this point it doesn't really matter from an asset protection standpoint since there's not much to protect. But let's say in the coming 2-3 years we end up acquiring another 20 properties in the LLC we co-own, I would want this first one to be part of that LLC as well. Otherwise my partner that I'm working with won't be legally entitled to its profits. This is a partner that I am planning to work with long term, not just a temporary money partner. The idea is to have our real estate business activities be 50/50 all the way through, both active and passive. Maybe this isn't commonly done? I'm not sure. Also, if me or him will be guaranteeing all the loans for the LLC, doesn't that defeat the purpose of the property being in the LLC from an asset protection standpoint? If the loan is in mine or his name, even though the property will be in the name of the LLC, and someone sues the LLC, won't either one of us then still be liable for the damages?

@Mike Goikhberg These are questions you will want to ask a real estate attorney and I am not an attorney. Entity structures will vary from person to person. However, if someone falls and cracks there head on your property, I decent attorney will sue the LLC first. After exhausting all assets, that attorney will sue each member of the LLC. There is a common misconception LLC's will protect you from personal liability. You should carry a large insurance policy.

Also, if you and your partner had 20 properties I doubt you will have 1 LLC for all the properties. You will probably have several LLC's maybe even 1 LLC per property. Again, I would hold off on worrying about the entity structure. In my opinion, you will be spending money on unnecessary items at this point in your career. Save the money you would spend on forming these entities, and put it to use in a marketing campaign. You can always form the LLC later and transfer the property or change the beneficiary of the trust.

The purpose of the LLC isn't for protection from the bank in case you default, Mike. In theory, it's protection against lawsuits that likely will never happen, especially with little houses. I do put my 5+ unit commercial apt bldgs inside LLCs, though. Houses I just act above board and carry good insurance.

Sounds like you have your plan. Owning your primary in your own name IS a good idea.  Sec 121 cap gains exclusion after 24 months, then invest however you like!

This post has been removed.

Are you thinking of putting each rental property into an LLC? That's a lot of work.

Are you thinking of putting each rental property into an LLC? That's a lot of work.

I do plan on getting a decent insurance policy for sure. However several lawyers (from anderson law group) and also one CPA from the BP forums have pretty conclusively stated that LLC's do in fact protect your properties quite a bit - Both inside protection (someone banging their head from a fall inside your property), and outside protection (you OR your dependent hit someone with a car and get sued). The CPA even talked about how he used to think it's all superfluous until he ran into a situation where a client's son created a liability that ended up costing said client over 3 million $ of real estate because it was in his name. Many similar stories were shared by the lawyers from Anderson. I agree I shouldn't be dwelling so much on these details, I probably won't be making an LLC yet, just figured I'd see what people on this forum had to say about the situation. Thanks!

@Mike Goikhberg , the LLC will not protect you from personal liability. If you manage the property yourself the LLC will not protect you much from liability. There is also the ability to sale and pay NO capital gain taxes if the sale profit is less than $250K for single or $500K for married. You will be living in it so no liability for a renter. Maybe you can sell it to your LLC in 2 years and claim some profit, no idea but maybe @Steven Hamilton II , @Brandon Hall can help you out.  

by outside protection I just meant that the properties one holds inside an LLC are not accessible to creditors in a suit being brought against the person in their personal name. not that I would be protected from lawsuits in general just because I have an LLC. That's interesting about the no capital gains thing though, I hadn't heard of that. Selling to your own LLC sounds clever as well, hadn't thought of that.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here