How do I protect myself with an LLC?

Question

Hello All,

Thanks for a great forum. I am so happy to have this resource at hand to learn from experts.

I just got my first 2 rental properties (SFH, Duplex) in Florida.

After getting conventional financing, I asked my lender if I could transfer the properties to an LLC to stay protected. I was told this is not an option, and it's stated in the loan agreement that it cannot be transferred.

Are there any ways around this? The only thing I could do, according to them was to refinance.

Thanks

David Dachtera · Answer

@Vick Ghadimi,

Yes - about the only way would be to have the LLC buy it from you.

An LLC alone is not good protection, though it's better than holding in your own name. You need a business entity structure where the entities are owned by each other, not any human person. They also need to be fully  insured.

If you own in your own name, remember that even fully insured, once litigation is brought, the discovery process will make your ENTIRE ESTATE public knowledge - the "vultures" WILL descend!

Jessie Huffey · Answer

@Kevin Lefeuvre. Great question to clarify: "My question to everyone considering the LLC as protection, do people realize what protection we are talking about?" Yes, I guess not everyone realizes the only protection is for assets outside of the LLC. This is one of the reasons that I attempt to balance the value of the assets in the LLC with the debt level of the LLC- I think this is a good strategy to minimize litigation. Glad that point was brought up!

Kevin Lefeuvre · Answer

@Caleb Heimsoth very true. But most loans have a provision allowing the lender to call the loan, if the borrower does that. So at the end of the day, the lender's approval is required, and since it's a different type of loan/lender, from what I have seen, it's been challenging.

Kevin Lefeuvre · Answer

@Vick Ghadimi first check if you can find the lender. You need a commercial lender and it's going to be very hard to find one, especially for a newly incorporated LLC.

@Jessie Huffey you correctly wrote: "in almost all cases the amount they can get from litigation is limited to the value of the LLC" . My question to everyone considering the LLC as protection, do people realize what protection we are talking about? The LLC DOES NOT protect it's own assets, it's just a wall to protect your OTHER assets. In other words you are absolutely not protecting that Duplex by putting it in a LLC. Insurance (when they work) do protect.

Jessie Huffey · Answer

Yes, Vick- you can buy directly under the LLC even if it is newly formed, but it will limit your options in terms of lenders willing to finance. Also, David has some good ideas in regards to protection but the most important thing to keep the protective qualities of the LLC is to keep very good business records, have separate bank accounts, etc for the LLC and do not co-mingle personal and LLC funds- unless the person who wants to sue you is able to "penetrate the veil, ie. prove co-mingling, etc." in almost all cases the amount they can get from litigation is limited to the value of the LLC and your entire estate is off-limits, just make sure everything you do is legal.

Vick Ghadimi · Answer

@jess

@Jessie Huffey Would it be possible to buy it directly under the LLC? Keep in mind, this LLC would have been newly formed, would the lender allow the LLC to own the property if it has no history?

Thanks for the other advice, I will look into umbrella insurance, maybe it's a solution for the time being.

Jessie Huffey · Answer

Ideally, you should have bought the properties in the name of the LLC to start with but there are ways to get the properties into the LLC, one of which would be to sell the properties to the LLC (but this would require you obtaining another financing option). I would talk to an RE/ asset protection attorney in your state to hear all of your options. However, if your main motive is protection, you may be able to just obtain an umbrella insurance policy as an alternative. It wont provide 100% protection, but it is the next best option to having the properties in a separate LLC.

Jason Bradstreet · Answer

If the LLC were to purchase the property, I would assume that would be a commercial loan with a higher down payment?

Having tough time finding lender who understands this option.

Kevin Lefeuvre · Answer

Exactly @Jessie Huffey

How do I protect myself with an LLC?

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