LLC Conflict and Confusion - what's right?

Question

Hello BP,

I'm operating out of Maryland.  I have heard and read that if you are going the LLC route, the property needs to be titled (before/after purchase) in the name of the company.  An accountant is now telling me that that info is a bit outdated.  He says that the property goes in my name but any lease has to be in the company name.  Anyone with insight on this?  Thanks in advance!

Bill Gulley · Answer

A pass through LLC may be able to manage or sub-let your property, some issues arise; 1. some states may require a management company to have a license, 2. legal suits, like evictions or small claims may require an attorney represent the LLC, 3. building permits need to be obtained by the owner unless obtained by a contract, so the LLC has operational limitations, 4. liability is limited, but this is over blown in closely held LLCs and running your books as the owner and the owner of the mgt company can have issues, greater care needs to be taken to keep things separate.

If you only own one property, or even two or three, you're probably better off owning personally and being well insured, primary purpose of a business entity is for business reasons, not liability protection. Those  offering LLC set ups and trust stuff use the liability as a marketing aspect and generally aren't the whole story.

Your accountant may or may not be correct, RE is governed first by local custom, he/she may see that as being acceptable, or it could be an accountant giving legal advice......ask your attorney.

You can not obtain a secondary market loan in the name of a business.

Switching names in title is a violation of the due on sale, the lender may or may not kick about it.  If names are changed in connection with your estate planning the due on sale won't apply. Consult an attorney. :)

Andraise Scott · Answer

Thank you @Hattie Dizmond , @Chris Martin and Bill Gulley

John D. · Answer

@Beth L. The owner could certainly sign an agreement with a property management company.  The property management company could then sign the lease with the renter.  I am not sure how much benefit you get there though as only a reasonable percentage is retained by the prop management company.

Also, you can certainly ask the tenant to pay rent to whatever entity you specify, regardless of who has signed the lease, but again this may or may not help your end goal.

I think you should probably get some further clarification from your lawyer, there are a number of ways this can be handled appropriately, it seems for some reason your lawyer is steering you towards only one.

Beth L. · Answer

@Andraise Scott

I am in MD and my lawyer said that the lease HAS to be in the name of the owner. I was asking since I own my properties in separate LLCs and wanted to start a new LLC to be the face of the business, to handle all the property management stuff. Doing this would really only consolidate incoming rents and outgoing maintenance fees to one name and account and could then be allocated to the properties' accounts.

Not sure on the W-2 tax question though.

I would confer with both the lawyer and CPA on this.

Bill Gulley · Answer

Didn't have a W-2 job since the 70s!

@Steven Hamilton II

Chris Martin · Answer

I don't think you and your accountant are on the same page. It sounds like your accountant assumes the LLC will be the manager for your property, and by 'your property' I mean a property that is deeded to you as an individual. There is nothing wrong with that arrangement if that is how you (and your legal advisor, accountant, partners(?), etc.) structure your company. The owner would be you individually and the manager/agent will be the LLC. There are some technicalities about this arrangement that I won't go into, but this setup can work.

Other options are to have the LLC own the property... that is very common, especially for multi-member LLCs... or to not bother with an LLC at all and for you individually to own and self-manage the property. This latter structure (no LLC) is common as well, and likely the easiest way for beginning investors to acquire and finance (with cheap GSE loans) the first handful of properties.

It all boils down to what you are trying to do and what your goals are.

Hattie Dizmond · Answer

@Andraise Scott Unless your LLC has the credit history necessary to finance the property, your name is going to have to appear on the title.  Now, at least in Texas, you can put the LLC's name on the title as well, but the loan is a full-recourse loan, personally guaranteed by you.  What I would do is just have the property titled in your name, because it will make the closing & funding processes much simpler.  Once you have closed, simply transfer the title to a trust and name the LLC as the beneficiary.  Now the LLC holds the property, so the income you generate from leasing the property goes to the LLC.  The value of the property and the loan you guaranteed just shows up as part of your equity account in the LLC.  So, yes the lease does need to be in the name of the LLC.

(Not legal advice!)

LLC Conflict and Confusion - what's right?

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