How LLC and mortgage works for first investment property

Question

Hi Everyone,

I am about to close on my first investment property (singe family home) that I plan to hold and rent out.  Very excited.

I have one partner going in on this deal with me and we are planning to set up an LLC to hold the property.

As I understand it, we can move the title of the property over to the LLC and run our rental business through the new LLC -- but what about the mortgage?  We are getting the mortgage as an individual, and not through the LLC, to start with.  Are we able to move the mortgage over to the LLC at a later date so it’s not in one of our individual names?

Thanks for the help and advice.

-Dan

Daniel Becker · Answer

Thank you both for the advice!  Much appreciated

Joshua Hardy · Answer

@Daniel BeckerNice job on getting the first investment property!   As @Ashish Acharya has said above, there will be a due-on-sale clause in your mortgage.  From my understanding this is something that is a part of all modern mortgage documents.  However, people still do a form of seller financing when acquiring deals called 'Subject to' or 'sub to', this is where the buyer will purchase property using the existing mortgage in place, and continue to make payments to the mortgage company.  This can have benefits for a distressed seller buy allowing them to catch up a late mortgage and continue to make good payments until the buyer eventually exits the deal.  You would essentially be doing the same thing, except instead of someone else buying the property subject to your existing mortgage it would be you and your partners LLC.  If you and your partner are going to be on the mortgage and you also will be the only members of your LLC then it would seem to be pretty much a non-event, but if you don't want to walk the risky line of getting the bank to call the note, then best to verify with them before transferring the title.  I'm curious to see if the bank would allow you to go ahead and close in the name of the LLC while still personally guaranteeing the note, that why you don't have to ever take title.  One other thing to be aware of is LLCs with multiple members are a little more complicated come tax time... just a heads up.

Ashish Acharya · Answer

Congrats Daniel.

There should be a clause in your contract call "Due on sale": See below:

"A due-on-sale clause is a clause in a loan or promissory note that stipulates that the full balance of the loan may be called due (repaid in full) upon sale or transfer of ownership of the property used to secure the note.

There are situations when a bank will not care but if they do,  it can have implications.

I personally think that you do not have to transfer it to LLC. LLC is only an asset protective vehicle, and you can achieve similar or better protection with an insurance.

LLC will be useful when once you have few more rentals or RE activities, and you want to keep the business books separate under LLC as a best practice.