I have an SFH and a duplex as rentals, both with mortgages in my name. I want to protect myself and my family from lawsuits and was told by a friend to start an LLC and transfer the properties into that LLC. Since I have mortgages on them, and since most mortgages have the due on sale/transfer clause, I'm wondering will they actually exercise that clause if I transfer the properties to my LLC?

@Nathan Shankles , I did this same thing with my first rental. I purchased the house and lived in it between 2016 and 2018, where in 2018, I moved in with my at the time girlfriend (now wife) and rented it out. You will be able to move the title/deed of the house in to your LLC by using a Quitclaim Deed. You will need a lawyer to write this for you. Once you have that, you can go to the county assessor's office to file.

However, as you alluded to, there are some risks. First, you need to look at your mortgage to see how long you have to live in the house before you can start renting it out and stuff. For example, mine was one year, which I met. Second, you will most likely be unable to move the mortgage in to your LLC. I tried doing this with my bank and they wouldn't let me. Third, if the bank wanted to, they could probably evoke the due on sale cause, but so long your paying your mortgage on time, they shouldn't care.

So the benefits of doing this is if a tenant sues you, so long your LLC (make sure you have an operating agreement) is set up correctly, your personal assets should be protected and the tenant will only have claim to assets in the LLC. The worst case scenario will be that you lose the house and any other assets in your LLC (cash or other properties), while still protecting your personal assets (401k, savings, your personal house, etc.). Additionally, the bank will then call in the mortgage, which you will have to pay from your personal assets as its still in your name and there is no collateral against the mortgage anymore.

@Brian Spies thanks Brian. What's the annual cost for you to maintain your LLC?

@Nathan Shankles , I have my rental unit in Kansas City, MO with my LLC setup in the same state. Missouri doesn't have any annual filing obligations for LLCs, so its nothing for me (I also recently verified this with a lawyer who also wrote me a new operating agreement). However, other states will have annual filings you will need to do along with a cost. You will have to go to your Secretary of State's website and do some research to find out the annual filing costs. Each state will have different costs and requirements.

@Brian Spies thanks Brian!

@Nathan, you're missing a critical  aspect of what you want to do....

In California, this will trigger a change in ownership and cause the state to reassess your property value as if it was sold; consequently, your property tax is likely to increase. You can transfer up to 50% ownership to your LLC without this occurring.

oh, and the LLC fee in California is $800 per year.

Not a great source, but I'm mobile... https://www.deedclaim.com/cali...

@Nathan, I'd seriously consider getting a DST and then transferring over to a trust. That typically won't trigger a Due on Sale Clause. If in the rare case it did, the legal remedy would be to transfer it back into your name (which is so rare I don't actually know if that has been done with anyone else & not in my experience). Another advantage of a DST is that properly structured when you have it done properly by those familiar with REI concerns, is that it also is not subject to the CA Franchise tax. On top of that, the anonymity aspect is a very powerful asset protection strategy for CA investors.

I have My first Rental property put in my LLC in Virginia but Be careful not sure about other places but My Home owners insurance went up $977 was told because It was placed in an LLC If any one knows anything about this please share Thanks.

As I understand it there are benefits from having the LLC there seem to be several cons. Is this correct? What about the tax implications? Is that a benefit or a con?

Benefits:  They can't access my personal assets

Cons: Potential issues with mortgage; they can take the house but leave you with the mortgage; insurance and taxes can increase; potential to break the LLC seal which would negate the benefits

Thanks!

@Brian Spies

What about setting up a trust for your real estate?

The trust also covers the owner.

@Daniel Smyth , yes, Trusts are also another option.  I knew someone who had all of their rental properties in Trusts.  While I understand the foundation of a Trust, I do not know the details of how to operate it with a rental property.

@Nathan Shankles all great advice above. Especially the DST. I recommend you call your lender. Remember an LLC needs to have a commercial loan, it can't qualify for a residential loan like you did. Some lenders don't care. Others absolutely won't allow it. So just call. If they are good with it just do a quitclaim and you're good. PS you will need an agent for your LLC in MO, typically a lawyer, and they do charge an annual fee but not the state.

@Brian Spies

I am new to this, but for years I have heard of such things. There were for "other" people, right?

Be sure to let us know what you do, and how everything works out.

Dan

@Stephen Mobley as far as insurance goes it should really change if you have less than 10 units. It can be a gray area but it shouldn’t change much.

My bank found out that I switched my properties from my name to my LLC. They just told me to make sure I pay on time and to not do it again for future properties.

@Nathan Shankles

On one of the podcasts that BP did, an attorney down in Texas by the name of Scott Smith discussed this and a number of other topics. Although he is not done any work for me as of yet, he did seem extremely knowledgeable. I reached out to him about some personal things / strategies and I plan on following up with him. Suggest that you may want to do the same.

BP will not let me up give you his email address for some reason. That said, you may want to do a search on his name, Scott Smith

Again, I have not used him......yet!

@Nathan Shankles

Robert Kiyosaki has one of his experts address this topic in The Real Book of Real Estate. My summary of understanding is if it's just your name on the mortgage, and just your name on the LLC, then this is just transferring an asset from you to your LLC, and would not (should not) trigger any clauses ("Due on Sale" etc.) because you are still 100% responsible for all the terms of your mortgage, because your LLC received the asset and the mortgage ‘as-is.' If I had the book with me I'd tell you the chapter and experts name. But he was clear: don't let your bank bully you into believing you have to pay anything different than if you kept the mortgage in your name. He was firm in his view that even though the banks make threats and pretend to prohibit the transfer, they have no ability to act for the reasons I stated previously. This stood out for me because I'm about to do the same (transfer my rental to my LLC). Good luck!

A LLC won't stop you from getting sued...just get umbrella insurance and don't be a slumlord and ignore maintenance/saftey issues.

unless you have lot of wealth/networth it probably will not make sense to go down the LLC route. If you have primary home concerns there's ways to protect that with out doing an LLC...

LLCs also can be pierced and any good lawyer will know this ...

Any lawyer who I have spoken with who I know enough to be frank with has told me that sure the due on sale clause can be triggered because it is deep in your mortgage docs, but if you make the payments the odds of you having an issue is small.

Some other things to consider:

- Do you currently have owner occupied insurance rates on the property? If so, that could change if the insurance company figures out you know longer live there.

- At least in CT where I am from if you own a property in a LLC you have to hire a lawyer to do an eviction. If you own it in your name you can do the eviction. Big difference in cost there.

- There are added costs to having a LLC, do you know what those are for your state?

@Nathan Shankles  

I don't have a ton of input here, @Michael Noto  addressed great points

Just wanted to add, during a recent refinance in CT where we transferred ownership to an LLC our attorney advised us to utilize the warranty deed versus the quitclaim because the quitclaim would void our title insurance and end up costing us much more than the additional few dollars to file a warranty deed.

**I'm just sharing my experience for my situation. Of course seek your own legal advice, especially pertaining to your state and your circumstances but I never heard of that before and had always dealt with quitclaims in the past. 

After she told me I did a search and as always found a BP thread on it you can review here

@Brian Spies  

So the benefits of doing this is if a tenant sues you, so long your LLC (make sure you have an operating agreement) is set up correctly, your personal assets should be protected and the tenant will only have claim to assets in the LLC. The worst case scenario will be that you lose the house and any other assets in your LLC (cash or other properties), while still protecting your personal assets (401k, savings, your personal house, etc.). Additionally, the bank will then call in the mortgage, which you will have to pay from your personal assets as its still in your name and there is no collateral against the mortgage anymore.

I'll clarify and add to your point Brian.

I had a consultation with a lawyer the other day on the topic of LLC's. One of my main motivations for exploring the LLC's was personal asset protection. If you are in the E-quadrant and utilizing an Employer-sponsored 401(K), your funds built up in this investment vehicle are actually already sheltered from inside attacks that could result from a lawsuit at one of your properties by ERISA (Employee Retirement Income Security Act).  

401(k) Protection

Employer-sponsored 401(k) plans are safe from lawsuits. Only the Internal Revenue Service or a spouse can make claims on that money. Employer-sponsored accounts are protected by the Employee Retirement Income Security Act. Congress authorized 401(k) plans to help employees have some money to fall back on when their working days are done. Federal lawmakers gave these retirement plans special protections for this reason.

For those of you who are holding a W2 position, one of your larger assets that you may want to seek protection for might actually be to protect your wages from garnishment.  

@Ralph Poirier

Consider having an attorney draw up a loan between you and your llc. Put a lien on the llc. That way you never have to worry about paying a mortgage on a property if it were lost in a lawsuit..

You would come before the lawsuit, but behind your bank..

@Bromley Palamountain   Can you elaborate on this please...

"For those of you who are holding a W2 position, one of your larger assets that you may want to seek protection for might actually be to protect your wages from garnishment."

This is a new one to me, how do you go about doing this?  

Before you go the route of complicated ownership entities, talk to your Insurance broker and CPA. Most likely you dont need to do an LLC....  just get an Umbrella policy (500/yr?) ....

Be a smart business owner and dont just blindly follow what the Gurus say to do - remember they are making money off you....  they dont have your best interest at heart.....  

Also remember that LLCs have ripple effect - your Insurance will cost more, your taxes will cost more, having your taxes filed each year will cost more and on and on.

Contact an attorney that specializes in this work and tell them what you want. A Saavy attorney will have contacts at various lenders & know the right people to speak to get what you want.