Should I close the loan as an LLC or on my own name?

8 Replies

Hey Biggerpockets community,

I am looking for my first investment property and in the meantime casually talking to lenders, my CPA, etc to educate myself about legal and financial implications of any moves in advance. There is one thing I am very confused about and I wanted to get your opinion on the matter here.

Since I have my primary residence (condo with 27 more years of mortgage payments), my CPA recommended that I buy my investment property as an LLC, not on my name. This made sense from a liability viewpoint, but I realized the loan would be now considered commercial and rates would be much higher (about 0.5 to 1.5 more depending on property). Plus they require higher downpayment % that I would like to avoid. I called 4 different lenders to hear my options. Lender A said I have to do LLC before closing and close with that name and pay the higher rates. Lender B said if I close with my name and then transfer to an LLC after closing, the bank or credit union may call the loan and force a closing, but it is unlikely (whatever that means), and usually they wouldn't even increase the rate. Lender C said I would not be able to close it with a fresh new LLC because that LLC wouldn't have had any performance to show or tax returns to present during underwriting, and the way that most of her borrowers go is to close with their name first and within an hour of the closing, create the LLC with the help of an attorney and transfer title right away (not sure if this is even possible!). And finally Lender D said I can close with my name and transfer to an LLC, but this may trigger a taxable event, the bank may call the loan (like Lender B said), or an increase in the rate from residential rates to commercial rates may take place or may not even allow the title transfer to an LLC.

Not sure which one is right, or which way I should go about to both have the liability protection as well as the milder loan conditions if possible at all (lower downpayment and lower rates). Please let me know your thoughts.

Thanks in advance.

Updated over 1 year ago

Bottomline: Have most people been closing their mortgages with freshly formed LLCs, or do most people close first as a "natural person" and then transfer to LLC? If the latter, did they face any problems such as rate increase or loan call?

Why did the CPA recommend you purchase via LLC? That's important because they have the full picture of your financials.

Do the numbers work if you fund as an LLC as opposed to in your name? Rates are typically higher for rentals unless you claimed it's owner occupied at some point during the financing application.

Ask your lender if they'll allow you to use the new LLC but sign a personal guarantee. This will allow you to get the LLC going and show some history so when you purchase future deals the LLC has a record.

I purchased properties in my name but have since moved most to an LLC. Don't forget to update your insurance when / if you use an LLC to hold the property. Also consider a $1m umbrella policy no matter which way you deed the property.

 

@Carl Millsap

Thanks for the response. I think the CPA recommended LLC only for liability protection. And yes, I do want to have it under LLC eventually, my question is about "how" to get that done. As far as I understand, to reduce complications of title transfers etc, you can form the LLC before closing and close with that if you are willing to pay the higher interest rate (even though one lender said the LLC wouldn't have enough performance history so they wouldn't close it that way??). The other option is to close as "myself" at the lower rate and then transfer to LLC soon after closing. While this is attractive interest rate-wise, one lender said it may not be allowed or it may trigger a loan call in. Or they may increase the rate, which defeats the purpose.

 

@Sefa Demirtas find the lender that will allow you to close with the LLC and sign a personal guarantee. That's the lender you want to build your relationship with.

You can also do as I suggested which is close under your name, wait 3-6 months then transfer to your LLC. Can the lender exercise the "due on sale" clause yes....is it worth the risk...only you can answer that. In my experience most banks aren't searching records to call loans; the .5 to 1.5 difference is probably $35-100 difference in payment. Which goes back to my earlier question does the #s work at the higher interest rate? If the bank does "call the loan" and / or increases the interest rate will the project still cashflow?

@Sefa Demirtas

If you want the liability protection, you have to set it up properly and do everything by the books. 
Failure to do so may just negate the protection you are looking for.

You should have title in the LLC's name, mortgage docs in the LLC's name, rent going to the LLC, etc.

If you can't get it done properly for the time being, get the extra insurance coverage.

Make sure to talk to an attorney to see if your actions are giving you the asset protection you are looking for.

Originally posted by @Carl Millsap :

@Sefa Demirtas find the lender that will allow you to close with the LLC and sign a personal guarantee. That's the lender you want to build your relationship with.

You can also do as I suggested which is close under your name, wait 3-6 months then transfer to your LLC. Can the lender exercise the "due on sale" clause yes....is it worth the risk...only you can answer that. In my experience most banks aren't searching records to call loans; the .5 to 1.5 difference is probably $35-100 difference in payment. Which goes back to my earlier question does the #s work at the higher interest rate? If the bank does "call the loan" and / or increases the interest rate will the project still cashflow?

Yes it still would cashflow, but closing as an LLC means also higher downpayments, which ties up more cash than I would have liked. This is why the other path (sign on my name, then transfer) still looks more attractive. One of the lenders above said he doesn't think the bank would call the loan just based on this, but you are right, I am exposing myself to that risk.

Originally posted by @Basit Siddiqi :

@Sefa Demirtas

If you want the liability protection, you have to set it up properly and do everything by the books. 
Failure to do so may just negate the protection you are looking for.

You should have title in the LLC's name, mortgage docs in the LLC's name, rent going to the LLC, etc.

If you can't get it done properly for the time being, get the extra insurance coverage.

Make sure to talk to an attorney to see if your actions are giving you the asset protection you are looking for.

 Thanks, I thought this question would have an obvious answer and would have occurred to many folks here, so I wanted to try this forum first. You are right it does make sense to talk to a lawyer too, not just lenders...

I was in the camp of running everything through the LLC when I bought my first couple of properties. Another avenue you might use is to find your local REIA and ask for input from the folks that have been doing it in your area. Our REIA has a group email function so you can ask this type of question and get localized advice. I found a local lender that let me do 15 year term with the downpayment terms I needed. They gave me a shot on the first couple, so due to the relationship I have stuck with them.