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Moving Properties to an LLC?
Hello, I have several long-term rentals that are all currently in my name. They all have mortgages in my name as well. I keep hearing it is smart to "move" these to a LLC, but how exactly do I do that? I know how to create a LLC and I understand the benefits of such a move. However, the mortgages are in my name. Any insights here would be great. Thanks.
I would first contact your mortgage holder to figure out the process to transfer the debt to an LLC. Then I would get with you CPA to figure out the plus and minus of going this route. If it all makes any financial sense then proceed.
Quote from @Tyler Carter:
Just because you hear something doesn't mean it's true. Educate yourself. If you are going to take on the extra work required by an LLC, make sure you have a valid reason to do so.
An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.
Warning: I am not an attorney, and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.
ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State's website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appear on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.
LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.
Additional thoughts:
1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.
2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.
3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.
4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your primary insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.
5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 14 years of experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.
If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require extra, on-going effort to maintain.
Quote from @Nathan Gesner:
Nathan, thanks a lot. Your thinking is exactly how I have been operating for the last several years. I do have an umbrella policy for many reasons to include my rentals. Additionally, my strategy isn't slum lord investing. I invest in mid to upper-income areas where good credit scores and high earners aren't hard to find. I can pretty easily find good tenants and screen them myself. Thanks for the thoughts and appreciate you taking the time to respond.
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Quote from @Tyler Carter:
Quote from @Nathan Gesner:Nathan, thanks a lot. Your thinking is exactly how I have been operating for the last several years. I do have an umbrella policy for many reasons to include my rentals. Additionally, my strategy isn't slum lord investing. I invest in mid to upper-income areas where good credit scores and high earners aren't hard to find. I can pretty easily find good tenants and screen them myself. Thanks for the thoughts and appreciate you taking the time to respond.
I would also add in some counties, moving the LLC from your personal name into the LLC can be considered a taxable event, you would need to see what the specifics are for where the properties are located. There can also be "transfer taxes" again, county-specific. Please do your research !
I am curious about this as well as I have a single family that was once my primary residence, I moved out and am turning it into a rental property. If I have it under an LLC, would the deed also need to transfer to the LLC to avoid having my personal name attached?
Quote from @Dean Valadez:
I am curious about this as well as I have a single family that was once my primary residence, I moved out and am turning it into a rental property. If I have it under an LLC, would the deed also need to transfer to the LLC to avoid having my personal name attached?
Dean, yes. If the property isn't financed then that is probably not as big a deal - Check tax implications and know there are other LLC rules to follow. If it is still financed then that is where the issues start in my case. The mortgage holders may call you to pay off the mortgage (refinance) if the deed is moved over to a LLC. Considering a lot of my properties still have sub 4% rates, that is not something I am crazy about at all.
Quote from @Tyler Carter:Thanks, Tyler. The property is financed at about 3% rate with maybe $45k left in the loan. I hear some people say that most/many lenders won't care if an LLC pays the loan so long as they are getting their money. As this is my first time doing this, I cannot speak from experience.
Quote from @Dean Valadez:
I am curious about this as well as I have a single family that was once my primary residence, I moved out and am turning it into a rental property. If I have it under an LLC, would the deed also need to transfer to the LLC to avoid having my personal name attached?
Dean, yes. If the property isn't financed then that is probably not as big a deal - Check tax implications and know there are other LLC rules to follow. If it is still financed then that is where the issues start in my case. The mortgage holders may call you to pay off the mortgage (refinance) if the deed is moved over to a LLC. Considering a lot of my properties still have sub 4% rates, that is not something I am crazy about at all.
Newbie question: what is the best way to transfer the deed to the LLC? Go through a title company? Are there closing costs associated with that? Go through a lawyer? Same closing costs? DO a quitclaim? How do I do a quitclaim?
@Tyler Carter - the whole point of moving them to an LLC would be primarily asset protection. As such, if this is not done correctly within Alabama law statutes, it is a costly and worthless effort as it won't provide any protection. I strongly recommend meeting with a real estate attorney, and seeing how this can be accomplished correctly; let them handle the process.
Quote from @Nathan Gesner:
Quote from @Tyler Carter:
Just because you hear something doesn't mean it's true. Educate yourself. If you are going to take on the extra work required by an LLC, make sure you have a valid reason to do so.
An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.
Warning: I am not an attorney, and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.
ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State's website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appear on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.
LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.
Additional thoughts:
1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.
2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.
3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.
4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your primary insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.
5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 14 years of experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.
If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require extra, on-going effort to maintain.
Hey thank you for this information Nathan
Quote from @Dean Valadez:
Quote from @Tyler Carter:Thanks, Tyler. The property is financed at about 3% rate with maybe $45k left in the loan. I hear some people say that most/many lenders won't care if an LLC pays the loan so long as they are getting their money. As this is my first time doing this, I cannot speak from experience.
Quote from @Dean Valadez:
I am curious about this as well as I have a single family that was once my primary residence, I moved out and am turning it into a rental property. If I have it under an LLC, would the deed also need to transfer to the LLC to avoid having my personal name attached?
Dean, yes. If the property isn't financed then that is probably not as big a deal - Check tax implications and know there are other LLC rules to follow. If it is still financed then that is where the issues start in my case. The mortgage holders may call you to pay off the mortgage (refinance) if the deed is moved over to a LLC. Considering a lot of my properties still have sub 4% rates, that is not something I am crazy about at all.
Newbie question: what is the best way to transfer the deed to the LLC? Go through a title company? Are there closing costs associated with that? Go through a lawyer? Same closing costs? DO a quitclaim? How do I do a quitclaim?
If you have a mortgage on the property and transfer it to an LLC (the LLC would be a different owner) it could trigger a due-on-sale clause. Check with your lender first as well as the other advice that you got on here.