Switch home to LLC with loan

22 Replies

I have a rental that I purchased in 2007 and it is still at the bottom of the Marianas Trench. I see fish when looking out of the windows. The property is in my name, and I need to move it to an LLC for liability. I was going to use a quit claim, but I'm concerned that it could trigger a due on sale. I understand with interest rates so low, the chance is small presently. But I have a very low rate, and if (when) interest rates go up, the banks will start sniffing around for wraps, and other transfers to force refinances and increase their bottom lines. Any ideas? Or just have good insurance.

@Account Closed  ,

Quit-claims are regularly used for estate planning and other purposes, and I think it would be tough for a bank to truly clear the "due on transfer" if it were fought, if those were the pure reasons.. 

But what liability exactly are you getting rid of? The mortgage is still in your name, right? You can't quit claim the mortgage - just the ownership of the property. But that's not going to put it out of reach of the lender as collateral for your loan. 

@Al Williamson  's approach is the "official" way to do it, per the mortgage note, most commonly. Something like "borrower shall have written permission from bank to change ownership of subject collateral.."

Matt,

I was sort of joking with someone who was trying to use quit-claim a lot that I would start a hedge fund in 5 years when interest rates are higher, buy a bunch of long-term fixed rate loans in MBS w/ buyers that have violated covenants, then re-negotiate or "due on transfer" to recoup the discount quickly and make a killing.. lol I don't think I will..

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Moving a house you financed in your own name into an LLC will do very, very little to help you with liability. You are still responsible for the note, possible you manage the property yourself,,,the LLC isn't meant to be used that way.

If your a pure investor, don't manage the property, don't have anything to do with maintenance and buy the property in an LLC, you would probable have good protection,,of course you can't get a conforming mortgage with an LLC,,,

Thanks for the responses, but i think that you guys are misunderstanding. My fault, I said the house is underwater, which is irrelevant. Arizona is a non-recourse State, so I could $%#& can it back to the bank and walk away without a deficiency. The liability I'm worried about is something like a personal injury suit from a tenant.

I agree. What are you hoping to accomplish with the LLC? Everyone thinks that an LLC is the end all be all....some even form one before they buy an investment. How much liability can there be in owning a house? As stated above, you are still personally on the hook for the loan, so I can only assume you are worried about getting sued for something? Slum lord in the making you are? Plan on violating building codes, handing out lead based paint to the kids on Halloween, intentionally creating liabilities all around? I didn't think so. You are going to own a properly maintained home that is safe. Can you guarantee that someone won't twist an ankle or get hurt some other way? No. Can you guarantee you won't get sued? No. But if you are maintaining the property properly, take care of repair issues and select tenants without a history of suing people frivolously, then you are most likely covered by a large....(LARGE) liability insurance policy on the house and then have that backed up with a LARGER umbrella policy.

And if you are like me and manage the rentals yourself, then LLC or not, you will ALWAYS be personally liable for any work you do. If an electrician makes a mistake, it is on him and the company he works for. If you make a mistake, it is on you and the company you work for. No company...then just you. I make plumbing and electric repairs. I install fixtures, sinks, dishwashers etc. But I know how to do it correctly and safely. That limits my liability because I know how to do the work right, thus liability is minimized. Rewire a house....no thanks. Bring in a pro.

Don't take our word for it. Call a couple attorneys. Don't tell them you want an LLC. They will just form one and bill you. Tell them what you are attempting to accomplish regarding liability management and ask their advice as to how much liability there is and how to handle it. I found out from my attorneys, that an LLC was just a waste of time, money and effort and that at the end of the day, would not afford me much protection. In 10 years when I am much more hands off....different story. I'm willing to bet your situation is at least a little different then mine. Call an attorney...get advice tailored for you. I bet you end up increasing insurance coverage and leaving it at that once you understand the rules and limitations of an LLC.

I heard Al Aiello present at the Mr. Landlord conference. He advocates an equity stripping process that make a property owner look like they have no equity and aren't a desirable targets for frivolous suits.

It's something to consider.

Get a good insurance policy and forget all about the Guru talk about an LLC for asset protection. Forget about the equity stripping that also is Guru talk that will land you in hot water if file false or misleading documents.


Joe Gore

There's lots of people out there selling advice that comes with massive disclaimers. Snake oil is snake oil. An LLC only works when it is a true, seperate, self sustaining entity. You need sufficient capital reserves, management etc. Creating an LLC to form a magical bubble around this "ASSET" that you intend to milk dry is not an LLC. You want your property in an LLC, or as some people recommend, an LLC per property, go for it. That means Commercial insurance at about a 30 - 50% premium increase since you can't insure it like you do now (in your own name) With sufficient reserves...(good luck getting a valid definition of that) my attorney says 10% of home value, liquid, in the bank at all times. Separate banking and credit accounts since you can't merge finances.

It's a great idea.  I see why people can sell the heck out of it.  But it simply does not work like that.  Unless you go through all the steps like i listed above, plus any more that your counsel recommends.....goodbye returns and positive cashflow, you won't have the protection you desire.  Get the insurance...large liability and large umbrella policy...do what you are supposed to do and you will be fine.  Let's not make this harder than it needs to be.

@Chris Simmons statements of an LLC are correct on the aspect of protection. The purpose of forming an LLC shouldn't be based on asset protection. Asset protection should be looked at as an added "possible" attraction to having one on top of your main reasons whatever they might be for creating your LLC.

In my case being in Illinois I take advantage of using a Series LLC for several reasons and none of those reasons are for protection.

NOTE: I'm a buy and hold investor who purchases straight out with cash. Otherwise as @Chris Simmons mentioned I wouldn't exactly say "goodbye" but it will eat into your returns and positive cash flow.

its not just long term holdings. There's  a self directed Ira, management company amongst other business within. Colleague me and ill elaborate when i get to a computer. I'm using a cell phone that's killing me to key into.

@Account Closed  I get your question.  (I think it was vastly misinterpreted.)  I think you should just maintain an extraordinary amount of insurance for your asset protection concerns until you either sell or refinance the property. 

If/when you refinance, presumably after you have a huge amount of equity paid down by your renters ;-), then you can transfer it to your LLC when you use a commercial loan through a portfolio lender to cash out refinance. Ask me how I know this. :-D

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Wow! I didn't realize that this was such a controversial question. I'm fairly new to BP, and I hope that this isn't one of those sites where nothing can be posted without it ending in attacks and arguments.

For those of you who have income properties in your own name, what would stop a creditor from going after your assets if a claim exceeds your insurance? My experience has been that if properly formed, a lawsuit ends with an LLC. Of course this may vary by State. For 80 bucks, it seems like cheap "insurance", and have another layer of protection.

As far as insurance costs, my agent sent me quotes for a rental property, and the entity that owns it did not matter. I'm not sure, but some people seemed to suggest that I should insure the house as my personal residence and rent it, which is cheaper, but as soon as they discovered that it was actually a rental, a claim would be denied.

Thanks (most) everyone for the responses.

@Account Closed unfortunately it's not nearly that simple, or if someone did something bad, they would just push all assets into an LLC and walk away.

As I outlined previously, if your a pure investor, you will have nothing to do with the management of the property, the rehab etc, and buy and hold the house in an LLC and the note is not guaranteed by you personally, a LLC does exactly what you think it will do.

I have $5MM in liability insurance with an umbrella policy, it doesn't cost very much at all, and I don't have to worry about liability as long as I take care of the house and keep up on maintenance etc.

If a tenant calls you and says "I smell gas" and you do nothing and the house blows up and someone is hurt or killed,,,your screwed no matter what you have done with insurance, LLCs, series LLC's etc etc.

If you had no idea there was a gas leak, and no reason to know it, then your covered by your $5MM in insurance

@Account Closed  I don't think this is a controversial subject but it is a very important one.  The whole point of coming to a forum like this is to share information.  Sometimes you gain information from others, sometimes you share what you know.  If my posts were aggressive or offensive to you or anyone else, I apologize.  My only intent was to share what I have learned so someone else could possibly benefit. 

When it comes to matters like this, the idea of someone thinking "if only I had known" when it is already too late is unacceptable to me. I used to think the same thing about an LLC and went to an attorney after I bought rental number 2. Fortunately, I went to an attorney I deal with regularly as part of my day job of suing people due to bad loans. Because of my relationship, he took time to ask me what I was trying to do and why. That is what started my true education on LLC's regarding their abilities and limitations as opposed to what the gurus that have nothing to lose when you get sued are selling.

For my specific case, managing my own rentals, being able to buy landlord protector insurance policies issued by the same company that insures my primary residence (about 50% cheaper than going to commercial broker), $500,000 liability per house with a $1,000,000 umbrella policy on top of that, being able to access conventional loans with 30 year, fixed rate terms (up to 10 mortgages per person), and most importantly, I have well maintained, safe properties.  

Will i do an LLC for my properties eventually? Yes....but that is well down the road...as far down the road as i can make it....when and if i am forced to the commercial side of lending.

The best advice I can give is for you to remember that at the end of the day, everything is  up to you.  You are in charge of your situation.  All the risks and rewards of your decisions are yours and yours alone.  Whether you come to a public forum like this where you can get a response from anyone, or you go to a professional attorney, CPA, inspector....whatever.  They will all give you their opinions and understandings of the facts as they know them.  An attorney will never guarantee you can win at trial, a CPA will never guarantee you won't get audited and an inspector won't ever guarantee the house they just looked at won't fall apart.  

Again, sorry if I offended you or anyone else. I was just trying to share information that I learned because I used to be on the LLC bandwagon and would hate for anyone else to waste time or money on something only to find out it wasn't really what they needed.

Good luck.

Originally posted by @Ali Boone:

You sure you need to put it in an LLC? Check this out (and read the comments, those are incredibly helpful)-

http://www.biggerpockets.com/renewsblog/2013/08/17...

 Thanks Ali. This article addressed what my question was:

Triggering Due-on-Sale Clauses. This one only matters if you already own a financed property. Oftentimes investors will buy properties under their personal name and then quit claim it to an LLC. There is no problem in doing that, but there is a slight risk that doing so could trigger the “due-on-sale” clause in your loan agreement meaning you would owe the remainder of the loan immediately. That could be a lot of money to have to come up with out of pocket! I was told it is a small chance it could happen, but a small chance with that much money is worth considering.

As far as the other disadvantages they list:

Cost. Here in Arizona it's a one time fee less than $100.

Financing. I'm not trying to avoid liability to the lender. Arizona is a non-recourse State, so I could walk away from the loan anyway, and the bank cannot sue me, or at least win.

Non-Foolproof Asset Protection. I don't believe that any one thing will give you full proof protection. It takes layers of protection, and it seems that an LLC is a cheap way to add another layer.

I think the problem is that laws vary so much by State. I'm shocked to learn that an LLC in California is $800 a year! Arizona is a one time fee less than $100. I have setup several, and they are applied for with a short form. The last one took me about 15 minutes. Of course, if you want to put together an operating agreement, that will take longer. A lot of hostility towards LLC's seems to come from their misuse advised by some of the gurus.

Here is some information about Arizona LLC protection by Keyt Law:

http://www.keytlaw.com/azllclaw/asset-protection/
Originally posted by @Chris Simmons:

@Matt Shields I don't think this is a controversial subject but it is a very important one.  The whole point of coming to a forum like this is to share information.  Sometimes you gain information from others, sometimes you share what you know.  If my posts were aggressive or offensive to you or anyone else, I apologize.  My only intent was to share what I have learned so someone else could possibly benefit. 

When it comes to matters like this, the idea of someone thinking "if only I had known" when it is already too late is unacceptable to me. I used to think the same thing about an LLC and went to an attorney after I bought rental number 2. Fortunately, I went to an attorney I deal with regularly as part of my day job of suing people due to bad loans. Because of my relationship, he took time to ask me what I was trying to do and why. That is what started my true education on LLC's regarding their abilities and limitations as opposed to what the gurus that have nothing to lose when you get sued are selling.

For my specific case, managing my own rentals, being able to buy landlord protector insurance policies issued by the same company that insures my primary residence (about 50% cheaper than going to commercial broker), $500,000 liability per house with a $1,000,000 umbrella policy on top of that, being able to access conventional loans with 30 year, fixed rate terms (up to 10 mortgages per person), and most importantly, I have well maintained, safe properties.  

Will i do an LLC for my properties eventually? Yes....but that is well down the road...as far down the road as i can make it....when and if i am forced to the commercial side of lending.

The best advice I can give is for you to remember that at the end of the day, everything is  up to you.  You are in charge of your situation.  All the risks and rewards of your decisions are yours and yours alone.  Whether you come to a public forum like this where you can get a response from anyone, or you go to a professional attorney, CPA, inspector....whatever.  They will all give you their opinions and understandings of the facts as they know them.  An attorney will never guarantee you can win at trial, a CPA will never guarantee you won't get audited and an inspector won't ever guarantee the house they just looked at won't fall apart.  

Again, sorry if I offended you or anyone else. I was just trying to share information that I learned because I used to be on the LLC bandwagon and would hate for anyone else to waste time or money on something only to find out it wasn't really what they needed.

Good luck.

 Maybe disagreeable, but not offensive. You can only be offended if you allow it. :)

I would not own real estate without sufficient insurance. In addition to your landlord policy, get an umbrella policy. The LLC will not protect you in the case of a serious lawsuit, but it does have other advantages for running your business. No need to transfer the properties into an LLC and take the risk of an early call on the loan. That being said, we have done just that and never had a bank call a loan. If they did, we have sufficient reserves to pay off the loan.

My understanding is that transferring the property to an LLC could trigger the Due on Sale clause, meaning the bank could require the remaining of the loan balance to be payable in full. However, banks are in the business of lending money and much rather have a property that is performing than to have to take over a property. I've heard that most banks "won't mind" the transfer of a property into an LLC as long as you continue making your payments. Banks might see the transfer of the property into an LLC and notice something is going on but all they care about really is just a loan that is performing and not in default. I would say an LLC is just an added layer of protection besides good insurance. The LLC might not take all the liability away, but I much rather have a property under an LLC than under my own name.