I'd like to get your thoughts regarding an umbrella policy or llc. I have a personal residence in Denver that I rent out while I am away for work. We have a standard landlord policy on the property now with a tenant that has been in there for two years and I'm wondering if its worth adding an umbrella policy or switching the house to an llc?
I understand the llc could trigger the due on sale clause which is only 40k so it would not be the end of the world but I am eventually planning on moving back to this residence one day. So if I plan to move back into the residence would it be best to go with an umbrella policy or the llc or both?
If you want to move it into an LLC, then send the servicer a letter and get authorization to move the property into an LLC. Tell the servicer that it is a rental property, and that you are moving it into the LLC for liability reasons only, and that you want a waiver of the acceleration clause in your mortgage for this specific purpose. In the event of any default adverse to the lender, you would immediately quit claim the property back to yourself. Once you get their authorization, they're going to have a hard time explaining in court why they accelerated your mortgage.
Regardless, I would recommend an umbrella as well. It's not like if your LLC is sued, you're just going to roll over and hand them the property. Umbrella is nice if things go to litigation, and in the final analysis isn't that expensive...it might cost you two months worth of profit on one property to protect all your properties.
I have titled all of my rental properties in my LLC, I don't feel it is necessary to inform the lender (assuming a typical long term lending institution). The likelkihood of the note being called due is extremely low. In any case use a warranty deed not a quit claim deed, to avoid losing title insurance.
Umbrella policies are a great way to add coverage when you have equity/assets. I pay about $350 a year for an additional $1 million in coverage over 10 properties.
Be sure if you change the title on your property you also change your property insurance to cover the entity.
I agree that in the short term the bank probably isn't going to call your loan. What I would be worried about is down the line, let's say 5 years from now, interest rates go to 5-7%, and the bank decides to get creative and get rid of some performing long term loans at 3.5%, which at this point are just costing them money. It hires a company to go through their portfolio and identify borrowers who have transferred their property out of their name. The bank then calls your loan, and basically dares you to sue them, since they are a billion dollar company, and you are you. Not really something I want to worry about, and not something I would put past these giant lending institutions. The reigning mentality these days seems to be "anything to make a buck".
Btw...you don't have to look far to see why not getting your lender's approval is a bad idea:
If they're doing it now, you can bet they'll be doing it big when interest rates rise...
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