Turning FHA multi-property into LLC

9 Replies

Alright, so I have been getting a couple different answers and I think I know the answer but I would like to get different responses from the BP community! 

I recently purchased a duplex in Cicero, Illinois via FHA. I will be house hacking it for a year or so but want to know if I can essentially turn the property into an LLC at all or after the year mandated is up? I have been told yes after the year is up, no not at all, and after a 5 year frame.

Thank you guys so much in advance!! (:

A lot of smaller RE investors don't put their properties into an LLC. However, you can still create your own LLC or Sub Chapter S Corp through which can you run the income through and still deduct your investment-related business expenses through. Find yourself and good RE accountant and he or she will be able to point you in the right direction. BP would be a good starting point.

@Samuel Cardenas congrats on the Cicero property! Which part of Cicero did you purchase this in? 

To your question about the LLC, you will most likely run into issues with your lender if you want to transfer the property to an LLC. This has been talked about here on BP quite a bit. Essentially, lenders don't like it when you quit claim deed the title to your LLC because you have personally guaranteed the mortgage. They like to be able to foreclose on you if things go south, and they look at the LLC as a change in ownership (which it is technically).

If you decide to refin with a portfolio lender in the area you might be able to make the switch happen. You will have to weigh the relative stress/cost of having an LLC against the value of the property. Most of the deals in Cicero are under 200k, and it is going to cost you $400 per year to have that LLC come tax time. You might find that this ends up eating all the cash flow too.

Also consider the interest rate when you refi your property. Depending how recent your purchase was interest rates have doubled!!! What I do is own the building and my LLC manages it. Doesn't offer any real protection, but it does provide a buffer between myself and the tenants.

@Samuel Cardenas the question is, why do you want to do this? If you purchased with an FHA, you have no equity, therefore you're likely a poor target for a lawsuit. If you have few assets, there is really nothing to protect, so it's not necessary

An LLC can manage a property without the property being owned by the LLC. I would recommend placing the property in an Illinois Land Trust then leasing the property to the LLC with the right to sublease.

Your bank as interpreter of your FHA loan makes the final decision. They will let you know if you can place the property into a land trust or an LLC. The bank and the FHA hold the final answer.

In my experience banks do NOT like to accept change without a refinance or a personal guarantee. If you ask for a change be prepared to reimburse the bank the legal costs to research your question.  It is always best to get these questions answered before the loan is signed to avoid additional costs down the road.

Ask your mortgage company if it triggers the Due on Sale Clause. Many people will tell you; "they'll never do that as long as you pay your mortgage". Well, that's of little consolation if it actually happens to you. I'm forming an LLC to work with partners, but keeping my duplex in my name alone. Really no need for an LLC or the cost for a couple properties. Get an umbrella policy to cover liabilities.

@Samuel Cardenas yes you can after house hacking for 1 year. However then you will not be able to get residential Conventional financing once you do. If you plan on refinancing it to get out of FHA, do that first. Then, if you finance it as a primary you need to wait one more year. If you finance it as an investment property, there's no waiting after that.

Hope that helps!