Getting rentals on an LLC

General Landlording & Rental Properties
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Getting rentals on an LLC

Nathan Frost
Rental Property Investor · Wichita Falls, TX · Member since 2018 · 353 posts · 79 votes

How do you purchase rental properties and get them put under your LLC? Are you buying them with your name and then transferring the deed? What is the best route to get homes purchased and under my LLC?

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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
7y

There are two options ultimately 

You buy in your name then QC it to the LLC. You're basically hoping the bank doesn't notice and call your loan (Which is totally in their rights to do).

The other option is purchase under the LLC, which will require commercial loan, and often a slightly higher rate.

Talk to your attorney- depending on circumstance an LLC may not necessarily be the best option for protection without the headache dependent upon what your goal is, your net worth is, property value ect.

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y

    There are two options ultimately 

    You buy in your name then QC it to the LLC. You're basically hoping the bank doesn't notice and call your loan (Which is totally in their rights to do).

    The other option is purchase under the LLC, which will require commercial loan, and often a slightly higher rate.

    Talk to your attorney- depending on circumstance an LLC may not necessarily be the best option for protection without the headache dependent upon what your goal is, your net worth is, property value ect.

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    7Reply
  • Atta Bari
    Member since 2018 · 60 posts · 10 votes
    7y
    @Natalie Kolodij would having rental llc will help and provide all benifits of buying my first property for myself under my name. Like first time home buyer thing etc
    0Reply
  • Mike McCarthy
    Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    7y

    @A Bari many/most investors will purchase their first 5-10 properties under their name, and instead of an LLC, get decent landlord insurance and an umbrella policy to cover their rental properties (and home and auto too).

    The umbrella insurance will cover up to $1M (or more) for an unlikely but possible issue.

    It's arguable how much an LLC would help as a small investor with a couple properties.

    Once you get bigger, and exceed some of the limits of conventional mortgages (4-6-8 properties) then you'll be in a better position to start looking at commercial loans and make the switch over to an LLC.

    0Reply
  • Robin C.
    Investor · Atlanta, GA · Member since 2016 · 112 posts · 25 votes
    7y

    I bought my rental using a SDIRA, then QuitClaim the deed to my LLC......

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    7y
    Originally posted by @Robin C.:

    I bought my rental using a SDIRA, then QuitClaim the deed to my LLC......

    Is the LLC owned by you personally or by the IRA?

    0Reply
  • Natalie KolodijBusiness Member
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    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Atta Bari:
    @Natalie Kolodij would having rental llc will help and provide all benifits of buying my first property for myself under my name. Like first time home buyer thing etc

    Nope- No benefits with regard to buying programs. 

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    7y

    @Nathan Frost I buy all my properties in the name of my LLC.

    If you buy in your own name and then transfer to your LLC, your lender can call your loan. Also you have no title insurance unless you do a full closing and get new insurance.

    2Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    7y

    @Nathan Frost

    They changed the law on Lenders doing a DOS if you quit claim your name to an LLC as of October of 2017. So you don't have to worry about your lender calling your note on you if they find out and feel like it. I would get the loan in your personal name then qcd it to an LLC later and you're good to go.

    3Reply
  • Nicholas Lohr
    Investor · San Francisco, CA · Member since 2015 · 302 posts · 206 votes
    7y

    @John Morgan Do you have a link to the documentation of this law change?  I just searched for a bit and couldn't find anything.  

    0Reply
  • Mike S.
    Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
    7y

    First of all, do not quit claim but use a warranty deed instead to avoid loosing your title insurance.

    Second, deed your property into a land trust where you are the initial beneficiary. The Garn St Germain Act will protect you against any due on sale clause. Change your name insured to the land trust.

    Later you will assign the beneficial interest of the land trust to your LLC. This assignment being private and not recorded, the bank won't know about it.

    4Reply
  • Jon Allen
    Rental Property Investor · Bloomington, IL · Member since 2018 · 55 posts · 90 votes
    7y

    Have you asked your lender if they would waive the due on sale clause for that particular transfer? Why would they want to exercise it if you can convince them they’re not going to be any worse off?

    0Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    7y

    @Nicholas Lohr

    https:www.biggerpockets.com/forums/49/topics/610831

    This is only for Fannie loans taken after 6/2016. Does not include Freddie Mac, VA or jumbo loans. Says you can change your personal name on the loan to an LLC and a DOS clause won't apply anymore.

    D1-4.1-02, Allowable Exemptions Due to the Type of Transfer

    A transfer of the property [...] to [...] a limited liability company (LLC), provided that: the mortgage loan was purchased or scuritized by Fannie Mae on or after June 1, 2016, and the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).

    Note: The servicer must notify the borrower that a property transferred to an LLC must be transferred back to a natural person prior to any subsequent refinance application in order to meet Fannie Mae’s Selling Guide underwriting requirements.
    1Reply
  • Scott SmithPro Member
    Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
    7y
    Originally posted by @Mike S.:

    First of all, do not quit claim but use a warranty deed instead to avoid loosing your title insurance.

    Second, deed your property into a land trust where you are the initial beneficiary. The Garn St Germain Act will protect you against any due on sale clause. Change your name insured to the land trust.

    Later you will assign the beneficial interest of the land trust to your LLC. This assignment being private and not recorded, the bank won't know about it.

     This is spot on. I work with many clients and the general flow can look like:

    • LLC > Land Trust > property / properties
    • Series LLC > Agent Trust > "child" series (A / B / C / etc.) > Land Trust > property

    I have used this with clients for years now. There is still the rare occasion that a bank will try call in their note, but once we discuss this Act mentioned above they withdraw. 

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  • Pete M.
    Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
    7y

    @Mike S. @Scott Smith

    What are the legal/liability implications of deeding a property from a person to an LLC? Does the LLC still afford protections, or was that broken through the conveyance?

    If you buy a SFR property in your personal name, get a conventional loan in your name, and then transfer to land trust (with beneficiary as an LLC), do you then essentially have a SFR property protected by an LLC and on a conventional loan? Or what am I missing?

    Thanks.

    0Reply
  • Jeff Johnson
    Rental Property Investor · Mc Kinney, TX · Member since 2015 · 35 posts · 9 votes
    7y

    @John Morgan can you point me to where I can look that up?

    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    7y

    Some comments on what @Mike S. and @John Morgan said.

    Yes use a warranty deed to transfer the title (actually a special warranty deed may be a better choice. A quit claim deed is somewhat of a red flag.) but I do not believe Mike is right about the title insurance.  If I have my facts straight, in the event of a title issue, your company would have to come after you personally, and then you would have to look to the title insurer to make you whole. The title company has no liability to your company without new title insurance. 

    The new law quoted by John seems pretty limiting to me. It applies only to Fannie loans and only if you are a majority owner of the company. That rules out a lot of loans.

    0Reply
  • Mike S.
    Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
    7y
    Originally posted by @Pete M.:

    @Mike S. @Scott Smith

    What are the legal/liability implications of deeding a property from a person to an LLC? Does the LLC still afford protections, or was that broken through the conveyance?

    If you buy a SFR property in your personal name, get a conventional loan in your name, and then transfer to land trust (with beneficiary as an LLC), do you then essentially have a SFR property protected by an LLC and on a conventional loan? Or what am I missing?

    Thanks.

    My layman understanding (ie I'm not a lawyer and you should consult with one for any legal decision) is:

    If you transfer your property to your LLC, you need to get consideration for it (ie share, beneficial interest, etc...)

    Then you need to manage your LLC as a business separate from you (no commingling of asset, proper documentation of meeting, proper administrative chores, etc...) as failure to do so will probably pierce its veil of protection.

    Except for that, unless your transfer is reversed for other consideration (like fraudulent transfer to avoid an existing creditor), your LLC should provide you the inside and outside liability offered by the LLC in your State.

    0Reply
  • Mike S.
    Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
    7y
    Originally posted by @Ned Carey:

    Some comments on what @Mike S. and @John Morgan said.

    Yes use a warranty deed to transfer the title (actually a special warranty deed may be a better choice. A quit claim deed is somewhat of a red flag.) but I do not believe Mike is right about the title insurance.  If I have my facts straight, in the event of a title issue, your company would have to come after you personally, and then you would have to look to the title insurer to make you whole. The title company has no liability to your company without new title insurance. 

    Yes, my understanding is also that your LLC will have to sue you. You in return will go to your title company to settle it. Your LLC by itself won't have the insurance directly (except for some title insurance that allows the transfer of the insurance to entities as long as the beneficial owner is the same).

    If you used a quit claim deed instead, your LLC would have had no recourse at all.

    1Reply
  • Scott SmithPro Member
    Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
    7y
    Originally posted by @Pete M.:

    @Mike S. @Scott Smith

    What are the legal/liability implications of deeding a property from a person to an LLC? Does the LLC still afford protections, or was that broken through the conveyance?

    If you buy a SFR property in your personal name, get a conventional loan in your name, and then transfer to land trust (with beneficiary as an LLC), do you then essentially have a SFR property protected by an LLC and on a conventional loan? Or what am I missing?

    Thanks.

    The lender actually doesn't even have to be alerted to the conveyance because ultimately, the borrower from the loan (the client) is still the owner of the property. Land trusts are technically estate planning tools so the it all flows back to the client. For that reason, the client is still on hook for the note. I tell clients to not even tell their lender, as lenders don't normally get it and it just leads to a lot of confusion and chaos where it doesn't have to be.  

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  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    7y

    @Jeff Johnson

    Pull up that long www.bigger pocket forum topic link I posted and you’ll find the 800 page legal brief on it. Someone else posted this and I got it from them. 

    0Reply
  • Stephen Sorenson
    Rental Property Investor · Phoenix, AZ · Member since 2018 · 12 posts · 2 votes
    7y

    I'll throw my two cents in here. I just had a conversation with one of my lenders this evening. My wife and I have a "vertically integrated vacation rental development and operation" business for the past 14 years. Initially, we were building and using regular mortgages, and the properties were in our names. We formed a set of LLC's initially because we were able to finance part of one with a self-directed IRA. Since then, we've been using commercial lenders, and the properties start out in the name of the LLC and stay that way. My question to my lender was, should I move the remaining properties into commercial loans - because we are looking to scale the business with investors now, and want the business to have its own credit, and us to have our own credit.

    He mentioned the DOS clause, in the context of telling me I could do it in two phases if I liked - first deed it to the LLC, which COULD trigger a DOS, then later refi. His contention is that no lender wants to call a performing loan. In practice, he's never seen a lender call a loan like that.

    Yes, the commercial loans are a bit more expensive. In some ways, they are easier though. Often small commercial banks are using portfolio money, so it's their rules, not Freddie, Fannie, etc. The fact the property has never been in your name also helps enforce the legal protections inherent in the LLC owning the property. Since we are now taking on investors, we really have to be cognizant of firewalling risk within each property.

    0Reply
  • Robin C.
    Investor · Atlanta, GA · Member since 2016 · 112 posts · 25 votes
    7y

    @Dmitriy Fomichenko, by the IRA.

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    7y

    @Robin C. got it, thanks for clarifying, your comment was confusing. So this is not "your" LLC as you said, LLC belongs to the IRA. My understanding is that the original question was about personal LLC.

    0Reply
  • Stephen Sorenson
    Rental Property Investor · Phoenix, AZ · Member since 2018 · 12 posts · 2 votes
    7y

    I have one LLC owned partially by the IRA. But also have other properties owned by an LLC that is "mine."

    0Reply
  • Ariel K.
    TX · Member since 2018 · 154 posts · 92 votes
    7y

    @Scott Smith I am a client and RLS is great - I transferred all my properties using their services. I highly recommend them!

    1Reply
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