LLC / legal set up of your rentals
Realtor · Grand Rapids, MI · Member since 2019 · 19 posts · 4 votes
Hi guys,
When you put your property in an llc , do you make sure that everything is in the Llc’s name (Insurance, mortgage, all the lease and rental paperworw, etc.) ?
Also, when you have multiple properties, how would you go about setting that up? A book I read suggested that you should have every property have its own llc and bank account. Seems pretty tedious and tough to keep track of when you have 10 or so different properties. Can you have them all in separate Llc’s but have a group llc that owns those Llc’s and then all of your leases and expenses go through that group.
For example:
Property1:123 main st Llc
Property 2: 456 main st llc
You form “main st capital” . Main st capital owns both llcs and then all of your lease agreements say “main st capital” on them and your rent collection all goes through main st capital as well as expenses and everything else. You pay your mortgage through main st capital for all Properties and such. Does this still protect you from piercing the corporate veil?
@Dzenan Catic
One often discussed setup is to have each property in its own LLC. Each LLC is owned by a WY holding LLC.
The WY holding LLC gives anonymity and charging order protection to all the other local LLCs.
Then you can have a separate company or corporation that is doing the property management for all the properties. This entity will sign leases, collect rents and pays property taxes, utilities, repairs on behalf of the property LLC. Every quarter the management entity will pay the property LLC the NOI minus its management fee.
@Dzenan Catic. Yes, if then real estate is titled in the LLC, then all related documents should likewise be title accordingly. Risk a "commingling" argument if not.
Check out a "Series LLC" in your state. The case law is undeveloped in many states, but worth exploring.
@Nick W. Graham thanks for the reply. I will check it out!
@Dzenan Catic
One often discussed setup is to have each property in its own LLC. Each LLC is owned by a WY holding LLC.
The WY holding LLC gives anonymity and charging order protection to all the other local LLCs.
Then you can have a separate company or corporation that is doing the property management for all the properties. This entity will sign leases, collect rents and pays property taxes, utilities, repairs on behalf of the property LLC. Every quarter the management entity will pay the property LLC the NOI minus its management fee.
Just for clarity, you wrote;
When you put your property in an llc , do you make sure that everything is in the Llc’s name (Insurance, mortgage, all the lease and rental paperworw, etc.), define "put".
By this do you mean buying the property in your name then "putting" it into an LLC via a QC, or are you referring to buying the property in the name of your LLC? If the former, the mortgage can't be transferred. It remains in your name even when QC'd into the LLC.
I am referring to buying the property in my name and then transferring it into an LLC via quit claim.
According to legal zoom:
"For owners of rental or investment real estate, it’s common to form a limited liability company and transfer title to the property from the individual owner to the LLC.
Transferring property to an LLC can limit your personal liability if someone is injured on the property and files a lawsuit against the property owner. People who own multiple rental properties sometimes form a series of LLCs to insulate each piece of property from liability claims involving other properties."
I was talking more so for the protection of your personal property in case someone tries to sue the llc. You are correct on the mortgage still being in my name even if its transferred into an LLC after purchasing. When you buy property with an LLC from the start, aren't you still liable to make the mortgage payments by being the guarantor on the loan anyway?
When you place a property into an LLC, that means you will deed it into the LLC. For example, if you have set up Snuggles LLC, then you will complete a deed where you are the Grantor, and Snuggles LLC is the Grantee. When selecting the proper deed from always use a Grant, Warranty, etc. but not a Quit Claim. The Quit Claim deed can void your title policy. A client of mine had 125k frozen on a sale because of a missed encumbrance, and his title refused to cover because he used a Quit Claim deed to place the property into an LLC.
After the property is in the LLC, you should transfer over insurance, taxes, utilities, etc. to the LLC. The mortgage will not transfer, so don't bother trying.
Collecting rents can be done through the LLC that owns the property or a separate management entity you create just for this purpose. With two properties, it probably makes more sense to have the LLC collect the rents at this point then grow into the other strategy. Do not have the rents collected by the holding LLC. This runs the risk you will be treated as a common enterprise and jeopardize your separate asset protection benefits of the LLCs.
Clint, what a great piece, I am thinking about buying a flip, fix it and then turning it into a rental (BRRR). How does that work if I buy the house to flip in the business name and then want to turn it into a 30 year fixed?
Thank you for that info. I really appreciate it! I will look into that with my lender. They told me to just do it through a quit claim deed, but I will ask about the other options and make sure that the title policy doesn't get void. Is there anything else I should look out for ?
This is a bit more complicated to answer without first knowing what type of entity are you using to buy the property and how is it taxed. If you provide this info and I can provide you an answer.
The only thing is to complete all of your financings before you move the properties into the LLC. I have clients who will tell us after the property is placed in the LLC that they want to refi. Ugh. We have to pull the property back out for the refi then put it back in.
This is the response I got from the banks title team. Does this mean that I would be okay? I asked if the quit claim deed would cause my title policy to be void:
"No. If the owner quitclaims the property into an LLC that is wholly-owned by the owner then the title policy continues
in full force and a Form 107.9 endorsement is not required.
If, however, the owner quitclaims the property into an LLC that is not wholly-owned by the owner, then a Form 107.9 endorsement would be required to name an additional insured. NOTE: A similar result will occur when dealing with a corporation. If the stock, shares, memberships, or other equity interests are wholly owned by the owner of the property
then the title policy continues in full force and a Form 107.9 endorsement is not required. If, however, the owner quitclaims the property into a corporation where its stock, shares, memberships, or other equity interests are not wholly-owned by the owner, then a Form 107.9 endorsement would be required to name an additional insured.”
When you place a property into an LLC, that means you will deed it into the LLC. For example, if you have set up Snuggles LLC, then you will complete a deed where you are the Grantor, and Snuggles LLC is the Grantee. When selecting the proper deed from always use a Grant, Warranty, etc. but not a Quit Claim. The Quit Claim deed can void your title policy. A client of mine had 125k frozen on a sale because of a missed encumbrance, and his title refused to cover because he used a Quit Claim deed to place the property into an LLC.
After the property is in the LLC, you should transfer over insurance, taxes, utilities, etc. to the LLC. The mortgage will not transfer, so don't bother trying.
Collecting rents can be done through the LLC that owns the property or a separate management entity you create just for this purpose. With two properties, it probably makes more sense to have the LLC collect the rents at this point then grow into the other strategy. Do not have the rents collected by the holding LLC. This runs the risk you will be treated as a common enterprise and jeopardize your separate asset protection benefits of the LLCs.
Clint, I've watched a few of your YouTube videos and learned a lot. You're an excellent teacher.
Regarding your statement that "The Quit Claim deed can void your title policy." This concern got may attention a few years ago after I'd done a few QCs. What I've learned regarding the voided title insurance is that it isn't a policy followed by all title companies.
Generally, the coverage of the Title Company policy will state; “The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title.”
However, its best to ask your Title company if the insurance coverage remains intact if the asset is transferred before doing the QC.
This is the response I got from the banks title team. Does this mean that I would be okay? I asked if the quit claim deed would cause my title policy to be void:
"No. If the owner quitclaims the property into an LLC that is wholly-owned by the owner then the title policy continues
in full force and a Form 107.9 endorsement is not required.
If, however, the owner quitclaims the property into an LLC that is not wholly-owned by the owner, then a Form 107.9 endorsement would be required to name an additional insured. NOTE: A similar result will occur when dealing with a corporation. If the stock, shares, memberships, or other equity interests are wholly owned by the owner of the property
then the title policy continues in full force and a Form 107.9 endorsement is not required. If, however, the owner quitclaims the property into a corporation where its stock, shares, memberships, or other equity interests are not wholly-owned by the owner, then a Form 107.9 endorsement would be required to name an additional insured.”
Here's an extended post I've made other forums that you may want to also consider and want to research;
Regarding the transfer of a property to and LLC; The lender can exercise the "due on sale" clause if the name(s) of the buyer are not the same name(s) as the members identified as the owners of the LLC. For clarity; as with a trust, lenders do not exercise the "due on transfer/sale" clause when real property is transferred to the SAME individuals in an official capacity (e.g. Joe and Jane Smith as trustees of Smith Trust). Typically, the same applies to LLCs where you and your spouse are sole members (single or multiple member LLC).
If you take out a mortgage personally and transfer the property to your LLC that you control, you should be exempt. Also, if your loan was conventional; Fannie Mae recognizes the legitimacy of a QC between the mortgage holders and the LLC so long as the LLC is controlled by the borrowers;
If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See for additional details.)
I believe Freddie Mac follows suit. Here’s a BP post on the same topic;
Regardless, you should always talk to your lender and tell them exactly what you’re planning and get their approval.
Next is to check with the Title Company regarding the Title insurance. Generally, the coverage of the Title Company policy will state; “The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title.” However, its best to ask your Title company if the insurance coverage remains intact if the asset is transferred.
I am not a lawyer and this is not professional advice.
If you really are going for asset protection by forming the LLC in the first place, does it make sense to quit claim the deed form your personal name to the LLC? The mortgage is still in the name of the individual even though the deed now says the LLC.
There is really very little precedence to whether the LLC protects the owner in the event of a lawsuit anyways versus just having increased insurance/umbrella limits in the individuals name. However, if you are trying to keep the "corporate veil" from being "pierced", I would think a lawyer would tear you apart in court with the quit claim strategy.
My personal choice has been to buy properties in cash in the name of my LLC, BRRRR, then refinance them in the name of my LLC, albeit at a higher rate, through a lender like Visio, Lima One, Corevest who will loan to an LLC. Bank accounts, commercial insurance policy, commercial umbrella policy....all in the name of the LLC.
I think having a bank account and LLC for each property is overkill. Its a lot of paperwork. Have a dollar amount that you are willing to defend against if litigation arises.....example 5 properties in 1 LLC worth $1M. If you get sued, those 5 properties are exposed, but not your entire portfolio. Personal risk management preference here.
Yes, the QC deed issue may not be universal with all title companies. It's always prudent to inquire and get it in writing. However, Dzenan the response you received " wholly-owned by the owner" what does that mean? If you use a holding LLC to hold the real estate LLC, are you covered? How about if you place your LLC in a living trust? I won't risk the QC unless there is another issue to consider, e.g., costs, etc.
I appreciate the advice! I will find that out as well.
Yes, the QC deed issue may not be universal with all title companies. It's always prudent to inquire and get it in writing. However, Dzenan the response you received " wholly-owned by the owner" what does that mean? If you use a holding LLC to hold the real estate LLC, are you covered? How about if you place your LLC in a living trust? I won't risk the QC unless there is another issue to consider, e.g., costs, etc.
I believe the form of deed does not ever matter as to whether the Grantee is an Insured under the policy. All that matters is if the Grantee meets the definition of Insured under the policy. If it is, the Grantee is an Insured, if it doesn't it's not.
With either form deed the conveyance does not void the policy, the policy coverage continues. In general, if the Insured conveys by QCD the expectation is that the Grantee and those who later take under the Grantee would never be able to successfully sue the Insured for a breach of warranty since no warranties were given. However, if in the unlikely event the Grantee filed suit against the Insured which alleged a breach of warranty and the allegation was not otherwise excepted or excluded from coverage, the matter should be covered under the policy and the Insurer would have an obligation to provide a defense.
The entity is an LLC. I haven't bought anything yet. I look forward to your response.