Closing STRs in an LLC or Trust | Investor Loans, Lenders & Mortgage Considerations

[AJ Wong]

With our twelfth STR closed or under contract including several prime luxury STRs on the Oregon Coast this year - I thought it would be prudent to share some answers to common questions regarding LLC Closings or transferring properties to an LLC or Trust post closing as we approach the close the window on material participation for 2025.

Note* There are certainly exceptions and exclusions to some of the guidelines noted - always check with your lender, broker, title agent, CPA or tax professional to confirm change of ownership & tax implications! 

- In general a conventional (full income, asset, credit verification) loan CANNOT be closed in an LLC or a trust. If the personal income, credit and assets are being utilized to qualify it title, note and deed need to be recorded in the individual's name.

- Can the note/deed be transferred to an LLC or Trust after closing? For conventional financing - most lenders have a 'due on sale clause' that could theoretically call the note (balance due on demand). In practice, so long as the obligations are being met on time, they do not... however for most investors this is a chance they are unwilling to take. On a positive there are a handful of national lenders that permit the transfer of ownership after closing.

- DSCR or debt-service coverage ratio loans are underwritten utilizing established or proposed long or short term rental income with minimums of 15-20% down. As a result the majority of DSCR lenders will permit the actual closing to occur in an LLC or Trust. The borrower must provide the Articles of Incorporation or Trust for review - it is best to do this at the time of pre-qualification. The downside is..higher rates, prepayment penalties are discretionary rental projections based on an appraisal or acceptable STR projection.

- NON-QM mortgages (alternative income documentation) or lenders also usually permit the closing in an LLC directly. The draw back is that terms are often slightly more expensive in either terms or cost and typically incorporate a pre-payment penalty (depending on state) and borrowers preference. '

The actual process of transferring a property from an individual to LLC is generally the same process for most states - it involves the drawing and filing/recording of a new deed. Many title companies can per-arrange this for recording post closing. Other experienced title agents or real estate attorneys can draw the new deed and the property owner can actually record by mailing or filing a notarized copy to the county to record. Out go-to title partner will provide this as a courtesy - otherwise anticipate costs of $125-250 plus recording fees (usually +/- $100).

For investors that want to verify there is no lender risk in transferring their property to an LLC - they will want to fully disclose their intentions to their licensed mortgage broker or loan officer and ensure they verify the lender will allow, the general process and that the loan is priced accurately with that lender.

Often - the rock bottom terms available (full income, credit, asset, prime credit) are not necessarily provided by lenders that will permit a transitions to an LLC. In recent transactions - there has been about an 1/8th (.125%) or a few thousand dollars in difference between the 'best' rate and those priced specifically for transfer to an LLC. Although this can vary case by case.

Some recent investment property 30 year fixed financing transactional examples :

- 20% down conforming Jumbo at 6.625% with .25% in lender costs and a lender credit - $7500 seller concession 

- 20% down conforming Jumbo at 6.875%. with 1% in lender costs and a lender credit - $15K seller concession 

- 20% down conforming townhome at 6.375% with .5% lender costs and a lender credit - 2% seller concession

- 15% down non conforming at 6.875% no PMI with 1% lender costs and a lender credit + 1 year PPP

 -10% down conforming jumbo second home loan* at 6.75% with .75% lender costs and lender credit  

- 50% down confirming at 5.625% with .5% lender costs and lender credit - $5K seller concession 

- 20% down conforming super jumbo at 6.875% with 2% lender costs and small lender credit - 2% seller concession 

In the majority of investment property transactions his year we have been able to negotiate seller concession of 1-2% to cover all or the majority of closing costs and prepaid items. 

As a mortgage broker of 20+ years my best advice for qualifying a mortgage broker is reputation, references and transparency. Even with 'AI' lending is still nuanced and an experienced loan officer can help you identify potential pitfalls or conversely eligibility or programs that could make the investment difference. For example - with interest rates expected to decline, more borrowers are exploring ARM products with lower rate incentives as well as interest only repayment options or extended amortization schedules.

Feel free to share any insight with your transfer experience or note any differences. 

[Joseph Chiofalo]

Hi AJ, 

This is a common request I get my from investor buyers that want traditional conventional financing and to close the property in an LLC.

These programs require that the borrower close the transaction in their personal name. 

Some lenders that we work with may allow the transfer to the LLC after closing, but like you mentioned it is extremely important to verify and confirm that the lender will not restrict the buyer after settlement.

Joseph Chiofalo