Rental property without LLC - Due on Sale Clause

[Patrick I.]

Hi everyone. I am fairly new to the forum and have been doing a lot of reading to prepare myself for my first deal. I met with a mortgage originator at one of the large bank in Minnesota today who told me that a transfer of a property under a LLC would trigger the due at sale/transfer clause. From what I understand, it is recommended to have the investment property under the LLC for protection purpose. For my first deal, I am looking at a duplex or four plex for house hacking to get my feet wet. These are my questions:

1. Is there a bank or lender in MN that allows property transfer under LLC?

2. Is a LLC even necessary?

3. If transfer under the LLC of the property is not an option, how do you protect yourself against a litigation? Is an umbrella insurance enough?

4. At the end of the year, are you providing the rental m1pr form to the renters? How would you go by doing so without a structure such as a LLC?

Thanks

[Greg Scott]

@Patrick I.  I am not a lawyer but my personal opinion is that LLCs are over-sold to beginning investors.

Put yourself in an ambulance-chaser's shoes.   Assume your tenant has a slip and fall or other accident.   Your property insurance probably has something like a half million dollar liability coverage.   That is worth his time.   What is your net worth?   Is it worth the lawyer's time to chase after your bank account and other assets.  Remember he gets only a fraction of what his client gets.

Personally, I bought a $2M umbrella insurance policy and stopped putting my properties in my LLCs. I have a good friend that puts everything in property-specific LLC.

Now, as I'm moving into apartments, I'm selling off the single family. Every apartment has a property-specific LLC.

Regarding mortgage providers, yes they will always tell you you can't put the property into an LLC without triggering the due on sale clause. In reality, as long as payments are being made they don't seem to care. I have 3 properties that have been in and LLC for 5 years and not a peep from the bank. I've never heard of anyone having the note called due.

On the other hand, it is theoretically possible that interest rates could rise significantly.  If that happens banks might start looking for ways to get out of low-interest notes and call due old notes, similar to how companies can call a bond due.   However, I would say that scenario is also unlikely.

Good luck