Hey everyone! First post here. I just bought my first duplex in Manchester, NH and I have a question about LLC's. I can't find a loan to let me buy this in an LLC. So I'm moving forward with putting my name on the mortgage and just buying a higher limit of insurance. But I'm curious if it still makes sense to create an LLC. I'd like to be able to refinance this property and transfer ownership to the LLC at some point. Will a bank want to see that I'm keeping the books as the LLC? Is it feasible to "hire" my LLC as the property manager so I could push liability that way? Is it possible to take advantage of any tax breaks if the LLC isn't on the mortgage? Can I have my tenant make rent payments to the LLC? Any help is appreciated. Thanks so much!
Hoping I can repay the favor once I start learning how to play this game.
Ok, here goes, I'll do my best. You can refinance into an LLC, I've done it. A commercial mortgage will allow you to buy a duplex in LLC. I didn't keep books as an LLC and the bank didn't care. Not sure about your liability and tax benefit question. My tenants do pay rent to my LLC's.
Congratulations on your new venture! I would recommend listening to the podcasts here on Bigger Pockets if your not already doing so. They have a wealth of knowledge.
3 years ago I purchased a 4 unit in my personal name, created an LLC and used a Quit Claim Deed to transfer title into the LLC. My tenants pay the LLC and my LLC pays the mortgage. It's a common practice you do not have to refinance the property.
Loans have a Due on Sale clause and there is a slight chance that a bank could invoke it but as long as you are paying the mortgage they usually do not care.
Here is a link to a podcast with Garrett Sutton on the topic.
I'm not an accountant, tax professional, attorney, or financial advisor, but I'm happy to share my insight into this on a few points. Solely my non-qualified opinion and not to be taken as advice.
I'm assuming you are considering forming an SMLLC (where you are the sole member).
From a tax perspective:
1) An SMLLC is a "disregarded entity" from a tax perspective and will pass through to the Sch E of your 1040. It will therefore make no difference whether you own it individually or through an SMLLC in regards to taxes.
2) You can absolutely create an LLC to act as property manager. However, there may be tax consequences of doing so. The property will expense the management fee paid to your PM LLC as a deduction to passive rental income on Sch E. HOWEVER, the PM LLC will book the property management income as Sch C active income, and it will be subject to SECA tax. Overall, doing this will result in higher tax liability on the dollars paid and collected as management fees. If your solution is not to charge a management fee, I think that may fully undermine any defensibility as to the legitimacy of the liability protection you seek in establishing the LLC in the first place; which I believe to be moot anyway as I will cover below.
In regards to liability protection:
1) An LLC only serves to limit liability to assets owned by that LLC. If all you own is this property, you aren't protecting anything. If, on the other hand, you have significant wealth outside of the LLC, it makes more sense (subject to the following considerations).
2) I have heard from attorneys that an SMLLC doesn't offer much protection, and to really get the liability protection offered by an LLC, it must be a multi-member LLC. I think the jury is out on this, but it's a topic of discussion and disagreement amongst legal professionals.
3) When someone sues, they go after everyone and everything they can. To think that you protect your assets by creating an LLC to manage the property is, in my opinion, a dream. The lawsuit will almost certainly name both the property management entity as well as the property ownership entity. If you have a 3rd party management company, you can push the liability onto them and their insurance (if you can show that the matter at hand was part of their responsibility), but you will still be named in the suit. If you own that property management company, you're just pushing the liability from yourself to, well, yourself.
In regards to quit claiming the property into a newly formed LLC and the bank not caring as long as you are making your payments:
1) I agree that it is unlikely that the bank will call the note for this. However, you are just starting out and looking to build relationships and a reputation. Do you want to start off by doing something behind the bank's back that they most certainly will not like, even if they don't call the note? I propose that the answer should be 'no'.
2) You may be subject to transfer tax if you do this. However, I do remember a NH bill exempting property transfers from RETT if the ownership of the entities remains the same. Not sure if it passed. Something to ask your accountant or attorney.
Bottom line is that, in my opinion, you stand to gain little, if anything, from transferring the property into an LLC at this point, or creating an LLC to manage it. Moving forward, as you build your portfolio, it begins to make a lot of sense to own properties under multiple LLC's (this doesn't have to mean one LLC per property, but it can if they are large MFH). For now, I would think that you are better off having a good liability insurance policy, and a strong lease in regards to who is responsible for what (if the lease says the tenants shovel the steps, they will have a hard time suing you for slipping on them), and requiring each tenant to carry a renters policy that names you as "additional insured" under the liability portion (in case someone besides your tenant sues for something that was the tenant's responsibility).
Moving forward as you expand, it becomes more prudent to set things up with proper entities. I hold my properties in multiple LLC's and I have another LLC for property management that does not own anything. You can find local banks that will lend on properties held in LLC's as a commercial loan, and if you ever purchase a property that is 5 units or more it will have to be a commercial loan anyway.
The above is not legal, tax, or financial advice and you should seek the advice of duly licensed professionals. The information provided is merely the opinion of a non-qualified individual and should not be relied upon to make any decisions. Blah blah blah...