LLC

10 Replies

So I own a rental property that is under my name (deed, mortgage, and insurance). I would like to deed the property to an LLC that I will create. After discussing with a few experts (my CPA, my mortgage rep, and an attorney) and asking around, it seems there is a catch 22. Banks don't like lending to LLC's, especially new ones. As an investor you want to protect yourself, but in order to get a loan the LLC has to show some "experience" in paying down debt, which this LLC will not have (even though I own the LLC and have been managing the property on my own for 11 years). I am risking a lawsuit and my personal assets are at risk because I can't get a mortgage through an LLC that allows me to make money on my property. However, where I am now, trying to deed the property to my LLC my insurance has to be changed to the LLC as well, which raises a red flag with the mortgage company because they want me to refi at a higher rate because the LLC doesn't have the history. Any suggestions here? Anyone have the same experience? What should I do?

I've seen lenders require people take out loans and take title themselves then later Weeks or so - after the original deed is recorded) permit the property title to transfer to an LLC. The new deed is recorded.

What is permitted varies by state so I'm glad you are already talking with professionals.

Casey,

Have you found any more information out about your situation? I ask as I am in the same boat. I own a few rentals in my name (and my wifes). I currently have an umbrella policy. From all my research thus far, it seems like 6 to one/half dozen to the other. Creating an LLC that can't be pierced sometimes feels like a unicorn which then begs the question of why create an LLC and not just have an Umbrella policy? I find myself continually questioning my umbrella policy approach as if I should have an LLC. It's probably a personal opinion, so anyone out there with strong opinions one way or another?

I'll throw in another wild card. What about creating a trust and having it owned by the trust?

Thanks,

Mike

Mike - Thanks for the note. I agree, seems like we are in a tough spot. The trust situation makes sense, and we are lucky that we can do that in CO! 

Still not sure where to go with the LLC as of now. Anyone have any thoughts or experienced the above (original post)?

Casey- I also have had the same conversations with my mortgage company, attorney and CPA and unless the property is paid for it does not appear that their is any way to hold the property in sn llc without the potential risk of the note being called due.  An umbrella policy is a good back up plan; however it will not protect you in the event you say/ddo the wrong thing. There is a great podcast in this topic as well. 

If you are currently risking a lawsuit and you transfer to an LLC or Trust, you could still be sued for fraudulent transfer and be forced to transfer the property back to your name if you lose the lawsuit. If they sue you in federal court, I hope you have very, very, very deep pockets.

If the threat of a lawsuit is not imminent, then I would get all properties out of your name anyway, and as fast as you can. I moved all my properties out of my name several years ago. I did this by hiring an asset protection and tax attorney to transfer all my assets to individual LLCs which where managed by a trust that I set up. I hired an attorney because I didn't want any Tax implications. 

One thing you want to be aware of with a traditional mortgage is that you could trigger a *due upon sale* clause and require an immediate pay off of the loan. However, a good attorney will handle this. My guy wrote letters to the bank notifying them of what was happening and told them to contact him with questions. One of my commercial loans which is through a small bank ended up transferring my loan to a high risk department because of the transfer. At the end of the day, the loan has always preformed on a very expensive commercial property and so really, what are they going to do. Foreclose on a preforming loan? That's a very expensive option to exercise on a preforming loan.

Since I have restructured my assets, I have put all new property in individual LLCs. Because I am starting new LLCs for each property, (which are all owned by a parent LLC company whom which the managing member is a Trust), i never have credit for the new entity. I simply secure the loan myself and let the bank know that the property will be held in a LLC. I have not had any problems to date.

I will say that this type of structure does cause a lot of extra paperwork when buying out of the country, but thats a different topic.

The bottom line is this, people are greedy and sue happy. If they find out how much property you own, they will try and take it from you, period. The topic of asset protection can be debated for hours, but if you have a significant amount of assets in your name, its just a matter of time before you are sued. And most likely it won't be your fault, they are just looking for a settlement.

@Luke Stickney is right on: you shouldn't have an issue taking out the loan in the LLC's name, so long as you guarantee it. LLCs are a disregarded entity for tax purposes, which in addition to directing which person or parent entity pays the LLC's taxes, also directs who or what is ultimately responsible for the mortgage (assuming you're not able to land non-recourse debt).

I'm not a currently licensed CPA or attorney, but I'm surprised your people didn't approach the problem this way. I'd think that either they don't have a good grasp of the issue, or perhaps it wasn't explained well enough to them?

@Casey Fisher Residential property and LLCs do not mix well as you are finding. There have been many debates on this, especially since podcast 109. I put my commercial 5+ unit properties into LLCs and have no problems with lenders or insurers. Ask your insurance carrier about insuring it once in an LLC. Talk about excited! Leaving a paper trail by quitclaiming to an LLC removes anonymity anyway & that's half the point. I would just get good insurance. That's what I do with all my single-family rentals. When mine are paid off I will re-consider or sell on owner contracts.

Again, a single member LLC isn't going to do much good shielding liability if you are the manager, you're the man behind the door and the LLC is one of your assets.

What was life like before LLCs (90s) ?   Pretty good, leave it in your name, manage it well, keep it in good condition and you won't be negligent! Just in case, get a fat insurance policy and sleep well. :)

Are you self managing your properties? If so, every time you step foot on the property for maintenance or inspection you lose that personal asset protection you built with an LLC. You can be sued as the property manager.

Originally posted by @Luke Stickney :

If the threat of a lawsuit is not imminent, then I would get all properties out of your name anyway, and as fast as you can. I moved all my properties out of my name several years ago. I did this by hiring an asset protection and tax attorney to transfer all my assets to individual LLCs which where managed by a trust that I set up. I hired an attorney because I didn't want any Tax implications. 

One thing you want to be aware of with a traditional mortgage is that you could trigger a *due upon sale* clause and require an immediate pay off of the loan. However, a good attorney will handle this. My guy wrote letters to the bank notifying them of what was happening and told them to contact him with questions. One of my commercial loans which is through a small bank ended up transferring my loan to a high risk department because of the transfer. At the end of the day, the loan has always preformed on a very expensive commercial property and so really, what are they going to do. Foreclose on a preforming loan? That's a very expensive option to exercise on a preforming loan.

Since I have restructured my assets, I have put all new property in individual LLCs. Because I am starting new LLCs for each property, (which are all owned by a parent LLC company whom which the managing member is a Trust), i never have credit for the new entity. I simply secure the loan myself and let the bank know that the property will be held in a LLC. I have not had any problems to date.

I will say that this type of structure does cause a lot of extra paperwork when buying out of the country, but thats a different topic.

The bottom line is this, people are greedy and sue happy. If they find out how much property you own, they will try and take it from you, period. The topic of asset protection can be debated for hours, but if you have a significant amount of assets in your name, its just a matter of time before you are sued. And most likely it won't be your fault, they are just looking for a settlement.

It looks like you have a setup that is most attractive. So, you set up a Trust, then formed a parent LLC within that trust, correct? So, when forming LLCs under the parent company, wouldn't that set you up for one big lawsuit if someone were to find out you owned the main LLC?

Also, what banks are you using that are okay with the property being in an LLC? Are you doing smaller banks that keep their loans?

I'm trying to find a way to buy homes, but not keep them in my name. Transferring them to an LLC does make me nervous with the note being due, but also because now there is a paper trail of all the homes I buy and then transfer them to an LLC, so if I were to get sued, an attorney would be able to find all of the homes, is that right? Don't know if you know about this last part or not.

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