1st property - LLC

14 Replies

Sorry if this is already a topic somewhere but I want to purchase my first rental property but do it under an LLC. I currently have an LLC in Oregon but its unrelated to real estate. My question is can I obtain my first rental property inside an LLC and keep my personal life/finances out of it or at least to a minimum. I am in the process of absorbing all this information but there is a lot. Thanks and sorry for the newbie question. Bill.


@John Anderson.  Thank you for input.  I have lots to learn obviously.  If you don't mind, what would you say the #1 small business type would be for one that holds rental properties in their portfolio?  I want to spend my time researching the right business types and not the wrong ones.  Thanks again!  Bill.

I have all of my properties in an LLC and have never had an issue getting a loan. Yes, they are going to look at your personal finances to help qualify you. Listen to podcast 109, there is a lot of great information about asset protection in there.

In my experience, both above answers are correct. I do not currently hold my properties in an LLC since they are residential loans (less than 4 units), but I will be transferring them there soon (I will get to that in a minute). No bank I have spoken with will make a residential loan to an LLC. As mentioned, it is possible to transfer the title at a later date from your personal name to your LLC, but you do run the chance of the bank calling the loan (or sending you a nasty-gram to change it back). You wouldn't want to do this if you re-financing the property. However, both my attorney and my lender have never personally had a client's loan called for this reason, so you are weighing the risk of personal liability against the bank finding (and caring) that the title has transferred. For me, I will be transferring all of my property into individual LLCs since my personal real estate portfolio, and personal assets, have grown in value. This makes me feel better than some founded, or not, lawsuit will likely not result in financial collapse for my family.

As for commercial loans (more than 4 units), many lenders will lend to an LLC, some without personal guarantees (although with less favorable terms). I know Chase bank will do this. You can contact Patti Condon in Portland - she is great. I have a long list of local Portland banks and brokers that can provide more flexible terms as well. You may need to seek out what financing solution you are looking for.

It sounds like you are trying to control your personal liability.  This is sort of complex and you are best speaking to an attorney, and a CPA, since LLCs will affect not only your personal liability but the way your taxes are filed. Also, everyone's personal situation (and comfort level), are unique.   I just completed a bunch of liability and estate planning with Neda Soofi in Portland.  I thought she was excellent.  My CPA is Tonya Bennet at Brown Armstrong.  I like her a lot also.  In my opinion, spending a few hundred dollars in initial planning to understand how all this works, is money well spent. 

Good luck!

@William Wilson I am the attorney from podcast 109 and what I recommend is using the Series LLC to compartmentalize the assets for liability purposes. Additionally, I recommend using anonymity trusts to file the company and to hold the title to the property itself. This way, nobody can find out that you own the company or what your company owns. This system provides the maximum for anonymity and protection while streamlining your taxes. It can also scale infinitely at no additional costs, fees, or filings.

You will want to obtain personal financing on the properties since the rates are better than the commercial loan rates. After you acquire the property, then it should be transferred into the company structure. The due on sale clause has no appreciable legal risk as long as the payments are being made on time.

I heard Clark Howard (clarkhoward.com) speaking on the radio about this very issue, and he said unless you are rich, all you need is a good umbrella policy for your rental property or properties. 

Thank you everyone for your advice.  I have a good insurance guy and financial firm already for my other business and I will meeting with them this week.  I do trust that they will tell me if they are the correct person or not for me in real estate and if they aren't then they will direct me to the right place.  I don't currently have an attorney but that is my next step.  I will research each of these items discussed here and I do like differing opinions as then I can learn more from it.  Thank you @Account Closed  @Toby Mims .  This is exciting! :)

I thought it was pretty common to transfer the ownership to an LLC after obtaining the mortgage. This helps protect the owners from the tenants being able to look up their home address and personal information.

Is this not possible to do on Oregon?  What are other folks doing?  I'm guessing that most folks didn't pay cash for their rental properties. 

We are refinancing two rental houses right now in Portland and then wanted to transfer ownership to an LLC in 6 months to a year.

My understanding is 1. Oregon doesn't recognize series LLC's. If the series LLC is organized in a state that recognizes them, then for it to do business here, you would have to file for it to do business in Oregon, thus additional filing fees etc. for each of those sub-LLC's. Competent legal advice necessary. 2. Having an umbrella policy is great (I have one myself) but it is possible that a claim can exceed the limits of your insurance policy so having the property in an LLC can help protect you personally. 3. Equity stripping is another strategy. If done legally and at arms length is probably the best strategy since if there is limited equity to seize, then it is quite possible the claimant with find it hard to get an attorney to take the case. But if it appears to a judge that this was only done to protect assets from creditors, and not for a legitimate business reason, then it could get unwound. Doing a combination of all three strategies could have you covered well for inside and outside threats to your asset. But, and a big but, I am not competent legal advice and you should get a GOOD real estate attorney and a GOOD CPA to help you with all of this. The forums are good for conversations and produce ideas, which often bring up more questions, which your real estate investment team can help you solve and do it in a way that is right for your situation. Good luck.

no series llc in Oregon.

Also the explicit stated and implicit undetstood purpose of a LLC is mainly liability protection, so no judge is going to pierce or unwind it on that basis alone.

Steve, I was referrIng to equity stripping that if not done correctly and appearing at arms length could cause one problems. The fact that there is an LLC is not complete protection when it comes to Charging Orders in Oregon.

Been reading a ton of posts/perspectives on this lately. Seems there are some real disagreements on best approach, though all agree with insurance as a base protector, many stating that until you hit a certain threshold portfolio size/equity LLCs may be overkill.

Then there is risk of calling loans due based on quit claims at close, restrictions on warranty deeds, and additional risk exposure by having title transfers.  

Frankly, after listening to BP #197 and Chris Hereen's approach of buying direct into LLCs, I question whether the approach of trying to leveraging traditional financing, yet treating it as a income biz makes sense if the goal is growing your R/E biz quickly anyway. The best investments are treated as a separate entity anyway, so why not start off with them that way rather than having to shuffle things around after the fact?