I chatted with someone who talked about how they moved the title from them to their LLC, and while reading about some of the options, I was curious if anyone here has done it. I looked at the warranty deed vs quitclaim deed and it seems like if you're transferring it to your own LLC, that the quitclaim seems to be the way to go. I checked out the MN forms for transferring, it and seems like the 10.3.2 number is the way to go for moving it from personal to your LLC.
I'd want to wait until I've had my property for a year before looking to move forward with it, but I was curious if anyone in MN has actually done the process before successfully.
@Kelly Conrad the mechanics of transferring the name is easy. I don't understand why you would wait one year? What is the significance, from what I understand you do not live in the property and never have so why? If you want it to ensure it is done correctly then you can have your title company do it for a small fee, it's easy and not that expensive so I would recommend that.
I think the main question is what is your motivation for changing it? I have posted on this multiple times, but there are negatives to owning a rental in an LLC and they may outweigh the positives provided you have proper insurance including an umbrella policy. A month or so ago there was an excellent discussion on the topic by @Tim Joyce and @John Woodrich maybe one of them can link the post here.
I have done it both ways using the quit claim deed form. I believe it is $52.70 to file in Hennepin county.
I have been in the process of moving them back into my personal name for the purpose of conventional financing has Tim discussed. My business lender does not really care what name the properties are in and conventional terms are better than business terms anyways.
Hey Tim! I thought I saw somewhere that it's recommended to wait a year until you do it, perhaps not! I didn't think about asking the title company to change it. I thought they might do something to inform my lender who could trigger the clause, but it sounds like they don't do that, and it also sounds like as long as the payment is being sent, the mortgage company likely isn't going to stir anything up.
My main motivation is that with the HELOC we needed for part of the down payment, and now the second mortgage on our property, it has caused our credit scores to go down a lot due to the debt-to-income ratio. The person I chatted with said that putting the property in my LLC would free that up from our own credit so that it'll be easier to get future lending (hoping to use private investors going forward since that 25% all on our own hurts!). We do also have an umbrella policy on our property as well.
Thanks for your reply!
@James W. So you purchased a property with your LLC and now you're moving it back? I'm a little confused on what you mean by moving them back. I thought you'd get conventional in your name, and then move it to your LLC.
If you purchased the property in your individual name, filing a quit claim deed will not pull it off your credit history.
You likely will not have any issues in filing a quit claim deed transferring it from your personal to business name, and the county will not notify the lender.
The only way to get the property off of your credit report is to get a business loan in the name of your business. Changing the name on the title will have nothing to do with getting the loan off your credit report or helping your credit.
Hmm, so then what can be done to show that we're getting income from that property? I know credit doesn't show the whole story, but it doesn't help when it comes to getting other lending. Or would it be more likely that a potential lender would the property as income and count it as such?
Yes. I have purchased properties years ago under my LLC and I’m in the process of moving them back to my personal name to lock into long-term conventional financing. Business loans seem to be somewhat competitive from the rate aspect, but usually have a 5 or 10 year rate reset and a shorter amortization. I plan on holding onto the property’s long-term, so it makes more sense to match the financing with my cash need to improve my cash flow.
Unless you get a loan in the name of your business to pay off your conventional loan, the loan will always be on your credit report. I currently have one loan off of my credit report it as a business loan, and I will be converting that into the conforming loan in the near future.
If you do not have much experience, or your business is new, it may be hard for you to get a loan in the name of your business in the first place. I would recommend leaving your existing financing if it is a conventional loan.
Most lenders like to see reported income from the property on your tax return. Some may use it if you have copies of leases and can show the payments coming into your account.
Requirements will likely differ by the lender. Once you have been doing it a few years and your tax returns show the income, it will be easier to get credit for the income.
Thanks for the shoutout @Tim Swierczek . Not sure I can find the post just now, but the high points are already identified here for the most part.
From legal standpoint, having property in a company offers some protection from outside, non-real estate-related lawsuit judgments (think a person injured when you drive intoxicated, when your auto insurance isn't enough and they start hunting for other assets). Good property insurance can offer protection from injuries related to your rental property, regardless of the owner on title.
Since the due on sale clause can have such catastrophic effects on a borrower if enforced, we just never feel comfortable advising clients to pursue that course. That said, 2 of 3 of recent clients decided to risk it anyways.
I am not versed in the laws around consumer credit reporting, but something about the plan raises red flags for me. If the person giving the advice about freeing up credit-space for future lending wasn't themselves a lender, I would personally feel very apprehensive about it. Just my two cents on that point.
What everyone mentions above is correct. To start off, if your goal is to fix your DTI ratio this won't help at all. Your rental income should offset this and if your lender doesn't understand how rental income works and DTI you definitly should be getting a new member on your team. @Tim Swierczek is a financing expert who also invests a lot in RE - if you are looking at financing you should talk to him. As mentioned the only way to remove it from your personal record is to get a loan that is not personal - in other words a portfolio loan. Tim can help look at those options also.
To the question asked - there is a due on sale clause mentioned that could call your note however through all the red tape it seems that this rarely happens. After dealing with the recorder's office on several occasions I have come to the conclusion that they will pretty much record anything if you pay the proper fees and if the legal description is close. That is why we have attorneys like @Tim Joyce who can examine your title and why people by title insurance, to protect against title flaws.
@Kelly Conrad all the above replies are correct. Changing the ownership of your building will not have any impact on your DTI. In fact, it really only complicates things for future lending until you get to a point where you are using commercial bank portfolio loans. As @Tim Joyce stated it has some protections for you but you need to weight those vs the protection you get from a good personal umbrella policy. The policy will be cheaper than the LLC.
@Tim Swierczek I appreciate the insight! My biggest thing was the DTI, but sounds like any lender would see what's going on and not hold that against me? Just sucks that my credit takes such a huge hit...but I suppose that doesn't really matter unless I'm talking to someone that I need a loan from, and then I'd be able to explain it.
One tip, would be rather than save rent in a bank account use the rent to pay down your HELOC and then if you have a large expense you can always use the HELOC to pay the debt. This will help improve your score over time.
@Kelly Conrad moving the property into an LLC has nothing to do with your credit. The loan stays in your personal name and so does the liability that is affecting your DTI.
The asset protection here is weak at best. Even if you put the property in your LLC, a quick search will reveal the loan for the property is in your personal name. They can pierce the protection by claiming this is in fact personally owned and that the LLC was just an attempt to shield liability.
A better approach:
1. Avoid liability in the first place, by enforcing policies and maintaining a safe property.
2. Purchase a blanket liability policy to cover you if you are sued. The insurance company will defend you to avoid payout. The insurance company has deeper pockets, so that is easy money for the attorney.
3. On a more basic level, why worry about protecting something you don't own. I assume you have a loan and borrowed 80% or more of the property value. The bank owns it, the attorney can't take it from the bank. Leveraged properties are not of value.
One final consideration is you said the bank won't call the loan as long as you are making the payment. I have heard other investors state they have had the bank invoke the due on sale clause. So it can happen. Maybe it is low probability. My point is don't be 100% sure you can do something that your mortgage contract says you can't do. You may have a false sense of security by listening to others. If your loan is called, it is YOU that needs to deal with it, not others that gave you bad advice.
@joesplitrock I disagree with the protection being weak at best. Once setup properly it does a good job limiting whomever comes after you. The problem with LLCs is most people don't operate them like a business but I haven't heard of anyone losing LLC protection in a RE transaction. Please share if you have.
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