Asset Protection : Land Trust vs LLC
I own an investment property in Austin and plan to acquire another by year-end. Seeking expert guidance on optimal structuring options:
1. What are the pros and cons of using a Land Trust versus an LLC for investment properties?
2. Can an LLC and individual owners be listed under a Land Trust?
3. What financing options are available when using an LLC with a Land Trust?
4. Does having an LLC on a Land Trust impact loan eligibility?
5. If I refinance in the future, will I need to modify my ownership structure?
Thank you for sharing your insights!
Most Popular Reply
Hello Kashyap,
1. A trust by itself does not provide asset protection which is why I recommend to my clients to also utilize an LLC when holding property. Land trusts can be great "smokescreens" and help keep your name off the public record, but they don't provide the same protection from personal liability that you get with an LLC.
2. A land trust can have multiple beneficial owners. How I typically structure my clients is to have the property deeded into the land trust with an LLC as the beneficiary so as to obtain asset protection. I don't use a land trust in every structure; whether or not it will be truly helpful depends on each unique client situation.
3. Securing financing for a property held within an entity presents unique challenges due to a limited pool of willing lenders. In situations where financing is necessary for a property acquisition, a common strategy I advise clients to consider is to initially close the purchase in their personal name. Following the closing, the property can then be transferred into the entity structure. While traditional financing avenues may be restricted for entities, alternative options such as SBA loans or engaging with hard money lenders may be viable. It's important to note that the majority of conventional lenders typically prefer the property to be held in the individual's name. Alternatively, if the LLC lacks a substantial operating history, lenders may require a personal guarantee from the entity's principals as a condition for loan approval
4. While some lenders offer flexibility and may approve loans based on the documentation of your associated entities, this is particularly relevant when your business lacks an established credit history. In such cases, securing a loan directly under the LLC name can be challenging. Even if an LLC loan is approved without a substantial business credit profile, lenders will almost certainly require a personal guarantee. This personal guarantee essentially shifts the liability for the loan repayment from the business to the individual, meaning your personal assets could be at risk if the LLC defaults.
5. You will likely need to take the property out of the entity to do a refinance.
Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.