Transferring property into LLC. What to do with a lease?

Question

I have purchased a rental property as an individual and rented it out a couple of months ago.

Today I registered an LLC and am in the process of transferring (deeding) the property into the LLC. What is the best/cleanest way to handle the existing lease? Give a 30 day notice, terminate the old Lease (in my personal name) and re-sign under the LLC or is there a better way?

Thank you in advance!

Allan C. · Answer

Did you purchase with a loan or is loan under personal name? Is LLC an interested party on the insurance? Are you maintaining the LLC properly with meeting minutes?

If you’re not doing any of the above, then best to just cancel the LLC since it’s not doing anything for you.

just get personal umbrella insurance and call it good.

Chris Seveney · Answer

There are approximately 746,232 posts on Bigger Pockets that talk about transferring properties to LLCs from your personal name and why that could be a very bad idea and give you a false sense of security. The other question every one of these posts asks is, "What are you afraid that you could be sued for that insurance would not cover?" To date I don't believe we had one person answer.

We actually lent money to a borrower in their personal name and they defaulted and transferred a property to their LLC and did not have the LLC actually pay money for the asset. It was not protected and we did not need a charging order against them because it was a fraudulent transfer.

Kevin Sobilo · Answer

@Vladimir Lukyanov, a couple thoughts:

1. Unless the existing lease specifically gives you the right to terminate it with a sale you need to wait until the lease term ends.

2. If it is a month-to-month agreement, then I would have them sign a new agreement start starts March 1 and add a statement at the end saying something like "This agreement replaces the month to month agreement dated XX/XX/XXXX between <Tenant Name> and  Vladimir Lukyanov".

3. I would contact them ahead of time and explain the situation so that they aren't scared by the change. Tenants will often get apprehensive about changes because there are so many horror stories. So, I would explain what the change is about.

Stuart Udis · Answer

@Vladimir Lukyanov The more pressing questions is why the decision to purchase the property in your name then transfer title? Seems fairly impractical. Curious to hear the reason.

Stuart Udis · Answer

Courts don’t care that Fannie Mae permitted the deed transfer. That approval relates to loan servicing, not liability protection. When a property is purchased personally and later transferred to an LLC, it’s much easier for a plaintiff to argue the LLC is an alter ego.  While the multi-member LLC may help your argument against the alter ego, a good plaintiff's attorney will be able to make a compelling argument against the strength of the LLC.

Not to mention, it's most beneficial to resolve most disputes at the entity level since it's easier to simply obtain a judgment or lien against the LLC and therefore cloud the real estate title. However, if there's benefits to attaching claims against the members of the LLC, your structure is especially vulnerable in injury, premises liability, catastrophic loss, or underinsured cases.

The steps you took don't stop lawsuits, doesn’t stop judgments, and doesn’t meaningfully deter plaintiffs from pursuing claims. It’s also easier to pierce and worse for anonymity, since the deed history directly ties you to the LLC, even though I personally believe investors place too much emphasis on trying to achieve anonymity.

Next you have to look at the underlying real estate. What shouldn't be lost in the steps you took to presumably obtain better financing is whether the financing is necessary to carry the transaction. If that proves to be the case, that may be the biggest liability exposure of all, particularly on you as the guarantor of the loan.

Vladimir Lukyanov · Answer

Impractical to have property in an LLC?The company that gave a mortgage would not approve it if the borrower was a multi-member LLC. So I purchased it as an individual. But the original mortgage holder immediately sold it to Fannie Mae and they allowed me to transfer the deed to the LLC for asset protection purposes.$150 and a day of work gave me a lot of protection, albeit with some hoops to jump through.

Drew Sygit · Answer

Let's start wit this - what do YOU think the benefits are of transferring from your name to an LLC and why?

Keep in mind:

1) The mortgage is still in your name2) Public records search will show non-discharged, active mortgage with your name on it3) Public records will also who history of deed transfers, including the transfer from your name to the LLC

John Annunziata · Answer

Vladimir LukyanovTransfer (deed) the property to the LLC- Assign the existing lease from you (individual) to your LLC- Notify the tenant in writing/email .. etc- No termination. No new lease. No 30-day notice.

Stuart Udis · Answer

@Olana BurgessThe best practice is to avoid wasting money on unnecessary title transfers in the first place.

Olana Burgess · Answer

The best practice is to execute a new lease agreement between the tenant and the LLC, but this can be done when the current lease expires. Instead, you should notify the tenant in writing that ownership has transferred to the LLC and provide clear instructions for where future rent payments should be made.

From the tenant’s perspective, nothing else changes. The existing lease remains in effect, including the lease terms, rent amount, and tenant obligations. Attempting to terminate or replace the lease mid-term can create unnecessary risk.

The clean approach is to let the current lease run its course, document the ownership change with the tenant, and then execute a new lease in the LLC’s name at the end of the lease term to align the paperwork with the ownership structure.

Transferring property into LLC. What to do with a lease?

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