How to move rental units from personal to LLC structure

Question

I am trying to restructure my rental units (2 duplexes), currently in PA.  Currently, they are financed under my personal name. My goal is to set up an LLC in Wyoming (I heard this is the best state to do an LLC) and structure these properties under this new LLC entity.  I am uncertain about the mortgage part because I have grate interest rates being under my personal name. I would assume the mortgage would need to be changed because it's a personal loan. Also, my insurance is coming up in June and I would like to restructure so I can change the insurance coverage to the LLC. Can anyone provide advice and steps to moving this forward?

Kerry Baird · Answer

@Tom McGee, You are going to hit some problems that you possibly do not know about if you set up a Wyoming LLC to hold these properties. Off the top of my head: transfer tax is assessed in my area if I change title. Using a foreign entity in another state results in foreign entity filing if operating business in my current State. I do not see much need for "asset protection" for only 2 duplex units. Cost to file taxes is higher for entities, and multiple entities each require a tax return...Mine cost $1200 per entity to file each year. Interest rates are higher when we purchase for an LLC owned property vs a personal owned property. We still PG (personally guarantee) DSCR mortgages on properties held by LLCs.

We went forward buying houses in our own names until the point where our DTI got out of balance, and where the reserve requirement was higher than the next down payment.  At that point, we moved into DSCR mortgages, and set up entities.

I argue that the best place to set up a new LLC is the State where you do business, i.e. the place where you own properties. We got both legal and CPA advice and then set up the current entity structure, which is this: Our trust (set up for asset protection) has membership interest in two LLCs (one in Texas and one in Florida, where we own rental houses). We have an S-Corp that manages both LLCs, so I can take payroll and contribute to retirement accounts.

If you can buy owner occupied property at the lowest down payment and lowest interest rates, occupy for 2 years and move on to the next for a few years...you will have strong winds behind your back, in terms of cash flow and equity buildup.  When you are ready to sell these first properties, then consider buying the next tier in the entity you set up for that purpose.

Tom McGee · Answer

Thank you @Lateefah Mathews.  Your suggestions are great and they are appreciated.  I can't seem to get passed the first step with mortgage company to transfer without refinancing. I have great rates at 3.5% (golden handcuffs).  Gonna keep asking -  there has to be other ways.

Jonathan Bock · Answer

@Tom McGee

Connect with @Stuart Udis he has a ton of threads about how to simplify asset protection and has educational events to discuss as well you should check them out before you go down this esoteric path of creating a complicated maze.

Lateefah Mathews · Answer

Hi @Tom McGee welcome to BP! So transferring properties with existing mortgages into an LLC without selling them to the LLC is a common strategy for most real estate investors seeking to protect personal assets and possibly enjoy certain tax benefits. As you've probably read here, however, you will need to check the terms of your mortgage agreement for a "due on sale" clause. This clause allows the lender to demand full repayment of the loan if the property is transferred. Most loans have this clause it may not state these words exactly but it's generally there. It's wise to then, seek consent to transfer from your mortgage lender. Some lenders may be willing to modify the loan terms to allow the transfer without invoking the due on sale clause, especially if it does not affect the loan's security or your ability to repay the loan. Simply let them know you want to transfer ownership but not payment.

If you get the OK, you'll want to form the LLC and create your operating agreement, then proceed with transferring the title of your property to the LLC. This is generally done through, a quitclaim deed or warranty deed, filed at your local county recorder's office. Then you'll need to notify your insurance provider about the change in ownership and have the policy updated accordingly. You can use a title company to transfer the ownership. Hope this is helpful!

Tom McGee · Answer

If I am unable to change the financing structure due to high costs of refinancing, are there ways to still protect the assets under an LLC?

Kerry Baird · Answer

@Megan Stone, the legal team that set up our structure used the state we live in to develop the holding company.  I have attended conferences where lawyers have spoken on using Wyoming or Delaware for this purpose.  I’d ask my legal team for their opinion and go with it.

Megan Stone · Answer

HI-- I ran into your post bc it was related to a post I just made. I was made aware by a a Wyoming legal group that forming the primary LLC in Wyoming (for my property in GA) would be of no legal benefit and they advised that I only set up the LLC in the state of the property. You could however set up the parent holding company in Wyoming. Just wondering if that is what you have also run across as well?

Thanks!

Tom McGee · Answer

Good point @Jerry W. Thanks.

Jerry W. · Answer

@Tom McGee, every mortgage I have seen since the 1970s has a due on sale clause in it.  The question is whether your lender will actually call the loan over it.  Many people say they never do, but if they can increase your interest rate 5 or 6% they might.  You could always do the  transfer, then if there is a problem just deed it back to your personal name.  My last loan was for 9.25%, so if I had my choice I would leave it in my personal name and up my insurance on it.  On a $200k loan you will pay $10K more per year in interest, or $850 more per month.  You can buy a BUNCH of insurance for that.

I personally like having an LLC, but if it would save me $850 per month on each house I own I hold them all in my personal name lol.

How to move rental units from personal to LLC structure

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