This question comes up with utmost regularity, and the answer, as is the case most often in real estate investing, is a bit muddy. So, let’s underscore a few things:
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Why Folks Want to Move Assets Into an LLC
I don’t think it’s a secret to anyone that the HUD, along with Fannie Mae and Freddie Mac, has done a fabulous job of making home-ownership in America accessible to lots of citizens. They’ve done so chiefly via the introduction of a 30-year mortgage. The idea behind it was that an average citizen, having taken on a 30-year loan, will spend their working years paying it off, and in time for their retirement, they would have a paid-for house in which to retire.
There are, of course, a couple of problems with this. One, on a 30-year amortization, a lot more interest is paid to the bank. Two, the type of employment infrastructure whereby you get a job with a company and stay there for 40 years is no longer the norm in today’s economy. Three, if you do stay in that house for 30 years, by the time the mortgage is paid off, your house is little more than a dilapidated, outdated, functionally obsolescent “pig” — specifically, if it was 20 years old when you bought it. Besides, in 30 years there’s going be no water left in California and no jobs in Ohio — so people from both states will either have to relocate to Colorado, where pot makes everything better, or to Mars with Elon Musk. 🙂
There is One Feature That is Very Attractive
The reality is that we live in a debt economy, and this means that unless we go back onto the gold standard, debt is as much of a tool as anything else. And, relative to money coming in and going out, the debt service is frankly more important than debt itself.
Well, that magical 30-year amortization is appealing to a lot of investors specifically because it comes with the low payment. Yes, it’s more expensive over the life of the loan. If this is for a rental property, you are not the one paying the debt service anyhow, and with a lower payment, there’s a bit more cash flow to be had.
This is indeed attractive to a lot of investors.
Who Can Qualify a 30-Year Mortgage?
The secondary market guidelines limit access to residential mortgages to individuals, meaning no entity other than a human being can qualify for secondary market residential note. While there are some rare instances where portfolio lenders originate 30-year residential paper that do not sell on the secondary market, by and large in order to obtain 30-year amortization, investors have to follow those secondary market guidelines.
What this means is that 99 times out of 100, if you want a 30-year amortization, you must put your name on the deed.
“But I Want an LLC.”
That’s right — ideally, from the standpoint of asset protection, it’s always better to buy property inside of an LLC. And thus you have a choice to make — either get a 30-year mortgage with lower payments and higher cash flow but put your name on the title, or buy in an LLC but most likely get no longer than a 20-year amortization, higher interest rate, and potentially higher down-payment.
And this is what everyone immediately runs toward — unless I can buy the property in my own name and immediately quit claim deed it into the LLC.
A few things to note:
Due on Sale Clause (DOS)
Due on sale clause is present in vast majority of modern paper, and it essentially provides the lender the right to trigger the acceleration clause. The trigger event is transfer of any portion of ownership interest to an entity other than that which is on the deed and the note.
The acceleration clause simply forces accelerated repayment of the outstanding balance of the mortgage. And guess what? Transferring title from yourself into a single member LLC is by most banks considered transfer of ownership interest.
“Oh, the Bank Will Never Find Out”
I’ve seen it happen, guys. My attorney has seen it happen. Yes, as long as the payments are made, perhaps the bank has no reason to look — but perhaps they do look. Are you willing to play that game with $50,000? How about a $500,000 mortgage? How about $5,000,000?
So, Can it Be Done?
Yes, if you ask your bank and receive a written permission to do it, then quit claim all you want. But most banks won’t go for it from what I’ve seen.
This issue is really a choice — do you want liability protection, or do you want higher cash flow via longer amortization and lower debt service? This is the decision for you to make. 🙂
Investors: How would YOU answer this question?
Weigh in with a comment!