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You should form your LLC before you buy real estate. This video explains the details.
When to Form an LLC for Real Estate?
We get phone calls like this all the time:
“Hey, I just did some research and realized I need to setup an LLC for my real estate in order to protect my assets.”
The very first thing I ask is, “Did you close on the property already?”
Far too many real estate investors say “Yes.”
I shout through the phone: “Nooooooooooo!” (picture thatscene in the movie where the main character just loses his best friend)
Okay, I don’t shout through the phone.
But instead, I have to help them get their head straight.
They’ve learned that they need to set up an LLC for their investment properties so that they can protect their personal assets, but they already bought their property in their name.
They think that just setting up the LLC is going to somehow magically protect their assets.
That’s not the case.
If you think about it, those properties are owned by you personally.
Just setting up an LLC does not automatically “attach” it to the property.
In fact, the LLC is not affiliated with the property at all.
I wish just forming an LLC magically protected all we do. But nope. It doesn’t work that way.
You’re creating an entity. That entity, therefore, needs to own the property and “do the business”.
What I mean by that is, the LLC ispurchasing the real estate, not you. Your purchase contract/agreement of sale, the deed, and any financing… all of that has to be in the name of the LLC.
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The LLC needs to hold title to the property, not you personally.
I got a phone call today from a guy in California who owns three different properties all financed by three different banks (in his personal name) and wanted to set up an LLC to protect his assets.
I said, “Yeah, just so you know, don’t go ahead and set the LLC up right now. What you need to do is call each one of the different banks to see if youcan transfer the title and how that’s going to affect the loan.”
He was bummed by the wake-up-call.
My advice to him was to first call all 3 banks to see what they have to say.
Due on Sale Clause
Many banks will have a due-on-sale clause if the property is transferred to another name.
If they agree to the transfer, he’ll need to deed the propertyfrom himselfto the LLC for $1 (often called a ‘dollar deed’).
Depending on what state the real estate is located,the name of the deed may be called something different.
There will also likely be transfer tax. Now the transfer tax will not be the same amount as if it were a full-price sale, but it could be a couple hundred dollars.
After you speak with the bank, you’ll need to call a titlecompany and double check on transfer fees/taxes and any other closing costs (there will be small miscellaneous title fees).
Now, some people are going to be out of luck because some banks may not allow the transfer.
To the bank, there’s a new buyer (the LLC)… and the bank may need to qualify the new buyer.
Even with you personally guaranteeing the loan, it’s usually no longer going to be residential loan.
It’s therefore a commercial loan (because of the LLC) and commercial loans take place usually within a different department in the bank.
Commercial loans have different terms and they have different rates.
You’re essentially refinancing the property in the name of the LLC.
It can be a bit of a mess really.
Hopefully you’re watching this video before you purchased your property.
Purchase Real Estate and Obtain Financing in the name of the LLC
To get full liability protection, you need to purchase your property and obtain your financing in the name of the LLC and order for that LLC to protect your personal assets.
However, if you’ve already bought property in your personal name and you want to transfer it to the LLC the biggest thing that’s going to hold you up is a mortgage.
You need to talk to the lender/the bank.
Let them know about your situation and see if you can go ahead and do a dollar deed or a dollar sale to transfer the property.
If you can, you’re going to have to pay some title fees.
You shouldn’t have topay full blown transfer tax… but again, you’ll need to call a title company in your county/city to double-check on this.
Hopefully, that makes sense and is helpful.
And hopefully you’re seeingthis video before you’ve purchased properties in your own personal name.
Even with strong liability insurance, you’ll want to have your properties owned by your LLC(s).
In worst case scenarios, both liability insurance and your LLC will really be your strongest combination for asset protection.
Just having one or the other is a weak scenario.
You want to protect your assets to the fullest.
Matt Horwitz
Founder & Educator, LLC University®
Matt Horwitz has been the leading expert on LLC education for the past decade. He founded LLC University in 2010 after realizing people needed simple and actionable instructions to start an LLC that other companies weren't offering. He's cited by Entrepreneur Magazine, Yahoo Finance, and the US Chamber of Commerce, and was featured by CNBC and InventRight.
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.
