Can houses in my name w/ conventional mortgages be xferred into LLC?

General Real Estate Investing
1

I’m pretty new to investing and have 4 rental houses in my name (here in OH) with conventional fixed-rate mortgages at great interest rates.

I manage them myself, carefully select the tenants, and have good liability policies.

I’m hoping to expand this year, but want to think through more carefully how to limit my liability.

If I wanted to move them into LLCs, can I do so without having to get new commercial (i.e., portfolio) mortgages (which, as far as I can tell, will be at higher and variable rates)? I’m assuming most conventional mortgages have due on sale clauses so I don’t see how this can be done.

If so, how can I transfer them?

Could I leave them in my name with the existing mortgages and–to protect my assets–set up an LLC for “equity stripping” so there is no equity to be sought by frivolous lawsuits?

Thanks!

2

Okay,

I see that these topics come up all the time. Let me try to summarize below what I have found, and hope more experienced folks can verify whether I understand correctly.

  1. The answer regarding Due On Sale clauses seems to be that investors often transfer (quitclaim) properties into LLCs, and expect that the lender will not act on the DOS (since it is not a sale) clause; normally, lenders don’t do so. I have been told that if you own the LLC, the lender doesn’t care if you move the property there because they still have a lien on the property and you are still paying them. Is what I have said accurate?

  2. Or is it the case that the loan is due on transfer via quitclaim deed? So if (for liability reasons) I want a property under an LLC, I should get a new commercial mortgage if I want to avoid the risk of having the conventional loan “called” (as due on sale).

  3. Since I manage the properties myself, I am liable for any negligence , including fraudulent claims of negligence. So, of course, I should address maintenance issues promptly and competently.

  4. I should have a general liability policy of about $1 Million, which should cost <$700/year (thus I don’t need liability policies on each property).

  5. If I hire a property manager, they are liable for their negligence in doing their tasks, so I can offload that liability for a price.

  6. If I own an LLC that manages the property, I am liable for negligence, so the benefit regarding asset protection from owning a property management LLC is nill/questionable.

  7. There are ways to set up such LLCs (or maybe a holding LLC) that at least attempt to hide the owner’s identity. But good lawyers can “pierce the veil” of secrecy and find the owner, unless perhaps one creates an LLC that is inpenetrable. For this, local attorneys are not usually viable options; companies set up to serve investors promise, however, to be able to help set up such LLCs.

  8. Others say Land Trusts are the way to go, but again, local attorneys usually can’t do it. Thus the investor must rely on someone selling a course to provide the more advanced guidance, and then try to find an attorney to work with. Does that sound right?

Thanks for any help!

3

Gah, so many questions and conflicting questions. Seems you should probably think more about what you can/want to do moving forward.

Proper Insurance is often quoted as one of the most preferable Asset Protection Formula’s.
Equity Striping is often quoted by some of the more advanced players on the forum.

The advice that is often given out by the resident ‘llc’ expert is that single-member llc, where the member is managing their own properties does not limit liability. For the best look for McWagner’s posts and read up on his responses to the LLC/Liability questions.

4

You’ve got a pretty good handle on it except #7. There is no such thing as privacy when dealing with real property.

5

Thanks to both.

And Mark, thanks especially for your contributions, which are outstanding!

6

Regarding my point 7 on the degree of privacy one can get through an LLC, I appreciate McWagner’s point that there is no privacy with real property.

Let me see if I understand:

a) the sole reason that justifies putting properties into LLCs is asset protection

b) The quality/value of the LLC depends essentially on the operating agreement.

c) There are some very carefully crafted and sophisticated operating agreements that may provide some degree of asset protection.

d) But there are complex questions of law and jurisprudence as to whether they will actually provide such protection.

e) And another says, if the sole reason for transferring the property to an LLC is “asset protection” (to shield assets in the event of a lawsuit). In this case, you may be running afoul of the Uniform Fraudulent Transfer Act.

Conclusions:
I) an LLC with a top notch operating agreement (in light of accurate knowledge of current law and jurisprudence), is a reasonable strategy, but no guarantee, especially because of unclear law and its interpretation in the courts

II) it is also not clear, or even unlikely, that your identity can be protected, even by the best crafted LLC

III) the better your operating agreement and legal representation, the better your chances of protecting assets through an LLC

IV) there may be offerings to small investors of LLC strategies, backed up by legal support that allow them the benefits of III

V) at least for a beginner, owning property in your own name, with a good general liability policy, combined with good management practices, is not only much more straightforward and cost-effective, but might protect your assets as well as the best LLC (primarily due to the fact that it is not clear which LLC strategies will withstand the courts)

Am I missing anything?

7

I agree you’ve got a good grip on the issues/potential advantages of having an LLC. Repairs you do yourself while managing your properties will open you up to liability personally for things gone wrong.
An LLC is a tool along with good management practices and good insurance like you’ve stated. All of these things are pieces of the puzzle to hopefully put you in a good position to protect your assets in the event you are sued. We’ve got several properties and have been doing this for awhile now. I’ve always been the plaintiff in any court cases. If you take care of things and run your business well, you will eliminate most of the reasons someone would want to sue you anyway. I think the risk of being sued is one of the big things that scare people about this business, but you do all these things to mitigate the chance of a significant lawsuit happening. I think it’s much more likely that you’ll end up in court going after someone for damages or unpaid rent compared to the risk of someone bringing a huge lawsuit against you.

8

Thanks Justin!

9

This thread has morphed into a summary of what I am learning about asset protection via a LLC so let me add something I heard yesterday when speaking with an real estate attorney here in OH about LLCs.

I asked him if he agreed that the operating agreement was decisive, and whether he thought that getting help in developing a very detailed one was important. He said the OA was not of primary importance (i.e., it is not even legally necessary to have one) because what really governs LLCs is the relevant OH state law, as found here http://codes.ohio.gov/orc/1705 .

His point was that if one really want to understand LLCs, one needs to become familiar with the state law that governs them.

That makes sense to me. Does anyone have an opinion?

10

Better yet let your lawyer be familiar with LLC in your state. Bring him your problem, don’t go and ask him for an LLC. Tell him your problem and let him suggest the proper solution.

11

Thanks. But I really don’t have a specific problem to ask him to solve other than that I want to understand my asset protection options, and whether an LLC should be a part of that.

12

Reading your original question, are you really concerned with limiting your liability, or with limiting the out of pocket cost that you would incur if a tenant was awarded a judgment against you.

You are always liable for your actions. I am not sure that “limiting” your liability is the outcome you want. If you want to limit your liability, sell all your rental property. Don’t do anything that would get you sued. Treat all your tenants fairly and equally–don’t discriminate. Take care of repairs promptly and use licensed contractors. Don’t defer maintenance, especially if doing so creates an unsafe or hazardous condition.

Limiting the cost of a lawsuit that goes against you is what insurance is for. Insurance companies usually try to settle lawsuits. Attornies on the other side also want to get paid so they also have incentive to settle. You just need to make sure that you are not bankrupted by a tenant lawsuit. Liability insurance with a policy limit that is a little greater than your net worth should be sufficient. Most hazard insurance policies on rental property have a maximum limit that may be less than your total net worth. An umbrella liability policy will bridge the gap between your property hazard insurance and your total net worth. That is what an umbrella policy is for.

LLCs don’t reduce your liability, but may effectively shield your personal assets from exposure in the event of a lawsuit. This is a conversation you need to have with your attorney, your financial advisor, and your insurance agent.

As an aside, if you do decide to transfer property ownship to an LLC, make sure that you also get an endorsement to your title iinsurance policy to name your LLC as an additional insured. Otherwise, you may discover that your owner’s title insurance policy is no longer in force due to the property transfer.