In a perfect world, banks and/or lenders would lend money to new LLC’s with no income or credit history, thus allowing you to purchase your investment property in the name of your limited liability company (LLC).
Should you transfer the title of your investment property into your LLC? You could probably ask 10 different people for their position on this issue, and receive 10 different answers. My position is that I do not like to transfer title from the individual to the LLC – for a couple of reasons. First, transferring the title when the mortgage is still in your name triggers a due on sale clause within the mortgage / note. Second, if you ever go to refinance, you will have to transfer title out of your LLC back to your individual name, creating a strange series of transactions for your lender and/or title company to sort through. Finally, if you ever need to file for bankruptcy, it may prove difficult to discharge a note if the title to the property is not in the filer’s name.
My position rests on the assumption that you have properly formed your LLC, complying with all of the statutory corporate formalities including organizational minutes, bylaws, appointing the Board of Governors, Managers, Membership Units, etc. In addition, all of your business dealings are done in the name of the LLC – your lease with the tenant will be between the tenant and the LLC, the tenant should pay the LLC, and the LLC has a separate bank account and accounting records.
From a legal standpoint, the tenant’s contract is with the LLC, not with the investor as an individual. If something goes wrong, they should sue the LLC, not the individual (this is called privity of contract). That is not to say that someone couldn’t try suing the individual – it is not uncommon for a litigious person to throw everything against the wall to see what sticks. Even if your strategy was to transfer title from your personal name to the LLC in order to “tie” the property to the LLC, the mortgage and note would still be in your name anyway, thus leaving the same issue for that litigious person to throw against the wall. In addition, if you completed all of the other steps to adequately form and operate your LLC, the argument to be made is that it would be bad policy if a court ruled that in order to receive liability protection from your LLC, that you should have violated the due on sale clause in your mortgage / note.
Again, every new business must start the ball rolling somewhere. Every new business is started with the capital or credit of the owner. Eventually when you have built your portfolio, built your LLC’s credit history and property equity, you will no longer need to purchase properties with your own credit and in your individual name. Your goal will be to get loans through the LLC and thus title of the property in the name of the LLC.
Remember, most banks do not make loans to brand new LLC’s, therefore you must start the ball rolling by purchasing your property personally. Perhaps the bank/lender will allow the LLC to purchase the property with the individual’s personal guarantee or co-signature on the note. If the bank will not accept the personal guarantee, there are several other options to consider. Some strategies could include the individual leasing the property to the LLC, which would then lease the property to the tenant. Alternatively, there could be a written agreement between the individual and his LLC whereby the individual pledges and confers upon the LLC the right to possession of the investment property. I also place language in the annual minutes of my businss entity clients that recognizes that the owner has granted consent to his LLC to possess and use the property for business and rental purposes. All of these alternatives should be documented through company minutes of the LLC that acknowledge and authorize the LLC’s use of the investment property. Having these added formalities can only strengthen the liability shield created by the LLC.
Please feel free to contact me if you need assistance with your investment property, have questions or concerns with respect to properly forming your LLC, or incorporating additional investment property ownership strategies to strengthen the liability shield created by the LLC.Read More