Investors looking into real estate often tend to assume they need to buy the property using a Limited Liability Company (or LLC) for risk mitigation purposes. While this may sound like a good idea, there are some myths associated with this.
When residential real estate is conveyed into an LLC, it restricts you as the borrower from refinancing a Conventional loan against the property. This will remain for at least six months until after the property is taken out of the LLC and held in just the borrower’s name, better known as a seasoning period.
There can also be other more significant catastrophic drawbacks. Fannie Mae and Freddie Mac do not allow for properties to be conveyed into LLC due to the restrictions of collecting a deficiency in the event that a borrower were to default with their mortgage. This can cause the loan servicer to accelerate the loan payoff and they can demanded a payment in full for the entire outstanding loan balance. Although this is rare, as it is not common practice for lenders to call loans for a full demand, there is a risk associated with it.
Basically, LLC’s and other entities are not loan friendly. The premise behind this is that Conventional loan financing is available to individuals purchasing real property, not companies, and mortgages are personally guaranteed by the individual.
If you are looking for asset protection, an LLC is not going to indemnify you from liability. The better (and safer) bet is to explore setting up a living trust and conveying the property into the trust.
For most real estate investors, the trouble of forming and maintaining a company isn’t worth protection from the theoretical threat of a lawsuit, particularly when affordable liability insurance is readily available.
Establishing an LLC can also impact your property taxes and future capital gains and you should seek the advice of your tax professional before making any decisions. In most states, you’ll need to pay an annual report filing fee for the LLC.
If your property is owned free and clear and you are not looking to add a mortgage anytime in foreseeable future, then holding it in an LLC may not be a bad idea.
Depending on the structure of your LLC, the legal fees to set it up could also be expensive. Make sure to get expert advice before taking this next step in ownership. If you have questions about this or are looking to speak to an estate planning attorney for a free consultation, please reach out to Bluefire Mortgage Group at (760) 930-0569.