While many real estate investors eventually form an LLC to limit their liability and protect their own personal assets, it’s important to consider LLC formation before purchasing your property.
I’m frequently asked about the ramifications of business structure, forming an LLC, and financing. When considering a purchase, there are a few important factors to keep in mind:
If you’re buying the property with cash…
If you’ll be purchasing the property with cash, you should first form the LLC or corporation (if it doesn’t exist already). Then contribute the cash to the LLC which can then purchase the property and take the title directly. This scenario will result in the least amount of paperwork, as you won’t have to worry about transferring the property over to the LLC.
If you’re planning on financing the property…
Generally speaking, it’s preferable for the entity that will own the property (aka the LLC) to obtain the loan directly.
Of course be aware that unless the LLC has its own long-standing credit history, income and assets to act as collateral, lenders may ask the company’s owners to personally guarantee the loan, even provide additional collateral.
If that’s the case, you may be wondering why you shouldn’t just apply for the loan as an individual and then once purchased, transfer the property over to your LLC. And indeed, you can transfer the property title to an LLC in minutes. However, most property loans will require you to obtain your lender’s consent before you can transfer ownership to a legal entity.
In other words, let’s say that you own an investment property in your own name, and have a personal loan/mortgage for that property in your own name. Then, you form an LLC for your investment. You’ll need to negotiate with your lender in order to transfer the loan and mortgage to your LLC. It’s not guaranteed that the lender will agree to replace you as the borrower. Additionally, transferring the loan to the LLC may entail changes to the terms of the loan.
As a result, it’s clear to see that the simplest and safest process is to create your LLC first, then apply for financing and purchase the property under the LLC’s name. You’ll be keeping your paperwork to a minimum, as well as any avoiding potential complications in the transfer process.