Borrowing versus transferring to an LLC after closing

[scottish007]

Hi All,

I have a question regarding the use of an LLC to purchase and house real estate. As per my attorney and my tax accountant's advice, I established an LLC to house my property investments.

In conversation with several lenders, they informed me that the LTV will be reduced if I borrow under the LLC. If I am the only party to the LLC, why would they reduce their loan?

Another lender stated that I should consider transferring the property to the LLC once the loan is funded. This would maintain the LTV and allow for protection that an LLC affords.

Which path should I pursue, borrow then transfer (higher LTV), or borrow under the LLC (lower LTV)?

I am a very ethical person and will not enter in any shady dealings, but in this case, I am not sure what is appropriate versus shady. Help!!

:SM021:

Paul

[Jason and Phyllis]

Paul,
this is a question we've come up against ourselves. We have also been told by lenders and brokers that, if we title under the LLC, the LTV would be lower and the rate would be higher (a few times using the LLC also added points!).

We've heard that quit claiming the title, from your own name to the LLC, after you purchase the property MAY trigger the "due on sale clause" in the mortgage. If that's the case you could be responsible for the total amount of the mortgage immediately.

I may have added more questions, rather than an answer. I'm anxious to see other replies.
Jason

[JR_FL]

Paul,

Some lenders will require you to have it in a personal name, some don't. You just have to explore loan options. Remember this phrase:

"He Who Has The GOLD Makes The Rules"

[scottish007]

Great answers so far..........bump:praise: :SM106:

[Dan]

Buying in your own name and then transferring to the LLC definitely violates the due on sale clause. Whether the lender will ever care or not is another issue. I've done it numerous times and as long as the payments are made on time, they don't care.
However, I have a question. Is this a single member LLC? If so, you wasted your money (in my opinion). There is no asset protection there. Hopefully you understand that even with a multi member LLC, the LLC doesn't not protect the real estate within it, it protects your other assets from the real estate. However, if you are actively managing the properties yourself, you have established a possible way for the liability to still spread to your personal assets.

[mike_mn]

My canned answer is to not worry about any entities until you amass a substantial portfolio. A 1 million dollar umbrella policy should cover you with any issues that may arise as long as you keep your business above board at all times and keep good records. You could play the lottery while you invest cuz, you have as good a chance for your 1 million dollar umbrella policy to not cover you as you do to win the lottery IMHO.

If your next question is what is a substantial portfolio, then my next answer is a dozen or so 1 to 4 unit buildings that are at < 70% LTV. The insurance is sure to cost you a fraction of what the attornies for setting up entities, filing and tax prep fees for multi person LLC's and corp's.

I also agree with Dan, that LLC's don't really protect you if you are activly managing the properties anyways...need another entity for that...and more cash and time to manage it.

[scottish007]

Great responses!

Ok, can you expand on the concept of liability if I manage myself?

I do NOT plan on managing myself. My UK property is currently with a property management firm, my US properties will also be placed with a property management firm.

Am I limiting my liability when I place my property with a management firm? Am I essentially hoping that they create the problem versus me when I manage the property directly?

[Gllt39]

I was wrestling with the same dilemna. Additionally, after transferring a property from my name to an LLC, problems/questions arose about insurance.

My insurance company still listed me personally, as the policyholder, with the LLC as an "additional interest". I was warned that the insurance company could deny payment, since the loan was in my name and the property titled in another name (LLC)

I located an insurance company in Ft. Lauderdale Florida that insures the property in the name of the title holder (the LLC in this case) and not the note maker (me, personally).

Anyone familiar with John Galt Insurance in Ft. Lauderdale?

http://www.john-galt.com/

As posted previously, some banks don't care as long as you make the payments on time, especially in today's environment.

However, an umbrella policy may accomplish the same purpose, if you have only a few properties (2-5).

[Gllt39]

Scottish...I am from Blackpool, with family/friends in Yorkshire and down in Devon. Family is still there. Brother used to work for the Land Registry Office. (All...Title searches are done by the gov't in the UK. No private title companies. A British title search reveals the history of the country by the landowners going back centuries)
I live in Colorado now, where I focus my investing. No properties in the U.K, but is interesting. Are lease options. and purchasing "subject to" the existing financing, viable in the U.K.? I understand that British real estate loans are all adjustable. How do you manage that uncertainity?
What can you share about REI in the UK? I realaize many Brits, buy flats and villas in Spain for their retirement. But what about the U.K. REI market? I remember the council houses were gov't owned cheap rental housing. How does that play in today's England? I have been in the U.S for 40 years.

[scottish007]

Scottish...I am from Blackpool, with family/friends in Yorkshire and down in Devon. Family is still there. Brother used to work for the Land Registry Office. (All...Title searches are done by the gov't in the UK. No private title companies. A British title search reveals the history of the country by the landowners going back centuries)
I live in Colorado now, where I focus my investing. No properties in the U.K, but is interesting. Are lease options. and purchasing "subject to" the existing financing, viable in the U.K.? I understand that British real estate loans are all adjustable. How do you manage that uncertainity?
What can you share about REI in the UK? I realaize many Brits, buy flats and villas in Spain for their retirement. But what about the U.K. REI market? I remember the council houses were gov't owned cheap rental housing. How does that play in today's England? I have been in the U.S for 40 years.

Hi Gilt39,

As far as I am aware, lease options and subject to are not viable options. Put simply, I am not aware of investors being able to use, however, I will check.....

You are correct regarding the adjustable nature of loans. To the best of my knowledge, fixed rate loans for the life of the loan do not exist. For examples, see the attached site:

http://www.dunfermline.com/ManagedPage.aspx?id=2479&context=2:36,2735

There is uncertainty, but the entire market is based on same principle. Therefore, the whole market is subject to the same risk and that may oddly provide some level of risk reduction.

The UK REI market offers some interesting investment options, yet the differences between regions can be very pronounced. For example, the London, Manchester, Glasgow and Aberdeen are obviously influenced by the UK economy but they are also influenced by local trends that are not highly publicized nor apparent to the foreign investor. As we all know, real estate markets are local, but this is especially the case in a country where the accents can change within a couple of miles.

Ex council houses can be purchased by investors. Some offer nice returns. However, as you may recall most have no curb appeal. I have a very good understanding of the Scottish market, so I cannot discuss the English market in any detail. However, there are a number of companies that specialize in the English market. They are quite easy to find on the internet.

I hope this helps.

Scottish007