When to Form an LLC for Real Estate?

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Let’s talk about a major mistake that real estate investors make: when to form an LLC for real estate…


We get phone calls like this all the time:

“Hey, I just did some research and realized I need to setup an LLC for my real estate in order to protect my assets.”

The very first thing I ask is, “Did you close on the property already?”

Far too many real estate investors say “Yes.”

I shout through the phone: “Nooooooooooo!” (picture that scene in the movie where the main character just loses his best friend)

Okay, I don’t shout through the phone.

But instead, I have to help them get their head straight.

They’ve learned that they need to set up an LLC for their investment properties so that they can protect their personal assets, but they already bought their property in their name.

They think that just setting up the LLC is going to somehow magically protect their assets.

That’s not the case.

If you think about it, those properties are owned by you personally.

Just setting up an LLC does not automatically “attach” it to the property.

In fact, the LLC is not affiliated with the property at all.

I wish just forming an LLC magically protected all we do.  But nope.  It doesn’t work that way.

You’re creating an entity. That entity, therefore, needs to own the property and “do the business”.

What I mean by that is, the LLC is purchasing the real estate, not you. Your purchase contract/agreement of sale, the deed, and any financing… all of that has to be in the name of the LLC.

The LLC needs to hold title to the property, not you personally.

I got a phone call today from a guy in California who owns three different properties all financed by three different banks (in his personal name) and wanted to set up an LLC to protect his assets.

I said, “Yeah, just so you know, don’t go ahead and set the LLC up right now. What you need to do is call each one of the different banks to see if you can transfer the title and how that’s going to affect the loan.”

He was bummed by the wake-up-call.

My advice to him was to first call all 3 banks to see what they have to say.

Due on Sale Clause

Many banks will have a due-on-sale clause if the property is transferred to another name.

If they agree to the transfer, he’ll need to deed the property from himself to the LLC for $1 (often called a ‘dollar deed’).

Depending on what state the real estate is located, the name of the deed may be called something different.

There will also likely be transfer tax.  Now the transfer tax will not be the same amount as if it were a full-price sale, but it could be a couple hundred dollars.

After you speak with the bank, you’ll need to call a title company and double check on transfer fees/taxes and any other closing costs (there will be small miscellaneous title fees).

Now, some people are going to be out of luck because some banks may not allow the transfer.

To the bank, there’s a new buyer (the LLC)… and the bank may need to qualify the new buyer.

Even with you personally guaranteeing the loan, it’s usually no longer going to be residential loan.

It’s therefore a commercial loan (because of the LLC) and commercial loans take place usually within a different department in the bank.

Commercial loans have different terms and they have different rates.

You’re essentially refinancing the property in the name of the LLC.

It can be a bit of a mess really.

Hopefully you’re watching this video before you purchased your property.

Purchase Real Estate and Obtain Financing in the name of the LLC

To get full liability protection, you need to purchase your property and obtain your financing in the name of the LLC and order for that LLC to protect your personal assets.

However, if you’ve already bought property in your personal name and you want to transfer it to the LLC the biggest thing that’s going to hold you up is a mortgage.

You need to talk to the lender/the bank.

Let them know about your situation and see if you can go ahead and do a dollar deed or a dollar sale to transfer the property.

If you can, you’re going to have to pay some title fees.

You shouldn’t have to pay full blown transfer tax… but again, you’ll need to call a title company in your county/city to double-check on this.

Hopefully, that makes sense and is helpful.

And hopefully you’re seeing this video before you’ve purchased properties in your own personal name.

Even with strong liability insurance, you’ll want to have your properties owned by your LLC(s).

In worst case scenarios, both liability insurance and your LLC will really be your strongest combination for asset protection.

Just having one or the other is a weak scenario.

You want to protect your assets to the fullest.

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Video Transcript:

Hey, folks. Matt Horwitz, LLC University. Hope you’re doing well. Let’s talk about a major mistake that real estate investors make in regards to set up their LLC. Just got a phone call today and we’ve gotten dozens and dozens and dozens of these phone calls. People phone in saying, “Hey.” They’ve done some research. They’ve learned that they need to set up an LLC for their investment properties so that they can protect their assets, but they already bought their property in their name. They think that just setting up the LLC is going to somehow magically protect their assets. That’s not the case. If you think about it, those properties are owned by you personally. Just setting up an LLC, it’s not affiliated with that at all. An LLC doesn’t protect anything you do magically, right? You’re setting up an entity. You’re creating an entity, you’re creating an entity by state statue. That entity, therefore, needs to own the property and do the business. What I mean by that is that when you’re purchasing the properties, you’re purchase contract, your agreement of sale, the deed, any financing, all of that is in the name of the LLC.

The LLC holds title to the property, not you personally. Got a phone call today from a guy in California who owns three different properties all financed by three different banks and wanted to set up an LLC to protect his assets. I said, “Yeah, just so you know, don’t go ahead and set the LLC up right now. What you need to do is you need to call each one of the different banks to see if he can refinance or transfer the title and how that’s going to affect the loan.” Once people kind of understand like, “Okay, cool. I realize that I need to transfer the title into the name of the LLC.” Right. They realize they need to do that. Sometimes it’s called a dollar deed.

Basically, where you are in the United States, it’s going to be sometimes the name of the deed may be called something different. There may be different fees, but essentially you’re going to be selling the property for one dollar from yourself to your LLC, but if you have financing and you have mortgages attached to those properties you can’t just knock it out and do it really quickly. You have documents and documents and mortgages and clauses and things that you signed at settlement. Just because it’s going from you to your own LLC, it doesn’t matter. To the finance company, it’s going from the seller to a different buyer, right? You need to pick up the phone, call the different bank and say, “Hey, look. I need to get this title out of my own personal name and put it into the name of the LLC.”

Now, some people are going to be out of luck because some banks may not allow it. If they’re going to be lending to an LLC even with you personally guaranteeing the loan, it’s no longer going to be residential loan. It’s therefore a commercial loan and commercial loans take place usually within a different department in the bank. They have different terms and they have different rates. You’re essentially refinancing the property in the name of the LLC. It’s a bit of a mess really. Hopefully, if you’re watching this video you’ve caught it before you purchased your property. You need to purchase your property and obtain your financing in the name of the LLC and order for that LLC to protect your personal assets.

However, if you’ve already bought property in your personal name and you want to transfer it to the LLC the biggest thing that’s going to hold you up is a mortgage. You need to talk to the lender. You need to talk to the bank. Let them know about your situation and see if you can go ahead and do a dollar deed or a dollar sale. Transfer the property. You’re going to have to pay some title fees. You’re not going to pay full blown transfer tax. In different places it’s called different things. Sometimes it’s called the common level ratio. It’s really, basically, cheap and affordable way to do the transfer tax because you’re basically selling it to yourself for a dollar. This is much more of a title based question than it is a LLC formation based question. You really need to be calling the bank and the title company to figure out what needs to take place. Just so you know, in order to get that asset protection you have to transfer those properties out of your personal name into the name of the LLC. That’s the sale of real estate. Needs to take place at a title company and if you have mortgages and finances in place you’re going to need to be refinancing or I’m calling it a transfer, but there may be a more technical name for that.

Hopefully, that makes sense. Hopefully, that helps. Hopefully, you’re watching this video before you’ve purchased properties in your own personal name. Even with strong liability insurance, you want to have an LLC. In worst case scenario, both of those together are really going to be your strongest combination. Just having one or the other is a weak scenario. You want to protect your assets to the fullest. Hopefully, this video makes sense. If you have any questions, you know where to find us. Thanks.

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Matt Horwitz
Founder & Educator at LLC University
Forming an LLC shouldn't be so complicated. Our step-by-step guide will make the process a breeze – and no complex legal jargon! We teach people how to form an LLC for free in all 50 states. We hope you find our free guides and resources helpful in your entrepreneurial journey.
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31 Comments

  1. Bob Reichelderfer October 29, 2017

    I stumbled on to your site a bit late but here goes. I am purchasing two rental properties in Wyoming and live in Colorado. I have just set up an LLC in Colorado but have not yet conducted any business in Wyoming. The properties close to soon to change from my personal name on the title. I told I can, as soon as possible after closing, convert ownership to a Trust with the LLC as grantee. My question is before I start collecting money and set up a bank account, should I set up a Wyoming LLC and use that or do the foreign entity thing and use the Colorado LLC?

    reply
    • Matt Horwitz October 29, 2017

      Hi Bob, great question. The short answer is that you can do either a Domestic Wyoming LLC or a Foreign Wyoming LLC (the Colorado LLC registering to do business in Wyoming). They both will work. There may be subtleties between the two (in terms of tax and legal consequences), but I am not abreast on all those details. You could use our “knights of the roundtable” strategy and phone a few accountants and lawyers to find out though. Also to keep in mind, if you were to form a Domestic Wyoming LLC, that can be filed online with the WY SOS and the approval is instant. So that would allow you time to assign your purchase contract and take title in the Trust/Wyoming LLC. Keep in mind though, that if you have financing in place, the bank will likely not allow this. If that’s the case though, you can close in your name, then quitclaim deed the property to the Trust/Wyoming LLC. On the other hand, a Foreign LLC registration in Wyoming must be done by mail, and that will take 4-7 business for approval. If doing a Foreign LLC registration in Wyoming, you’ll need a Colorado Certificate of Good Standing, but luckily, the CO SOS has those available online for immediate download (which will save you some time). Hope that helps. Let me know if you have any followup questions.

      reply
  2. Koteswara Rao January 22, 2018

    I am a little late. I have 2 rental properties in my name. However there is no mortgage on both of them. Recently I have formed an LLC as well. Do you have steps to transfer the properties to the LLC. I want the titles to be warranty changed as well as recording done for the changes.

    reply
    • Matt Horwitz January 22, 2018

      All you’ll need to do is get in contact with a local title company and sell the property from yourself to your LLC. Hope that helps.

      reply
  3. Richard January 31, 2018

    Thanks for the video. My wife and I purchased a rental property in a high traffic tourist town in SC and are currently using it for short term rentals. There is no mortgage against the rental property as we took a loan against our residence, which was paid off in full. Hope I explained that correctly. My wife is the CPA so she’s the brains of the organization. However, she doesn’t think it is necessary to put the rental home in an LLC. I, on the other hand, think its very risky not to. What are some of the ‘real world’ reasons that I can use to convince someone who has it all figured out?!?! Thanks so much.

    reply
    • Matt Horwitz January 31, 2018

      Hi Richard, sounds like a nice investment. And I hear your situation. I would suggest reading our asset protection article and then doing further research regarding liability issues in the context of real estate rentals. I feel that LLCs are cheap compared to the personal liability protection they offer. If you and your wife are sued and lose the case, your personal assets are at risk. Maybe suggest to your wife to call 5+ real estate lawyers and see what their thoughts are regarding liability. Hope that helps a bit :)

      reply
  4. Shana February 15, 2018

    Great video. So glad I found your site. I am planning on turning my primary residence (which is in my name) into a rental property. I did contact my bank and they said that if I transfer the property into a LLC that the due-on-sale clause will be enforced. I have only lived in the property for 3 yrs and so I have barely made headway with getting my mortgage down. What other options do I have to protect my asset? Can I form a LLC and use it to manage my property (i.e., paying all the bills to start building credit for the LLC) until I have attained enough equity to transfer it into a LLC?

    reply
    • Matt Horwitz February 21, 2018

      Hi Shana, thank you! The “management” LLC will not protect you in the event of a lawsuit. It’ll still be you that is sued personally since you own the property. Best thing in your situation is liability insurance. You may also want to speak with a few real estate lawyers about the following. You could quitclaim deed the property from yourself to your LLC and not tell the bank. As long as you continue to make payments, it’s likely there won’t be issues. Of course though, there are certain risks, and this reply is not meant as an endorsement of such. Hope that helps.

      reply
  5. Josh February 28, 2018

    Hi Matt,
    Just read the articles and watched your video on forming the LLC in your home state. Very informative and well, just simple, great, communication! I felt confident and settled on doing that. I have four rental properties that are owned (no mortgage) in Missouri. I live in California. At the VERY END of the video, you state: EXCEPT in the case of real estate! lol. I was scrambling to find the next article/video to explain and couldn’t find anything helpful. So, any more detailed breakdown / info on why form the LLC in the state where the properties are located? Any info or link to something you’ve done? thanks so much for any input!

    reply
    • Matt Horwitz February 28, 2018

      Hey Josh, thank you for the kind words :) And I totally understand about the “where’s the next video/article” part… we’ll soon be addressing these concepts in more details in separate videos and articles, but for now, here’s an overview of your situation.

      With rental property in Missouri, you’re legally “doing business” in Missouri, so that’s where the entities should be “formed” or “registered”.

      – “Formed” = formed as a Domestic LLC
      – “Registered” = registered as a Foreign LLC

      (related article: Foreign LLC vs Domestic LLC)

      In your case though, because you reside in California, things are different. For most people who reside in most other states, they could just form a Domestic LLC (or LLCs) in Missouri and be done with it. However, California law (both Corporate law as well as Revenue and Taxation law) is written in such a way that if you formed a Missouri LLC (a Domestic Missouri LLC) you would still be “doing business” in California, and therefore, you’d be required to register your Missouri LLC as a Foreign LLC in California. California has some of most strict laws in regards to what it means to be “doing business”. Something as simple as making a phone call from CA to your property manager in MO is “doing business”.

      And even if you don’t register your Missouri LLC as a Foreign LLC in California, you’re still on the hook for the annual franchise tax, as well as other California taxes. The California Franchise Tax Board (FTB) is very aggressive in hunting down those doing business in the state with unauthorized/unregistered LLCs and you’ll likely be subject to fines and penalties, as well as all unpaid annual franchise tax for all of the years you were illegally operating the Missouri LLC in California.

      So what’s the solution? Since a registration (or formation) needs to take place in California, do you go “California to Missouri” (Domestic CA LLCs registered as Foreign LLCs in MO) or do you go “Missouri to California” (Domestic Missouri LLCs registered as a Foreign LLCs in CA)? There isn’t a black and white answer to this, so I would recommend speaking with an attorney (or a few) to address your situation in more detail. One thing to consider (and to run by a real estate attorney) is what might be an ideal setup for you… one in which you’re properly registered to do business in Missouri as well as properly registered to do business in California.

      Since you have multiple properties, you’ll likely want to better protect your assets by setting up a different LLC for each property in Missouri. Here an idea for a structure: form 1 Domestic California LLC and have this LLC be the “parent” LLC (owner) of multiple “child” LLCs domestically formed in Missouri. This way, you are registered in both states where you’re “doing business” and you should only need to take care of one annual franchise tax payment in California (instead of multiple annual franchise tax payments for multiple LLCs). And it doesn’t matter if those multiple CA LLCs are Foreign or Domestic… you’d still owe multiple franchise tax payments.

      So, the rough news is that CA is strict and you’ll need to register/form an LLC there (and be subject to the annual franchise tax)… but this is the cost of doing business in CA. The good news is that Missouri is a very affordable state for LLC formation. At the time of this reply, the cost to form an LLC in Missouri is $50 ($50 if filed online; $105 if filed by mail) and there are no Annual Reporting requirements (no report and no payment). Hopefully this information was helpful and I’m curious to hear what you end up doing, so feel free to keep us posted :)

      reply
      • josh March 5, 2018

        Hi Matt,
        Thanks so much for the response. It has certainly helped narrow down the options. I am currently making some Attorney, CPA appts. to ask further questions about strategy, cost, etc. of setting up the LLC’s in Domestic or Foreign form in the California scenario. Will be happy to post conclusions for my situation at least. Thanks again!

        reply
        • Matt Horwitz March 10, 2018

          You’re very welcome Josh. I look forward to hearing about your progress! Thanks :)

          reply
  6. Debbie March 7, 2018

    Hi Matt,

    Nice concise video! So I have a bit of a different question for you. Let’s say I’m thinking about buying a property, but haven’t found what I’m looking for as yet… Then, all of a sudden, there it is! So I’m chomping on the bit to get a offer (contract) to the Seller.

    But IF I do that _before_ I set up the LLC, then your gonna yell at me!

    So here’s my question: is it possible to put wording in the Purchase Agreement (contract) which _initially_ has my name as the purchaser, but also allows (at closing) for the name to change to the LLC (which will be set up by that time)?

    Seems to me that such a *magical* clause could help someone who is _shopping_ for a property but doesn’t yet know if they will find something!

    Thank you!!!

    reply
    • Matt Horwitz March 10, 2018

      Hi Debbie, yup, of course. Many contracts are assignable unless their is a statement otherwise. However, it’s common for real estate investors to list the buyer as “Mary Doe and or assings”. Also make sure to strike out and initial any clauses that state the contract is not assignable. Hope that helps.

      reply
  7. Mike March 7, 2018

    Hi Matt,
    I am in the mortgage business. Many people contact me rearding buying a small rental property and wanting a nice 30 year fixed rate loan. They are dismayed that the Fannie Mae and Freddie Mac will not lend to LLCs and are dismayed that I would offer a portfolio ARM loan…..
    Have you had this experience, please advise.

    reply
    • Matt Horwitz March 10, 2018

      Hey Mike, yes, very common for the Fannie and Freddie loans. I’d look for a referral relationship with a commercial bank or a bank with a small commercial loan division. They group the LLC-owned purchases into the commercial division, although most are still residential properties. Hope that helps.

      reply
  8. Charlene April 7, 2018

    Hi Matt, just wondering if you might be able to give some advice. My mother-in law purchased a house and paid cash to help her son out in a situation. He convinced her to create an LLc in Missouri. Her son is living in the house and was to make payments back to her. He has not and she wants him out. She has 99% of membership. How can she disolve the LLC and does he have a right to live there.

    reply
    • Matt Horwitz April 8, 2018

      Hi Charlene, it sounds like your mother-in-law bought the house and then formed the LLC… if that’s the case, the home is owned by her personally, not the LLC that was setup later. Either way, this falls into the realm of real estate law and contract law. We definitely recommend you/she get in touch with a lawyer to handle the eviction process. Hope you get to the bottom of things.

      reply
  9. Sharon April 16, 2018

    Hi Matt,

    I have a condo in California with no mortgage, and I’m planning to form an LLC in NYC where I am living and then place that CA condo in my NYC LLC. How complicated it will be? Do I need to pay the transfer tax?

    Thanks!

    reply
    • Matt Horwitz April 17, 2018

      Hi Sharon, you’ll need to speak with a title company in California for the details. Is this condo being rented out or generating income? If so, you’re doing business in California… meaning, that NY LLC needs to be registered as a Foreign LLC in California, or you form an LLC in California (LLC owned by you), or you form an LLC in California owned by an LLC formed in New York. California is very strict regarding doing business and paying annual franchise tax. I recommend reading what is doing business in California.

      reply
      • Sharon April 20, 2018

        Thank you Matt.

        Another question, let’s say if I won’t transfer the deed of CA condo to NYC LLC, can NYC LLC do some business on the CA condo, such as collecting the rental, finding the tenant etc. ? Or I still have to form a CA LLC to do this kind of property management, although I live in NYC?

        reply
        • Matt Horwitz April 21, 2018

          You’re welcome Sharon. If the NY LLC wants to do business in California, it should register as a Foreign LLC in California. Whether you form an LLC in California or register your New York LLC in California, you’ll still need to to pay annual franchise tax and comply with any other California Franchise Tax Board reporting requirements. It’s not about whether or not the LLC takes title to the property. It’s whether or not the LLC is doing business in the state. Hope that helps.

          reply
  10. Eric Ebrahimi July 6, 2018

    I am in Washington State, and would like to know if it is possible to create an LLC that would control two other LLCs. If this is possible, then this concept would be the same as Series LLCs, or Limited Partnership Corporation?

    Thanks,
    Eric

    reply
    • Matt Horwitz August 12, 2018

      Hi Eric, the word “control” can be a bit ambiguous, however, if you want a Washington LLC to own (be the Member) of two other LLCs, then yes, totally possible. There are some similarities between this and a Series LLC, but it’s not the same thing. Hope that helps.

      reply
  11. Karen August 13, 2018

    I have a rental condo in Florida that I purchased for 160k 5 yrs ago in my personal name that is currently worth 300k. I just created an LLC but concerned that if I sell my property to the LLC for 1 dollar I will have capital gains on 300k when I sell it. If I make it my primary residence later could I still have first 250k exempt if I am sole proprietor of LLC? Appreciate your expertise!

    reply
    • Matt Horwitz August 16, 2018

      Hey Karen, we’re not as familiar with the tax details as we are LLC formation details, so this question would need to be ask to an accountant and/or a real estate attorney. I’m not sure if the tax basis carries over or not. Also, since your LLC will become the owner of the condo, I don’t think you can make it your primary residence. Therefore, I’m not sure about the 250k capital gains tax exemption. Additionally, there may be a few other strategies available in how you transfer title that provide asset protection and tax advantages. Feel free to share any of your findings as we’re curious to learn more. Hope that helps and thank you for your understanding.

      reply
  12. Lenee August 28, 2018

    Hi Matt, love your site. What if you already bought a property, and are now setting up LLC for real estate after the property has been bought but do not have a loan on the property? How would i handle this transaction? Thank you for your time and advice Lenee

    reply
    • Matt Horwitz October 10, 2018

      Thanks Lenee! If you still want the LLC to own the property, you’ll want to speak to your title company about selling the property from yourself to your LLC. Hope that helps.

      reply
  13. Fatima October 7, 2018

    Hi Matt,
    Thanks for video. It’s really helpful and informative. I’m planning to purchase rental property out of the USA. Do I still need an LLC in the USA?

    reply
    • Matt Horwitz October 25, 2018

      You’re welcome Fatima :) I have no idea about purchasing property outside of the USA.

      reply
  14. Sue November 5, 2018

    Hi Matt, great informative videos.

    I live in NC and have a rental property in IL without any mortgage.

    Have two other properties on mortgage in other states. Since those two properties have mortgage, I am not touching them now unless I get some knowledge about how this LLC things work.

    But for the 1 property in IL without mortgage I am planning to create an LLC and have my wife as member and me as manager.

    Q1: When I will do Quit Claim Deed to LLC for $1, then there will be a loss to me as the purchase price – depreciation will be much more than $1. Can I claim that loss
    Q2: Should I create another LLC in NC which will be a member of IL LLC? I stay in NC and dont want to break any IRS rules.
    Q3: Should I create a disregarded entity owned by LLC in NC to keep it simple and it will help in future for other properties.

    Thank you for your guidance.

    reply

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