Rental Property LLC FAQs
Thursday, July 28, 2022
FAQ: Can My Rental Property Be Held In A Limited Liability Company (“LLC”)?
A single entity LLC provides numerous advantages for rental property owners, including reducing personal liability and allowing more costs to be tax deductible. Many rental property books and podcasts recommend that Buyers take advantage by purchasing their rental property in an LLC.
Can Rental property Buyers purchase in an LLC?
If paying cash for the property, then the answer is a clear “yes.” If financing the transaction, then Buyers need the lender’s authorization. Most residential lenders do not allow Buyers to purchase in an LLC. Lenders that do allow Buyers to purchase in an LLC typically provide a portfolio product containing an adjustable rate mortgage with an interest rate approximately 100-200 basis points higher than a conventional investment loan. A workaround for Buyers is to obtain “umbrella” insurance, which can help shield liability. An umbrella policy typically can cover all properties in a Buyers’ portfolio, and generally costs in the $500-$1000 annual range (we recommend that Buyers contact their insurance agent for a quote). An LLC costs $500+ per year in state filing charges, so the pricing is in the same ballpark.
Can Buyers transfer a rental property to an LLC after the closing?
If the Buyers have a mortgage on the property, then the answer is typically “no”.
Par. 18 of the attached standard MA Uniform Instrument Mortgage reads in relevant part: "[i]f all or any part of the Property or any Interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender’s prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument." This is referred to a as a "due on sale clause.” Thus, if Buyers transfer their rental property into an LLC without lender authorization, it could trigger the clause which allows the lender to call in the loan.
Moreover, by transferring their rental property into an LLC, Buyers could invalidate their homeowner's insurance. Lenders require that the name insured on the insurance certificate match the name on the mortgage. If Buyers move a property into an LLC without lender authorization, then there will be a discrepancy between the named insured and the owner of the property, which gives an insurance company a reason to invalidate a claim. Further, most lenders require a copy of the updated homeowner’s insurance certificate each year. If Buyers do in fact change the name on the certificate, then the lender will be on notice that an unauthorized transfer occurred, which could trigger the due on sale clause. For similar reasons, a transfer to an LLC could invalidate the title insurance.