renting property and using a LLC?
February 19, 2010 by
Filed under realestate rentals
Me and a couple people or forming an LLc and will be buying and selling realestate.. My question is that i already own 4 rental propertys with mortgages on them.Can i transfer ownership to the llc to manage for me? What is the best move to make??
Yes, it can go under a separate division of the llc on the bylaws. Beware remember in an llc you are all members not stockholders. The advantage is to gather value to use the llc with whatever equity is in your property, if the llc does bad, cover yourself with a separate document all members sign clearly staing the purpose of your placing your properties in the llc. I really don’t see an advantage, unless your other members are putting up equal value into the llc.
Hi, Oh wow! I see many problems! First of all, your bank/secondary market mortgages probably have a due-on-sale clause that accelerates the note to maturity if you transfer an ownership interest in or to the property! Next, are all other Members of the LLC contributing capital for contributions to be equal or do you need percentage ownership interests? I could go on, so let’s just begin with the only advantage I see, that would be for tax purposes, since you’ll probably have more losses in the short term that can only be deducted to the extent of rental income and the properties you contribute may help with additional income that can ultimately be deducted.
Unless you have to come up with capital to play with these other members, I would continue holding the properties as you do now! You may screw up past deductions taken and closing between you and the LLC will need to be pro-rated for rents and contracts assigned. You may have a gain on the sale from you to the LLC if you plan to tranfer at current market values! What you are thinking will be a dream come true for your attorney!
If you simply want to have the LLC manage the properties, do a separate Management Agreement, but beware of taxes! You won’t have a problem with your mortgages if the LLC only has a management agreement that has an at-will termination clause for both parties. A real estate management company in any state will also require at least one (if not all) member(s) have a real estate license.
The LLC is a living breathing separate entity and must meet the legal requirements to manage, sell, rent or even advise the public in real estate matters.
I really think you may have been drawn into the joys of an LLC and other business entities may better serve your needs, like a Real Estate Investment Trust or REIT, which may be down the road for you, or even simpler;
Buy and rent properties with your buddies on an individual basis, easier to finance, insure and tax individually. Buy and rent properties as Tennants-In-Common and then as individuals, execute a buy sell agreement of your interest for the sale and dispositon of the property in the event of bankruptcy and death. You can even finance the buy out in the even of death with a cheap term insurance policy. Liabilty is not that great of an issue for renting property unless you intend to be a slum lord, it’s not that big of deal! Property insurance will afford liability coverage and with an LLC expect more costly premiums with a commercial policy.
PS. The Articles of Incorporation for the LLC may be incorporated in a simple Buy-Sell Agreement between Tennants-In-Common, including the sale and transfer of the property in certain events, like failure to actively participate in management, or failure to manage, consequtive losses, just about anything you can think of!
Bottom line, not a good idea to pass existing properties into a new business venture, just do a Management Agreement.
Hope this helps you, Good Luck, B.
You will find it harder to finance or refinance a property in a corporation. If you don’t plan to do that, go ahead and transfer ownership.