asset protection

Landlords get sued more often than most other professions.

As real estate investors start building a portfolio of properties, many start looking to isolate their properties under different LLCs. But that raises a question: how do you move a property into an LLC name after you already own it?

And what about your mortgage lender? Doesn’t a change in legal ownership trigger the “due on sale” clause in your mortgage?

Deni and Brian talk through how to change your property’s legal ownership to an LLC without running afoul of mortgage lenders, and what kind of lenders to use moving forward to avoid this problem.

Video Broadcast Version

Audio Podcast Version

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Resources Mentioned in This Podcast & Video:

live off rents podcast transcript

Deni: Hello, everybody, and welcome. Sorry, we’re a few minutes late. Technology is lovely all the time. Please let us know where you’re joining and any questions you have during this. Please just reach out and ask. Yeah, we talk to each other enough. We would like this to be more interactive. Last week, if you joined us, we were discussing protecting your rent with rent default insurance. And this week we’re going to talk all about how to put your investment properties into an LLC. So, with that being said, Brian, tell us a little bit about what an LLC is.


Brian: Sure. Well, an LLC is the simplest form of a legal entity, stands for a limited liability company. And it can be a sole proprietorship for an individual. It can be a partnership between multiple people. For example, Deni and I own an LLC together, a 50/50 partnership for Spark Rental. And they’re very easy to form. They’re inexpensive to form in most states. You do have to pay the state annual renewal fee, but that in most states is also quite low. So, it’s really the simplest form of company that you can create.


Deni: And now let’s talk about why. Why do we need an LLC?


Brian: So, the idea behind forming a legal entity, and in particular an LLC, is to isolate the LLC s assets from your personal assets in case you get sued over your business or business practices. In the case of landlords and real estate investors, they typically will buy properties under the name of an LLC. And if they get sued by a tenant or by a neighbor or a buyer or seller or contractor or someone else over their activities as a real estate investor, then the idea is that the most that these plaintiffs could take from you are just the property itself or any other assets that are owned by the LLC and that they can’t come after you personally. They can’t come after your personal assets, for example, your checking account and your investment brokerage account, and all of your other personal assets. So, the idea is to separate your business assets from your personal assets and that people can only go after your business assets if they sue your business.


Deni: Now, what about insurance? Will not be just enough?


Brian: No, normally not. I mean, some higher-end landlord insurance policies do cover certain types of liability. No insurance policies cover all liability. For example, I used to own a bunch of properties in Baltimore City and lead paint was a big concern in Baltimore City. And every in between every tenancy. I had to go get lead paint inspections and certifications done for each of my properties. And no insurance company in the world would cover lead paint liability. So, if someone if a tenant had sued me over lead paint poisoning, the insurance would not have covered it. It was the specific exclusion from the policy. The policy only couple covers a few specific inclusions that they list, and those tend not to be very extensive. Your little insurance policy can offer you a little bit of protection against legal liability and lawsuits, but not full protection and really not that much protection either.


Deni: I mean, technically, they could go after your personal home. You know, any other businesses, if you don’t have it set up as separate entities, right?


Brian: Yes, if you own properties under your personal name, you know, for example, the first property that I ever bought, I bought under my personal name. And I’m actually in the process of selling that property right now, still in my personal name. But if those tenants were to sue me, they could theoretically go after all of my personal assets, not just the property itself.


Deni: Right.


Deni: So, is it difficult to put a property into an LLC?


Brian: No, it’s not difficult. From a legal standpoint where landlords and real estate investors run into trouble is the due on sale clause with their mortgage. Let’s start with the easy part of this question or answer, and then we’ll get into the trickier part. The easy part of this answer is let’s pretend for a second that you own a property free and clear. There’s no mortgage against it and you want to move the property from your personal name into an LLC name. That’s actually quite simple. You go out, you create the LLC by filing the paperwork with your local states, your state’s Department of Assessments and Taxation, or business license. And then you can simply record a quitclaim deed from you to the LLC. Quitclaim deeds are very simple deeds that just say that the owner quits all claims to the property and assigns ownership interest to a new owner. It’s a very easy and simple way to move a property from your personal name to an LLC name. And you just have to file that deed with your state or your county’s public records. So very easy. There’s really not much to it. Where things get tricky is if you have a mortgage because mortgages, almost every mortgage lender out there requires a due on sale clause in the legal paperwork.


Brian: When you that you sign at that hour and a half closing where you sign your name a thousand times, one of the things that you sign there says that if the ownership of the property changes, if the property gets transferred to someone else, the mortgage balance becomes due and payable in full immediately, which is the problem if you are just trying to leave your mortgage in place as you move the legal ownership from your personal name to a legal entity name like an LLC. There are a couple ways around this. The simplest is if you get permission from your lender, um, most lenders, in my experience, aren’t very willing to offer that permission. But you can call them up and you can tell them what you’re doing. Explain the situation and see if they’re willing to sign off on it. If they are not willing to sign off on it, then you have a couple options. Your first option is to refinance, and you can pay off your original mortgage in full and refinance with a portfolio lender, for example, that doesn’t mind lending money to an LLC. Most conventional lenders, they do not want to lend to legal entities. If you went to just your regular mortgage broker when you got a loan on your rental property, that lender is probably not willing to lend money to an LLC in the first place.


Brian:  We have an article that’s all about how to borrow money out of our mortgages when you own property under an LLC name. And then we’ll put a link to that in the comments. But, hard money lenders, portfolio lenders, private lenders, are usually all fine with lending to a legal entity. you won’t have any trouble there. Now, there is a trick that my old boss taught me that is, you know, in the gray area of the law. So, what he used to do is if he ever had properties in his personal name and wanted to move them to an LLC, what he would do is he would file for an LLC that was named after his personal name. you know, in my case, it would be, say, Brian Davis LLC, and then he would quitclaim the property from his personal name to the LLC, which is named after him and is indistinguishable from his personal name, except for the fact that the very end of the Letters LLC.


Deni: That’s kind of brilliant.


Brian: Yeah.


Brian:  The idea behind it was that he would keep making the mortgage payments to the lender on time in full every month. No, no hassles, no headaches with the idea that the mortgage lender would never notice. the hope is that the lender just never finds out that you changed the deed. You change the ownership over to your LLC name. Now, the risk there, of course, is that if they do find out, they can call the loan and require it to be paid in full within 30 days or within 45 days or whatever the timeframe is written out in your mortgage note. Um, so there is an element of risk to it. But as long as you have some other lenders lined up that you could turn to, if that worst-case scenario happens, then you can go and refinance to a portfolio lender, for example, someone like Visio or lending home or whatever. that way, most likely they’ll never find out.


Deni: The name of the game is paying the mortgage., I not going to say I’ve done this before. you buy a house, you live in it, you rent it out. And technically, you’re supposed to let the mortgage company know. But I probably would think that ninety-nine-point nine percent of those people who do that don’t. Don’t you think the mortgage company, as long as you’re paying the mortgage on time, they’re not going to question? Really?


Brian: Yeah. most mortgage servicers are dealing with thousands, if not millions of loans every month. It’s all automated in a system somewhere. As long as you don’t come to the attention of a human being at the company, as long as no red flags are raised with your mortgage account, you can probably get away with this indefinitely, until some issue comes up. And then you have to if you had to contact them or if there were some problems with your escrow, for example, what you don’t want is a human being looking at your mortgage account too closely in this scenario. But as long as you’re just sending a check every month or paying electronically every month if you make their payments on time and in full, then they’ll probably never notice.


Deni: Right. Well, we do have a few comments and questions. Christina asked about insurance. And I’m assuming, Christina, you mean is insurance better than an LLC?


Brian: Christina may have missed our first part of the broadcast where we talked. We did talk about Landlord Insurance and how most insurance policies only cover a few exclusions for liability if they cover any at all. And I give an example about how there are certain types of liability that no insurance company in the world would cover, for example, lead paint lawsuits. insurance offers spotty protection at best. Now, that being said, LLC ownership also offers imperfect protection. And we can talk about that in a minute, Tony. But, when it comes to asset protection, you’re just trying to build as many barriers as you can, knowing that anyone protective barrier in itself is not going to cut. It is not going to protect you in full.


Deni:  And then do you make a separate LLC for each property to protect them from each other? Or can you put a bunch of properties in on LLC?


Brian: Right. To isolate the liability for each property from the other. what I used to do is I used to put three or four properties in each LLC to kind of strike a balance between, keeping the paperwork manageable and the liability manageable. And the LLC renewal fee is manageable. So that’s how I excuse myself. That’s how I handled it. But two or three or four properties in any given LLC. but you could do things like open a G. Brian Davis LLC, Gregory B. Davis LLC, Gregory Brian Davis LLC, Gregory Brian Davis Junior LLC. You could create multiple ones of these if you wanted to. how many properties you put in each LLC is really a personal choice based on your risk tolerance and your asset protection plan, your personalized plan.


Deni:  We have a question about real estate transfer tax when you do a quick claim deed. If I remember correctly, I don’t think there is a transfer tax with quitclaim deeds. I can never say that. It’s like Peter Piper picked a peck.


Brian: I think if you prove that you are the owner of the LLC and that there’s not a substantive change in ownership, you may be exempt from paying transfer taxes on it. That’s going to be state by state. check with your state about that because you might transfer taxes is the answer, albeit unsatisfying.


Deni:  just a tip is if you have a lot of properties, and you want some protection is to have somebody like Sayge Grubbs. Not that I’m pushing them out there, but to put in the creates like a trust. Which is a little bit more protection than an LLC.


Brian: That’s more advanced asset protection. And, you know, here’s the thing with asset protection as well, is that when you were younger, when you have a lower net worth, you don’t need much asset protection. As you build more assets and you build a higher net worth, then you want to start layering on more and more asset protection because you have more to lose. this is something that evolves over time. And in the beginning, it’s not something you have to worry very much about as you, get a net worth closer to seven figures, get into the seven figures. You have to start worrying about this a little bit more. And the ultra-wealthy people in the eight-figure club, you know, the three-comet club, you know, they have to do some much more advanced protection because they have a lot more to lose and they have a much bigger target sign painted on their back.


Deni: The more you have the bigger the target.


Brian: Right.


Brian:  there’s not a one size fits all solution for asset protection. And the rules change over time because it’s a bit of a cat and mouse game between, you know, companies and wealthy individuals who want to protect their assets and plaintiffs want to take those assets. each side gets more clever than the next, as they go and the rules change, the strategies change over time. it’s not like this is a one-and-done kind of thing as asset protection or something. You have to kind of keep looking at every few years as the rules change, as your net worth changes, as your assets change.


Deni: Is there anything else, Brian, that is good to know about an LLC? is there anything that is not good about an LLC?


Brian: Yeah, well, I mean, obviously, the renewal fees every year are an issue depending on your state. In some states, these renewable fees are as low as seventy-five bucks a year. In other states, they can be five hundred. I feel like someone told me that in California they’re like six or seven hundred dollars a year to renew. Maybe that’s not true. In Baltimore or in Maryland, I think it was three hundred dollars a year per L.L.C., which is not trivial.


Deni:  Daniel Jackson says in Texas there are no renewal fees and in Pennsylvania, there are not either.


Brian: That’s great. That’s fantastic. the renewal fees can be an issue depending on your state. And, you know, it also makes your accounting a little bit or it can make your accounting trickier. You need a bank account for each LLC, and you need to keep those assets completely separate from your personal assets or else you lose all of the asset protection benefits those losses convey. if you commingle funds, if you spend money from your LLC bank account on personal goods, then you waive all of your protections.


Deni: Big time.


Brian:  you have to be squeaky clean with your accounting, with your LLC assets versus your personal assets. Now, it doesn’t mean you can’t take distributions, and it doesn’t mean you can’t fund your LLC bank accounts with personal funds, you know, contribute personal funds to the business banking on. But you really should have an accountant and you should talk to them about, how to do it in a way that doesn’t jeopardize your legal protections.


Deni: You do not want to go to Starbucks and use your business account.


Brian: (laugh) you know, you write off and just swipe it. No, it doesn’t work like that. And in fact, I’ve been sued a couple of times based on my rental properties. And the first thing that plaintiffs do is they list you personally or they try to list you personally in the lawsuits or the list your LLC, and then they also list you personally. And then it’s up to you to petition the judge and say, actually, I should not be included in this lawsuit because this property is owned by my LLC and the LLC manages all of the funds completely separately. And I should be excluded from this lawsuit because of that. but every plaintiff in the world is going to try to go after you personally with each suit, and they will name you personally in the suit. And it’s up to you to make a case to the judge why you add your personal name should be removed from the suit so that your personal assets can’t be seized by the plaintiff if they win the lawsuit.


Deni: And attorneys know this. So, attorneys are the ones that are going to go after us personally. I mean, that’s just the name of their game. We do have a question from Katie, and she is asking when calling the lender for option one or requesting permission to do all this, is there a department that you specifically go to change your mortgage? So, you’re not calling? Yeah, I know what you feel, Katie, here. And I’m pushing button three and button four and waiting for twenty minutes each time.


Brian: Katie, you’re going to sell the same story five times, I’m sorry to say. It’s probably the servicing department or maybe the legal department. It depends on how the lender structures its internal departments. But I would expect that you’d need to speak with either the legal department or the servicing department. But you’re probably going to have to say this once a bunch of guys.


Deni: What about funding? Patrick Ryan is asking; how do you fund a newly formed LLC?


Brian:  you can contribute money from your personal account to the LLC bank account and you just want to keep that very clear and clean and obvious that, you wrote a check from your personal account to the LLC bank account. And on that check on the memo, you wrote, for funding the new business venture or whatever. Yeah. You just want to keep it all squeaky clean.


Deni: Right. And thank you, Janine White. She said this is very good information. Always nice to hear.


Brian: That is, thank you, Janine. I guess my last comment that I would say about this is the best way to go about doing this is to buy the property in the first place in your LLC directly and then borrow the money directly as the LLC to borrow your mortgage loan as the closes. You don’t have to go through any of these sorts of questions or issues about trying to transfer the property from your personal name to the LLC name and dealing with the lender and all that stuff. We recommend going through a portfolio lender. There are a series of online lenders that specialize in working with landlords and with real estate investors. those are on our loans page on it’s right there on the menu bar. I don’t know if you have that link handy, but we compare their interest rates, their points, and fees, the LTV that they lend, but all of them lend directly to L.L.C… So, it’s a non-issue when you go through a portfolio lender.


Deni: And I am putting that link in there right now. We have a question, and I am not sure, “What do you need? I’ve read real estate, too, on sale. I don’t know what the stats are?”


Brian:  what did you have on the due on sale clause? I’m not sure what statistics you’re looking for, It says meaning; how often do they get called to do. What I’m told is the insurance that causes the issue because it triggers the lender. the insurance. The property insurance policy. Well, you know, once again, this is why you transfer it to an LLC in your own name or an LLC that’s named after you personally, so that hopefully no one notices that, that the insured name changed slightly. So, it’s uncommon for loans to be called, in my experience, when I was younger, when I first graduated college, I worked for a lender for many years, and I never heard of a loan being called for the due on sale clause. It Doesn’t mean that it never happens, but it’s uncommon.


Deni: How does an LLC work in conjunction with an umbrella insurance policy? is it an overlap, or do they complement each other? I would think they complement each other.


Brian: They do complement each other. But we’re getting into the area where you should really speak with an asset protection attorney because neither Deni nor myself, I mean, we’re landlords and real estate investors were not attorneys. at a certain point, you bump up against the limits of our legal knowledge. Jamie, we talked earlier about insurance policies and some of their limitations. They can certainly help, but they will not cover every type of liability. And often they have specific exclusions, usually for the things that you have the highest risk for being sued over. an insurance policy alone is not going to cut it. And like we mentioned earlier, having an LLC alone is not going to cut it either.


Deni: Right.


Brian: You want to kind of build this wall around your assets, brick by brick by brick. because no one strategy covers you in full. we mentioned also one of the more advanced strategies that you can work with an attorney on is putting all your assets into a trust. Well, your assets are in LLC’s and the LLC’s go into a trust. you can create this wall even higher and thicker. But you do need to work with an attorney to create something that complex,


Christina said: “So proprietary offices are easier to pierce the veil”, that can be true, but not if you do what Brian was just explaining and keeping everything squeaky clean and separate. when you start using your LLC bank account for personal expenses. you lose some flooding there, so you really got to keep it separate.


Brian:  absolutely. You have to keep your accounting and your finances completely separate. Nicole had a question. Did you have one of our links handy for our loans page?


Deni: Yeah, it’s in the chat.


Deni: Oh, OK. So, Nicole, you would ask about refinancing a property we’ll put a link in the chat to where you can look at some lenders that do work with losses and you’ll also find a couple examples thereof lenders that work with individual borrowers as well, not just companies and LLC’s.


Brian: And Landon said, so you literally just call up the mortgage company and tell them you want to quitclaim the deed to your LLC.


Brian:  you can do that. They’ll probably say no. You can try that. You can try to get permission from them. More likely, you’re going to end up either needing to refinance or just quitclaim it to an LLC that is named after yourself and hope that they don’t notice. Which is the strategy that we explained a few minutes ago?


Deni: Daniel says, Can you talk about the liability of paying off a home completely, some folks have told me not to fully pay off a house. I don’t think that’s for liability reasons, though.


Brian:  I know I know what Daniel’s referring to. let’s say that you have a property that is owned by an LLC and the property has a mortgage on it for most of its value. very little equity in the property then technically the only asset that the plaintiffs can go after if they win a lawsuit is that little bit of equity you have in the property. Right. Which is not worth doing? the idea is that it’s a deterrent, for starters, because you have only one asset that the LLC owns, and that asset has very little equity in it. what’s the point in even suing? And, you know, even if they do sue and they do win, then, you know, no collection attorney or no collection agent is going to bother trying to foreclose on that property, because by the time you go through foreclosure, all the equity will have been annihilated anyway. the point? It’s not a bad approach. Which once again, one more brick in your wall. That being said, don’t make these sorts of decisions based on asset protection first. Make them based on financial and investing for those reasons first, and asset protection reasons secondary. If it makes sense for you financially to pay off your mortgage and then do that, um, don’t leave the mortgage in place even if you’d rather pay it off just for asset protection purposes. But having a full mortgage against the property makes it a much less attractive target.


Deni: Great question, Daniel.


Brian: Yeah. Yeah, we’re getting it. We’re getting more advanced here and we starting to bump up against the limits of Deni’s and my experience. So, with that, we are better we’re going to wrap things up.


Deni: And yes, Landon this video will be posted to our page and our website. it’s always available.


Brian: Yeah. if you go to the learn menu on our, you’ll see our podcast listed under there. We get these episodes posted there usually within a day or so, usually by Wednesday. They’re posted on the website and the Spark Rental podcast. published on iTunes and Stitcher and all the other mainstream podcasting platforms as well. And that’s probably a good moment to say, you know, rate, you know, give us a high rating if you appreciate the show, it’s an easy way for you to say thank you and a free way for you to say this.


Deni: And please, if you guys have any other subjects that you want to cover, you had questions about our would like to know a little bit more about to send it our way.


Brian: Yeah, absolutely. And next week, Deni is actually going to be off. She’s going on a road trip with her mother. am lucky enough to be joined by a guest. I’m going to have Becky Nova joining us again. She’s going to talk about how she built passive income from rental properties extremely quickly. I mean, she and her husband reached financial independence with rentals in something like two years, which was crazy fast. we talked a little bit about that the last time we had her on the show, maybe six months ago, a year ago. We’re also going to talk a little bit more this time about international real estate investing, because they do some international investing as well, even though they’re based in New York. it will be fun next week, 2:00 p.m. Eastern on our Spark Rental Facebook page, as always. In the meantime, let us know what kind of topics you want to hear about because this is about you guys. So, we want to talk about the things you actually want to hear about and to Daniel and Katie and Landon and Christina know. Thank you all so much for your participation and your questions and for and for the thanks. We do appreciate that. It looks like Daniel has a question here. Yes. Whether we do coach sessions? We do not, really, anymore. We do have a course.


Brian: It’s FIRE from real estate fire being an acronym for financial independence and retires early. we do include a strategy session with that. But we don’t do coaching anymore just because we don’t really enjoy it that much. yes, we don’t do it anymore. But we do offer a course and there is a coaching element that comes with that course. Kristina asked about syndications or JVS. Oh, yeah, we do actually. So, we do, sort of we can’t call it syndication, but we just launched our first co-investors deal, with a partner on the ground in Michigan named Drew Sidget, who’s a bigger pocket’s contributor. He’s a regular over there as well, which is how we met, and we did do a co-investing deal that we just closed. But we are doing deals that you guys can participate in if you want. send us an email to [email protected] If you want to be put on the waitlist for that because there is a waitlist for it. and then Christina actually clarifying that she wants to hear more about syndications and JVs is a topic. we will add that to our content calendar, Christina, and then asked, do we do commercial properties at all? Not really.


Deni:  I have that is a little bit of experience.


Brian: Deni has some experience with some restaurant real estate and some mixed-use real estate. And to answer your question, Daniel, we will not be at BP, I live in Brazil most of the year, so I will not be present for that. As much fun as it would be to go. It’s just it’s a bit of a long flight for me. All right, guys. And Christine, we also appreciate the other topic, proposal, building business credit for real estate investing.


Deni: So, some great topic ideas, Thanks for these great suggestions.


Brian: Yeah. So, we appreciate it, you guys. We will catch you next Tuesday, 2:00 p.m. Eastern, 11:00 a.m. Pacific on our Facebook page. And have a great week. We’ll see you on the flip side.


Deni: Have a great week.

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