HMW #129: 3 Big Risks of Transferring Your Property into an LLC

 Read Time: 6.25 minutes

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So you want to move your property into an LLC?

The process of switching the title of your property from your personal name to an LLC is super easy.  You have two straight-forward options on how to do it.

Option 1: Refinance your current residential loan into a commercial loan that is now in your LLC's name.  Most likely commercial mortgage terms are going to be higher than residential mortgage terms and it will cost you about $5,000 - $15,000 to get the loan processed as well.  However, the debt is no longer in your personal name nor affecting your personal debt-to-income (DTI) calculations if you do want to go out and get another residential mortgage in your name in the future. You have fully moved everything over from your personal name to an LLC with this option.

Option 2: Hire any real estate attorney to process something called a quit-claim deed (note: it's not "quick claim," which is what you may hear people erroneous saying). This should cost less than $200 and take about 15 minutes of work. A quit-claim deed is the legal paperwork you need to forfeit your claim to property ownership on the property deed and give the ownership to someone or something else. This happens often in divorces, inheritances, partnership restructuring, and more. However, many real estate investors want to do this for legal protections as they assume LLC is always better than having a home in their personal name.  (I've talked before that LLCs aren't often necessary.)

So there's a quick breakdown of the two ways forward.  Are you leaning towards one over the other?

I (Alan) thought so. It's no surprise that many investors choose the cheaper and faster route of Option 2. I've done this myself on multiple occasions, however, you need to understand the 3 biggest risks of taking this shortcut so you aren't caught unaware of possible obstacles in the future.

Risk 1: You don't realize the mortgage stays in your current name

So after doing option 2, the deed of the house is in your LLC name now, however, the mortgage is still tied to your personal name. This is all fine and dandy until you want to go buy another property in your personal name and your debt-to-income ratio is out of whack because you already have a mortgage in your name.

You can have up to 10 mortgages in your name, so that's not the issue. It's getting a lender to see you can afford multiple mortgages in order to issue you new loans that may be the problem. Also, if you default on this loan, it will affect your personal credit score. In certain types of commercial loans if you choose option 1, it would not. It would only affect the credit of your LLC.

Ok, good! Let's move along to the next one then.

Risk 2: You don't realize your mortgage can be called due

Mortgage underwriters originally approved you, not your LLC. If they catch wind that it's now in a different name, they have the right to call the loan. This means you either have to pay off the loan in full in cash or refinance it into your LLC name (option 1 above).

Now, a lender usually isn't snooping around looking for this. They sold a loan and as long as you are making payments on time each month, everyone usually remains happy. This is low risk, but it's a risk nevertheless.

In some cases, you may just feign ignorance and quickly quit-claim deed the property back to your personal name and continue as if the LLC thing never happened.

Risk 3:You don't realize your insurance is now possibly void

You typically have two types of insurance: property and title.

Property insurance is required by all mortgage lenders. And you'll want to make sure your new LLC is named in your current policy. Now any changes in insurance notifies your lender, so if you just change the name of your insurance policy to your LLC, then your mortgage lender gets notified of the name switch and that could trigger Risk 2 above. You can also just add your LLC at no cost as an additional insured instead of the only insured, so then your policy is in both your name and your LLC name to allow you to fly under your mortgage lender's radar a little longer.

Title insurance is optional at purchase and is included in roughly 80% of all deals. It usually costs about 1% of the purchase price. This is insurance against someone laying claim to your property from the past.  Prior to your ownership if there were any survey, inheritance, divorce, bankruptcy, or other claim issues on ownership of your property, then your title insurance protects you.

Title insurance was issued in your name at purchase and also does not transfer on a quit-claim deed, so it voids the insurance you paid for. You may want to re-issue new title insurance in the LLC name or just roll the dice like the other 20% of purchasers who don't want this optional insurance anyway. It's your call.

Glad to give you something to think about. None of these are dealbreakers for me, but you need to make your own choice on the risk levels you are willing to take when moving a property into the name of an LLC. I can only provide you the pros and cons and leave the decision making to you. Hope this helps make you a more successful investor in the long-run!

Glad to hear it!

Summary

• Quit-claim deeds have risks that you should be aware of
• The cheaper option to transfer property into an LLC is still most popular
• You need to weigh the risk-reward of every move you make in real estate
• If you liked this, we teach real estate in fun ways in our courses to make investing fun