The Issues with Owning Properties in LLCs
Many people who own rental properties find they are better off transferring those properties into an LLC in order to protect themselves and their investment. If you are interested in making such a transfer with the rental property you own, please use today’s blog as a reference. Also, make sure you discuss any changes with your legal counsel. We are not attorneys at Hoffman Realty; we are a property management company.
There are certainly risks involved in not transferring property into an LLC or another entity. Any liability in your rental property can involve your personal assets. That’s the most important reason to have your property owned by an LLC. However, there are also risks involved in transferring properties, and it’s worth knowing what those issues are. Once you have all the information, you can decide whether it’s worth it to transfer your property.
Re-titling your property
The first thing to consider is that when you re-title your property, from example from John Smith to John Smith Rentals, LLC, you run the risk that your mortgage company – if you have a mortgage – will call the note due. They can do this through the acceleration clause in your mortgage. I have heard of a very few cases where this happened, but it is a risk and you should be aware of it.
The second consideration relates to your title insurance. If you hold the title insurance as John Smith, and now the property belongs to John Smith Rentals, LLC, you are probably not going to be covered if there is a claim against the title. Our attorneys always recommend that you only transfer properties that do not have potential tile issues. They will probably be more mature properties you have had for some time and you know you don’t have to worry about a challenge to the title. They might also be in sub-divisions, where you know there will not be claims for encroachment.
Third, you need to understand that you will probably not be able to refinance your mortgage when your property is owned by an LLC. If you do want to refinance, you will need to transfer it back to your name and then put it back to the LLC after the refinance is complete. This involves a lot of paperwork some financial expense.
Finally, you need to think about insurance, particularly liability insurance. You will no longer get liability insurance attached to your hazard policy when you transfer your property to an LLC. Instead, you will need to purchase commercial liability insurance. This policy is often more expensive because it often involves more coverage and higher levels of coverage, resulting in a higher cost.
If you have any questions about transferring your rental property to an LLC, or questions about property management in general, Contact us or give us a call at (813) 875-7474.