Hello my friends and welcome to another episode of ask Marco where I answer your investing related questions.
I hope everyone is keeping well and staying safe, I know a lot of Californians here have made their way to the beaches again, now they’re keeping their social distancing. But I believe a lot of people are getting stir-crazy and have gotten a little tired of the lockdown and nationwide quarantine that has been going on. I mean, how many weeks can you be locked up in your house? So anyway, people are enjoying themselves while still trying to do what they think is right in terms of staying safe. So good for them.
So today’s question comes from Ivan and he’s wondering if it’s possible to refinance a property that is held in an LLC. And it’s a good question because it’s a common question and a lot of people hold their properties in an entity like an LLC for the sake of asset protection, but that could be challenging when it comes time to finance or refinance that property.
So Ivan writes in and he says, Marco, I started listening to your podcast about three weeks ago and I am inspired to grow my passive real estate income portfolio. I currently own one single-family investment property that is cash flowing $375 monthly. I owe $50,000 at 3.6% over 30 year fixed and the property is worth a $171, 080 as per zillow.com and realtor.com the home is in my name. After listening to an episode of yours about asset protection, I am considering transferring the investment into an LLC. However, I am concerned about the ability to refinance if the home is owned by a newly formed LLC. Is this a concern or not? Also is an LLC, the right move or should I consider an S Corp or maybe even involve a land trust? Thanks, Ivan.
Ivan, thanks for your question. Thanks for being a new subscriber to the show and congratulations on your investment property and your desire to build your passive income through a portfolio of income-producing real estate.
So let’s break this down. You’re really asking two main questions. Is it a concern to have the property in an entity like a newly formed LLC? Well, my first comment to that is, and this is, this holds true for pretty much everybody that holds any kind of asset, especially if it’s worth something or generates income. It’s not smart to hold assets in your name personally. And any asset protection attorney will tell you that now their approaches might be slightly different. They’ll pretty much all advise that you hold your assets in a title holding entity like an LLC. So you’re thinking the right thing and on the right path. And I’m not an asset protection attorney. I have learned a lot from many asset protection attorneys and there’s common threads or common denominators between them. All the LLC, a pass-through entity in the state of the asset is a pretty common way to hold title and start your asset protection plan so you’re on the right path.
Now is that an issue or concern when it comes to financing? Yes and no. If you are after conventional financings such as Fannie Mae or Freddie Mac, basically these GSM or government-sponsored entities, the GSE entities then yes, because conventional financing requires you to hold title in your name or your spouse’s name, but basically you as the borrower or borrowers need to be tied to that property. This is just for the qualification. After you have the property financed or refinanced, then as long as you are within the guidelines of that loan, there’s no reason why you can’t hold title in something like a land trust or and or an entity. So keep that in mind. Now, these are just very general suggestions if you will, because there is a clause in most loan agreements or notes that is called due on sale clause, which means that if you have one of these loans like a conventional loan and you transfer the title to an entity, that transfer can technically trigger the due on sale clause, which means that the lender has the option to call the note due, which means that is now fully due and payable.
That is an extremely rare scenario that is not likely to happen. What generally triggers that is an investigation that it has been triggered by you defaulting on the loan. Meaning if you haven’t paid for whatever, let’s say 90 days, three months, and you’re in arrears that is going to draw some attention and raise some red flags and if there’s an investigation they find that well you haven’t made payments for three months or more and now the property’s not even held in your name. Well that’s going to, you know, obviously call things into question. So the likelihood of that being triggered is very small. But what a lot of investors do, and I would argue to say that many of them, if not most of them, especially if they’re under the guidance of an asset protection attorney, will ultimately transfer the title into their land trust and or their entities.
And of course, you just keep paying the mortgage on time and that keeps the lender happy and it keeps you on track and building your portfolio. So it can be an issue with conventional financing, but if you are purchasing a new property or refinancing it, then my suggestion and logic would tell you to do the refinance or purchase first obviously and then transfer the title into the LLC or the entity that your asset protection attorney is telling you to hold title in. Now if you’re financing or refinancing with a portfolio lender or an asset-based lender where they are looking at the property often more so than they’re looking at you as a borrower, then most of the time they’re not going to have an issue with who you holding title in an LLC. In fact, many portfolio and asset-based lenders actually require you or want you to hold title in an LLC or some entity that they also know about and can record on the note and on the deed of trust or mortgage instrument.
So there are cases where it actually makes sense to have the title in an LLC and to be qualifying or refinancing in the LLC. But the key one to remember is the conventional loans by Fannie and Freddie. Those are no bueno, meaning you cannot have your title held in those entities and get a loan at the same time. So, um, to your last question here, you know, is an LLC the right move? Well, obviously some sort of title-holding entity is the right move because it’s a mistake to hold title in your name. From an asset protection perspective, you ask, should I consider an S Corp, an LLC, or maybe a land trust? Well, that really depends, but you need to talk to an asset protection attorney if you really want some definitive answers. But ultimately what you will find often, if not most of the time, is that LLCs are used as the vehicle or tool to hold title.
Now a lot of asset protection attorneys will take that one step further and they’ll just simply take the title, put it in a land trust. And that land trust is in the LLC. So the land trust is nothing more than a simple trust. It’s no different than any other trust. It’s just specific to real estate and it’s holding title to that one property. So the property goes in the land trust. Think of it as just like a wrapper on a candy. And then that goes in the LLC that you are using for your asset protection. And really that’s about it. So think of it like another layer on the onion. It’s just one more layer of asset protection. And the thing is, is technically speaking, a land trust is not for asset protection. It is for anonymity. It doesn’t really provide any asset protection. The LLCs, for example, do because of their separation and there is control and there is no ownership on your part.
So if you were ever in front of a judge and say, and you had to answer the question, what do you own? Well, you can say, well, I own an LLC, or I own whatever. It may be a holding company, but you technically don’t own that property. All right, well I hope that helps. Ivan, appreciate the question. If anyone else has a question about real estate investing or finance and you’d like me to take a shot at it and answer it on the show, then go to AskMarco.com or you can just go to passiverealestateinvesting.com click the Ask Marco button and submit your question. If you haven’t subscribed to the show, I keep asking you, just click that subscribe button and you will get notified probably twice a week. Now with the latest episode, help us share the show with other likeminded people. I’m sure you have some friends. Tell your friends about it. Let them know about the real estate investing show and we will continue to deliver great content. Thanks for listening. I will see you on our next episode.
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