Steps for-Success When Investing in Real Estate

By Garrett Sutton, Esq.

You have made your decision to invest in real estate. You know what property you want to buy. Your offer has been accepted. Now what do you need to do to make sure your property is protected from the start?

Here is a checklist of the seven steps for asset protection when you are buying real estate.

1. Getting in Escrow.

On the offer to purchase the property list the name of your entity as the buyer if it is formed. If it isn’t yet formed list your name and the right to assign the contract to an assignee (your new LLC or LP). So the offer would be from “your name and/or assigns.”

2. Form your Entity.

If you are going to be in escrow for a period of time (30 to 45 days) in order to get your due diligence inspections done you will have time in most states to get your entity formed. Also know that Nevada has an expedite service whereby LLCs and LPs can be formed in a matter of hours. Remember, your entity must be in existence at the time of transfer. If you don’t know what entity you need, please contact our office for assistance.

3. Financing Issues.

Some lenders do not want you to take title in the name of your LLC. Some will offer very technical arguments for why they don’t allow it, others will tell you they straight out they think you are trying to hide assets.The way around this is to take title in your individual name and then transfer the title from you into the new LLC. More and more lenders are okay with this solution. The banks I work with are. Know that in such a transfer the lender’s position hasn’t changed. They still have your personal guarantee and a first deed of trust against the property. There is still a ‘continuity of obligation,’ a technical term you can use with them. But I personally wouldn’t ask the lender if such a transfer is okay. Have you heard the old saying, “It is better to ask for forgiveness than permission.” It applies here. Pay the mortgage from an LLC checking account. Virtually all lenders are not going to call a performing note. Have a title company or attorney prepare a grant or warranty deed and transfer to your LLC.

4. Transfer Taxes.

If you immediately transfer from your name to the LLC beware of transfer taxes. Many states make an exception and don’t charge a fee when you are transferring from yourself (your individual name) to yourself (your new LLC). Others, like Nevada, don’t charge when the property goes from you to the LLC, but do charge, as in a refinancing scenario, when you transfer from the LLC back to yourself. The key state to be careful in is Pennsylvania. They charge a 2% transfer tax no matter what. So say you have a $1 million property with $900,000 in financing on it and you want to transfer into your LLC. A 2% tax on a $1 million property is $20,000. Ouch!

5. Insurance.

As I have often said, insurance is the first line of defense. When you insure the property make sure the insured is the LLC. (There have been cases where the title has been transferred from an individual to an LLC, the insurance company wasn’t notified and, using their contract loopholes, claims were denied because they didn’t insure the LLC.) If the insurance company says an LLC is a business and higher fees apply (which is nonsense – since they are insuring the same property) ask them to list the LLC as an additional insured. So the policy is in your name and the LLC is also listed as an additional insured. Send a C.Y.A. letter to your insurance agent notifying them that the LLC is on title to the property.

6. Banking.

You will open up a bank account in the name of the LLC. You will take a copy of your state filed articles of organization into the bank along with your EIN (tax id) number. If you are a single member disregarded entity (and work with your CPA on this) you will use your Social Security Number instead of the EIN. If you are a foreign national investing in the U.S. the procedures are a bit different and too far afield for this section. Consider calling our office for an explanation. (Please know that it is not a problem and can be done.) The bank may ask for a copy of your operating agreement. Have it with you in case they do. Your checking account will list the name of the LLC (including the designation LLC) right on the check. You want the world to know you are doing business as “XYZ, LLC” and not as an individual. Have your tenants make out their rent checks to “XYZ, LLC.”

7. Succeed.

Do all your business in the name of the LLC. Contracts, vendor work and the like are all done not for you personally but for the LLC itself. Always pay the annual LLC filing fees and prepare an annual tax return for the LLC. You want ongoing protection and to get that you have to follow all the rules. For more information on following the formalities see Run Your Own Corporation. Consider segregating properties into separate LLCs. We don’t want to create a target rich LLC. When you sell the property it is sold by the LLC, which receives the money and then distributes it to you. Enjoy the process and succeed with protection.