Many clients who want to put their rental property into an LLC come to my office after they have purchased the property. Some have done a recent purchase, others have owned the property for years. It's also pretty common to find that they are moving in with a significant other and they want to rent out their former home to create an additional stream of income for their family. No matter what the reason, many clients don't think of moving their property into an LLC until after they purchased the property.
There is nothing "wrong" with moving a property into an LLC after you've purchased it, but if you are considering a future purchase of a rental property, you may want to consider setting up the LLC before you complete the purchase.
Moving Property Into the LLC After You Purchased It
The common scenario my clients encounter is putting their property into an LLC after they already own it. While this should be a relatively simple process, one thing you need to watch out for in this scenario is dealing with your mortgage lender if you have one. For most people with a mortgage, the mortgage is in your name and is secured by your ownership of the property. So, if you're going to change the ownership of the property, you need to get your lender's permission to do so. If you've been working with a bank, it's usually a matter of a phone call and they can issue an approval letter for you. They will want you to remain personally liable for the mortgage payments but will agree that you can change the title of the property into the LLC's name.
However, if your loan has been sold to another bank or is being held by a servicing company, those companies may not agree to allow you to transfer the property into an LLC. If you end up in this scenario, you'll need to consider other options for your rental property if you'd like to get it out of your name.
Assuming your mortgage lender agrees (or you don't have a mortgage), then the process to move the property into the LLC is very straightforward. You need to prepare a deed that transfers the property from your name to your LLC. Before you can do this, make sure you've actually formed your LLC, you can't put the property into an LLC that doesn't exist. Preparing a deed for a property is one of those transactions in law that we don't recommend you try to do yourself. There can be a variety of little pebbles that can trip you up and you don't want to mess with your rights to property when it can simply be done with an attorney.
Moving Property Into the LLC Before You Purchase It
If you have the opportunity, I prefer that my clients form their LLC first and then transfer their property into the LLC when they purchase it. By going this route, you can eliminate the need to get approval from your mortgage lender after you've purchased the property. You'll need to advise them that the LLC will be owning the property and you can take care of any issues at the time you purchase the property.
The other advantage of this method of transaction is that you don't have to go back later and prepare another deed for the property. At the time of closing for the property, the deed that is prepared by the title company will be to put the property into the LLC and you'll be all set.
Since we don't have access to a Back to the Future time machine, for many clients, they already own their property and will need to use the first scenario to move their rental property into an LLC. But if you're getting started on your real estate investment journey, it may make more sense for you to get your LLC set up now so that you can have it ready for your investment properties when you purchase them.
If you're ready to move your property into an LLC, or would like to get more information on the process, let's set up a Legal Strategy Session to discuss the best options for you.