One of the common questions we get from prospective clients is whether or not it’s a good idea to put their investment property in an LLC. Before we dive into this topic, it’s important that we note: we are not attorneys and we are not offering legal advice. Anything you consider doing in your personal portfolio should be discussed with your attorney!

That said, we have worked with lots of clients and have had a great deal of real-world experience with this topic. We’d like to share some of our experience here for your benefit.

Benefits of LLCs

Generally speaking, an LLC can offer protective benefits for your personal assets and an alternative way to own your investment properties. Holding your properties this way also separates the ownership of your personal assets such as your personal home, personal savings account, etc. This desire makes complete sense, but if you have a conventional loan on your investment property, you need to be thoughtful about whether or not you employ this strategy, and how you go about doing it.

Lenders and LLCs

When you get a conventional loan from a bank for an investment property, you’re signing a personal guarantee that the loan will be repaid. That loan is approved off of your personal financials and you personally on the title as the owner. Because of this, typically the property itself must stay in your personal name so long as you have that conventional loan on it.

There are some lenders that will approve you moving your property into an LLC after you close on a conventional loan. Typically that is not the case if you’re doing conventional Fannie and Freddie mortgages. And in fact, moving the ownership into an LLC can potentially create much larger issues with the rules of your bank, and the loan you agreed to. In other words, you need to be very careful before employing this strategy. We recommend you consult with your attorney and accountant to understand the implications and potential pitfalls of the strategy.

Of our preferred lenders, Arvest is the only one that can currently accommodate this strategy. You’ll have to buy the house in your personal name, close on it, and then you can personally request the transfer of title into your LLC after closing.

Alternative Options

You can also purchase your property in an LLC from the beginning. But the loan would need to be written in the name and financially underwritten by the LLC, not to you personally.

Asset-based lenders will also (and often require) you to hold title in an LLC. The loan is based around that specific asset, and not solely on the financial strength of the borrower. However, the asset-based loans are typically more expensive and can have some really negative impacting pre-penalty fees if you don’t hold the loan for the full term, typically 5 or 10 years.

Final Thoughts

It’s easy to get lost in so many strategies, and opinions on this topic. There are advantages to both types of loans. Initially, investors can get the best rates and longest-term financing with conventional loans. However, as you grow your portfolio in size, and time, often the only route is commercial loans. Make sure to do your homework, talk to your attorney and accountant (and your bank), and make sure you have clarity of the implications of whatever decision and loan type you go with.