Q: I own 15 rental properties, all single family homes. I mainly rent to college students.
Recently I have become more and more uneasy about my liability and the threats I will sometimes get from pre-law students (or students with a lawyer parent). I work really hard to keep my properties well maintained and safe, but it seems there will always be something I can’t control.
I want to put each property into a limited liability company (LLC), for a total of 15 different companies. One of my mortgage lenders will allow this on my portfolio loans, but I have been getting a solid “No” from some of my other lenders.
Is there a better way to protect my properties? And, how do I protect myself from a tenant with dollar signs in his eyes? Also, is there a way to convince a lender to allow this as the loan still remains in my name and is better protected from liability?
A: You generally cannot ask a residential mortgage lender to lend cash to a corporation. You personally signed these notes to secure the loans and if you default on your payments, the lender can go after the property and your personal assets to collect what’s owed. If you used a commercial lender for your loans, they may allow you to transfer the properties as you wish, but may require additional documentation.
If you transfer the properties (which are the collateral for the loans) into an LLC and then default on your loan, the lender will have to sue you and the company to get repayment on their loan. If you have 15 properties in 15 companies, the lender will have to sue 15 companies along with suing you for repayment.
Almost all loans have a provision that states that the lender can call the loan in — meaning you have to repay the loan at that time — if you transfer title to the property.
You may be in a bind in your efforts to transfer title to your companies. You should talk to a real estate attorney further to determine whether you should do it, and if you do, what your risk is that your lender or lenders may decide to call in your loans.
Also, if you were to refinance the loans, you might request the lender at that time to allow you to transfer title to the properties to the LLCs and achive your goal.
Now let’s talk about your financial exposure. Consider buying a $5 million to $10 million umbrella liability policy that will help protect your assets should you get sued. Umbrella liability policies aren’t terribly expensive, but will give you additional protection from those tenants looking to cash out at your expense.
Please talk to your insurance agent for more details on umbrella liability coverage and to make sure your business and homeowners’ insurance policies are current and will protect you in case one of your law student tenants decides to start “practicing” early.
Finally, keep in mind that having 15 LLCs will cost you quite a bit more than having all of your properties in your name. Not only will you have annual fees that you will have to pay to your state, but you may also have additional accounting fees in filing tax returns for all 15 LLCs. You may want to talk to an accountant first to determine what this will cost you on an annual basis.
Nov. 24, 2006.