Loading summary
Transcript19 lines
- [00:00]
A
What's going on, everyone? Welcome to the David Green Show. This is Mortgage Monday. The biggest, the best, the baddest place to get your content about all things finance related in real estate. Joined today by the wonder kid, the computer that wore tennis shoes, as I like to call him. Big brain Christian Bashelder. Christian, how are you today?
- [00:19]
B
I'm doing good. I got, I got a big brain. You got a bald head.
- [00:23]
A
That's it. A lot of alliteration going on here and that's why you should come to us to get your mortgage. We are going to be tackling what is probably the most commonly asked question question in all of real estate investing. Though I still today have no idea why it is most commonly asked question. As you may have seen from the show title, we're going to be talking about should you put your house in an llc? Now, usually this is asked from the question of the real estate investor and we are going to be talking about how it affects the financing of real estate. So by the end of today's show, you're going to know if you should put your house into an LLC or not, at what point you should start doing that, and what types of financing options are available to you if you decide to do it versus if you, you don't. Christian, how does this show up in your world?
- [01:07]
B
Yeah. Outside of like David just said, being absolutely one of the most common questions we get, and this is across the board, this is from first time home buyers all the way to people buying their 50th property. Right. This is a hotly debated topic and I think you get a lot of varying opinions based on the service being provided. For instance, lawyers and attorneys, everything needs to be in an llc. Right. You always hear that. Right. And it's not really true. Um, and just speaking as an unbiased, you know, both as an investor, both as somebody knowledgeable about tax code and legal reasons, as well as a mortgage broker. There, there's, number one, some pros. Number two, there's some challenges that can be presented if you finance under an llc, depending on the loan product that we'll get into.
- [01:50]
A
All right, now, I think the reason people ask this question is they assume if they are sued and they are not in an LLC, they're going to lose all their money. We're not CPAs, we're not tax professionals. We do want to make a disclaimer right now. We're not giving you tax advice. We are speaking from our experience, what we've been told and how we often structure our own Opportunities and properties. Now, when you have your property in an llc, if your tenant slips and falls, if something goes wrong and they get hurt and they want to sue you, the theory is they can only take from you what is in that LLC. So if the house is worth 500,000 and you have a loan for 450,000, theoretically if they got you to sell the property, they would only be able to get that $50,000 of equity. Unfortunately, that's not always the case when your asset is kept inside of an llc, but you own that personally. A judge can steal what's called piercing through the corporate veil and say, hey, you were found at fault for this, you were negligent, you owe this person money. They're able to get funds that are outside of the llc. So it is not bulletproof like it's often spoken about. Additionally, when you buy your property in your own name, you still have homeowners insurance and most policies will cover you in the case of being sued. And one of the benefits of doing Mortgage Mondays with Christian bachelor big brain is that he is also an insurance broker. So, Christian, from that perspective, understanding policies for homeowners, can you share a little bit about protections that people can get if they're worried about this, but they don't want to put their house in an LLC because of fears that they won't be able to get the best financing?
- [03:17]
B
And like I said, guys, super commonly discussed question. So if you're talking to your loan officer, don't be afraid to ask this, right? It's something that should be brought up in terms of losing assets. Like David said, talk to any lawyer that is actually worth his weight. Right. That I've even heard piercing through the corporate veil like a knife through butter. Like a lot of times it's a lot easier than you would even think. And the reason being is that how the majority of investors use LLCs, they're not really operating as a standalone company. They typically structure them in what's known as holding companies, which is the borrower contributed the funds, the borrower makes the mortgage, the borrower possibly even guaranteed the debt. The borrower personally benefits from the rental income from property. It's not operating as a standalone corporation. Right. And when you operate it that way, any lawyer can see this isn't like a corporate entity. It's not a corporate property. Right? It's not like a company owning like a gas station or a liquor store. Right? It's a person owning a property operating as a landlord with just a little cute titled LLC on record. Right? That doesn't mean you're just, you know, the potential plaintiff here is just defenseless in potentially suing you right now. The counter to this is, well, I like the anonymity it brings, right? If just so you guys are aware, any realtor, any news organization, property records are public data. You can very easily go onto the county database and see who owns which properties. You can, you can go into corporate databases and search my name, David's name, anybody's name, and you can find properties if they're titled in their personal name on those. If they're in an llc on the county databases, instead of showing a borrower's name, it'll show an llc. Now, a real good attorney or like a private investigator could technically go in and find your closing docs and see who signed on the dotted line on behalf of that llc. Because obviously the LLC doesn't sign, right? It still tracks back to a person. So even then it's pretty easy to still go find who owns what property. However, there is the benefit, if you completely run it as a corporation, it's a completely separate entity. There is a way to structure, maybe your trust owns it and you get in tiered, you know, into tiered ownership. That's where now the cost kind of outweighs the benefit unless you really have something to protect, right? David, myself, we're good examples. We own a business, we employ multiple people, we own multiple businesses, we own multiple pieces of real estate. So that's where you start getting into maybe even the tax advantages of really structuring with trust. LLC is holding entities, all this stuff. But for the regular investor that owns one to five rentals, the exact same thing that you can accomplish with an LLC can be done with a really good liability insurance policy, right? You just have some. It's called an umbrella, right? So if you just call up your State Farm, all state farmers, whoever insures you, and you just tell them, hey, I want to get a liability umbrella policy. What that means is that if you get sued, there is a huge limit. Usually these are 1, 2, 3, 4, $5 million policies that protect you above and beyond what like your homeowner's policy would protect you for or, you know, the regular liability coverage that you have otherwise. And that's the same thing. If the borrower trips and falls, hits his head, you're, you know, at fault for some negligence. You didn't install handrails on your steers on your Airbnb, right? Things like that could happen if you get sued the same way that an LLC is marketed to protect you from anything an insurance policy does even better, because that can't be pierced. It's not like a lawyer is going to go around an umbrella policy. They're going to go make a claim on your umbrella policy. And that umbrella policy will do exactly what it's intended to do, protect you from financial loss.
- [06:52]
A
All right, so give me an idea here. If I'm shopping insurances, because this doesn't come up in the conversation very often, it's to LLC or not llc, as opposed to thinking, well, what insurance am I getting? And that will help me understand if it would even make sense to do the llc. If I'm shopping for insurance policies here, how much coverage do I want? How much can I expect that to make my premium go up? I know you can't give us some exacts here, but give us a ballpark of what someone should be talking to their insurance broker about.
- [07:20]
B
Yeah, good question. So a lot of times insurance companies and fun fact, I was actually an insurance broker prior to finding founding the one brokerage. So I'm speaking not only for somebody who has umbrella policies, but also for somebody who used to sell them. Umbrella policies are not, it's important to note it is a separate policy. So it's not something that's on your auto policy. It's not something that's on your homeowners or your landlord's policy. It's a completely separate policy. It's a different premium. It's not built into your other policies. However, it provides protection over and above all of them. So this even applies that if you get in a car crash and let's say you run into Elon Musk, right, and you cause him some bodily harm, what do you think he could sue you for? I mean, that's loss of work. And what do you think Elon Musk makes every day? That could be huge, right? So I mean, umbrella's policy wouldn't protect you at that point. But assuming you hit somebody not named Elon Musk, right? If you got sued and your auto policy covers you for $50,000 in liability, guess who pays the $51,000, you know, dollar that you get sued for, that goes to you now because your insurance policy is lapsed, right. It's not covered anymore. Right. You've extended past your threshold. That's where an umbrella policy would come in and pick up anything over that. And that applies to your auto, your homeowners, your landlords, any region in your financial situation where you could get sued for negligence. Right? And it's usually, they're usually pretty cheap. You wouldn't really believe it, but I mean, for a 1, 2, $3 million umbrella policy, I mean, we're talking a few hundred bucks a year, anywhere from four to maybe a thousand bucks a year. I mean, what, we're talking like 40 bucks a month. At that point, it's really cheap. To potentially save you a million dollars in a lawsuit is insane. Right. And especially business owners, people who employ other people. If you got sued for a million dollars, could you pay your employees? You know, if David and I, right now, if we got sued for 5 million, could we keep operating the one brokerage, or would they liquidate it as an asset and use that to pay the debts? Right. It wouldn't be good. So people with more to protect need more protection. Right. If you have stuff to lose, you need to make sure that there's contingency plans in place in the event the worst goes wrong.
- [09:29]
A
That's right. Now, one of the things that I've been saying in the podcast world for a long time is that you should take what scares you, turn it into a number. So if you're worried about risk, if you're worried about asbestos, if you're worried about things like that, how much would it cost to fix it? Now make the decision based on that number. Foundations is a common problem. Foundations. Well, how much would it cost to fix the foundation? Let's just figure out if the numbers work. If you're saying $40 a month, let's double it to $80 a month. Just take that number and say, hey, if I could get conventional financing because I owned it in my name instead of an LLC and it would cost me $80 a month extra on my insurance to provide the same protection, would that be a better decision? What about if it's only $40 a month, would that be a better decision? Also, you could cancel the insurance policy if you decide you don't need it. At a certain point, you're probably not going to cancel your loan. You're going to have to refinance. And you can't always refinance when you want to. Sometimes you have to refinance when the rates are in your favor. So that is some really good advice for people that are facing this dilemma of trying to figure out what to do. Now, let's dive a little bit deeper into the actual loan options here. What is the reason that you don't get the same loans when you own the property in an LLC as opposed to your personal name?
- [10:37]
B
Yeah, this is a really Good question. Now, with conventional financing, those who listen to this show regularly know the difference. There's some pretty stark differences in these loan products across the industry of mortgage lending. Right? The first region, the first section over here is your clean cut, Fannie Mae, Freddie Mac, fha, Virginia. You know, the stuff you qualify with with your income. Right? That's the conventional or the conforming loan, you know, region in America. With all of those loans, you cannot close. I want to make sure that's clear. You cannot close one of those loans while taking title in the name of an llc, you have to close in a personal name. Okay? Now, what a lot of people do is they close in their personal name and then transfer it to an LLC after closing. Some people are concerned and say, oh, the quit claim, or I'm sorry, the due on sale clause could be called. Right? That's a big concern that a lot of people have. You're technically changing the ownership of the property. The lender may not like that. They may call your loan due. Now, I want to add a little bit of clarity to this. If you change the ownership from a person to an llc, it doesn't necessarily invoke the due on sale clause. Where people get into trouble is not maintaining ownership. What I mean by that? Let's say we got the mortgage, the mortgage kitten back here. You guys have seen the mortgage butt. There's the finance kitty, the finance, the.
- [12:06]
A
Finance feline, David Beaver.
- [12:08]
B
There you go. But if you don't what I mean by maintaining ownership, let's just, for instance, assume David and I own a property. 50 50. So we're both equally on title. We bought it. It's in our personal names. On title, it reads Christian Batchelder and David Green as joint tenants. Okay? If I were to trans that it transfer that into an LLC that I own 100%. As you guys can see, David is no longer on title. Technically, David does not have ownership in that llc. That's where you can get into trouble because the lender didn't agree to give you that loan without David on title. They probably underwrote his income. He qualified for portion of the loan and now he has no collateral that he guaranteed for the loan. Right? That's where what you don't want to do. Now, if we transfer it into an LLC that David and I owned in the same fashion, 50 50, you would be fine, Right? It's super common. Happens all the time. This also happens with trusts. Right? If a father and mother own the property and their names, they transfer it into a living Trust that's not going to call your due on sale clause. Okay. People get into trouble when they're trying to basically conceal sales. Right. As if that looks like David sold his half of the property to me. And we're just not really wanting to talk about it. Right. We're just kind of transferring it so that we don't have to refinance, we don't have to get a higher rate, whatever the case is. Right. You don't want to do that. But to finish this, that's the conventional realm for the non conventional realm, namely DSCR loan products, bridge products, hard money loans. Most of those actually prefer for you to take title and llc. Some lenders will even give you a discount to fund an LLC instead of a personal name. Right. So with those products, because they're more what the industry refers to as business purpose, Right. It's treating it. They're almost like little mini commercial mortgages. Right. They're not treating the individual as a borrower. You know, the property is the main qualifying asset. They're not caring about your income or what you do for employment. The property needs to qualify for itself. The lenders like to see those taken in the title of an LLC because it makes it look like a business. Right now there's not some huge negative. If you don't, you can close DSCR loans in your personal name. It's just at that point it kind of becomes personal preference because both options are open to you.
- [14:24]
A
Okay. So if you want to get a conventional loan, it's going to need to be in your own name. If you're going non conventional or non qm, which would include DSCR loans, bridge loans. What else am I missing there, Christian? That would be non qm, all the.
- [14:35]
B
Different like self employment style loans. So fewer listeners have probably heard of like bank statement loans or 1099 loans where you still qualify with income. It's just not what's on your tax returns. Right. So all those type of loans have much more leniency to be under an llc. That's correct.
- [14:49]
A
Okay. But conventional loans are usually going to be your cheapest interest rate and your cheapest closing costs. Occasionally you hit these weird moments of bizarro world where the DSCR loans can have lower interest rates than conventional loans. Which side note, that's why you want to work with a mortgage broker. And what better broker to work with than the one brokerage? You definitely want to give Christian or I a shout out so that we can look into this. Because if DSCR loans are lower than conventional loans and you go to a normal retail lender or a mortgage broker that doesn't have a bunch of different relationships with banks like we do. They quote you the conventional rate and they don't tell you the DSCR rates would be lower. They don't explain to you that you would have different options and shop around to find you the best rate they get. They give you what they have, right? If you walk into a store, they can only sell you what they got on the shelves. It's one of the reasons why we have all this knowledge because we run a brokerage, not a retail lending shop. But that's a great reason why if you're going to be getting a loan, you need to know, am I going to be getting it in and LLC or am I going to be getting it in my personal name? Now, I do believe there is a point when you're investing when it makes more sense to own it in an llc. And for me, this is just my personal understanding. This is not me giving tax advice. It's when you have several properties that you are buying and you're owning them all in the same entity. If you have 10 houses, it makes sense to own those in an LLC because you are likely to have a lot of equity and you are going to want to protect yourself in the case of a lawsuit when you have a lot of properties versus when you're getting your first couple. When you're just buying your first couple properties. In general, you're protected by the umbrella policy that Christian mentioned on your insurance. So make sure you don't skimp on that. That's where your protection comes from, not from the llc. Again, everyone's different. You're a different situation. You definitely want to talk to the loan officer about the pros and cons of it. You want someone that can help you and you ideally want a CPA that can explain the differences as well. Christian, if people want to reach out to you, they're trying to figure out to LLC or not to llc. They want to know what interest rates are. They want to know if they should refinance their house or if they should wait. Where do people go?
- [16:50]
B
Yeah, just like David said, everybody is unique. So these are conversations. It's good that you're getting advice and guidance from a from a show like this. But talk about your specific situation with the loan officer. If you choose for that to be me, you can find me on Instagram @the1broker is my handle. There's a little under squares between the names. So at the/1_ broker. Please be careful, guys. We get literally messages all the time that somebody's impersonating David or I. Somebody's David Green at 23 or David Green 25. It's not us. Make sure it's actually our verified accounts and my email. If you just want to go directly to me and not have to deal with social media is Christian the1brokerage.com that's the foolproof way.
- [17:28]
A
So folks, we make these content for you. We make these podcasts completely free because we want to get you the help that you need and we want to make sure you don't get ripped off. We keep Christian pretty much giving consultations all day long in addition to closing loans loan. So make sure you reach out. You're not going to find a better person to take care of you. And not just you. This applies to your mom, your aunt, your grandma, your neighbor, the people that you know that you want to get a good rate and great service and anticipate what could go wrong and not just hope that everything goes right. You really need a trusted mortgage broker because to be frank, there is a lot of slime balls out there, especially in this industry. So we're not just for investors. Everybody out there that wants to finance real estate should be talking to us. Christian, anything you want to say before we let you go?
- [18:09]
B
I think we're good. This is like. Once again, guys, send this to anybody who has the LLC question, but please tell them to schedule a call. I cannot stress that enough. That's where we can take your specific situation into account in the advice and guidance we give you.
- [18:22]
A
There you go, folks. I'm @David Green24 on social media. Send me a DM and let me know what you think of the show. You can also find me at david green24.com and soon to be realtalkrealestate.com we are working on that website right now as we speak, having it developed. And leave us a comment on today's show. Let us know what you thought as well as what topics you'd like to hear. Chris, Christian and I both look at those and if we see something that's interesting, we will make a show on that topic because this is a community based enterprise and you are our community. We love you guys. We hope you're doing well. Stay in the fight, stay in the game. Things are tough right now, but that's okay because when the going gets tough, the tough get going. We'll see you next week on Mortgage Monday.