The Risks of Moving Financed Real Estate Into an LLC

In recent months, we’ve put a lot of focus on the different ways you can manage your real estate portfolio. Starting and expanding your real estate holdings can be a hugely profitable venture, but there are risks you need to be aware of along the way.

Last month, we touched on why managing your real estate through LLCs can be hugely beneficial. It’s a decision that can smooth out the entire process, even with a few added costs. However, the timing in which you move your financed real estate into an LLC may have major financial implications. We want to prepare you for those risks so you don’t run into any major problems.

Mortgage acceleration clauses

Your biggest risk in moving a piece of financed real estate into an LLC is you are creating a change of ownership. Even if you are going to fully operate the LLC, the LLC becomes the legal owner of the property.

Acceleration clauses are present in just about every contract that involves repayment, including mortgages. An acceleration clause essentially protects lenders from borrowers who sell off the property and attempt to pocket the profits without satisfying the mortgage. When there is a change in ownership, the lender may accelerate the entire balance of the mortgage.

Generally, acceleration clauses are used when someone decides to sell a property and move elsewhere. In that scenario, there’s far less risk because, ideally, you’re making a large enough profit in selling the home to cover the balance of a mortgage. When you move the real estate into an LLC, however, you don’t actually see an immediate profit and would be on the hook for the remaining balance out of pocket or be forced to refinance.

Refinancing your mortgage

This brings us to the next consideration. It’s unlikely you’re going to want to pay the entire balance off out of pocket, so your other option would be to seek another loan to cover the costs. Refinancing loans happens regularly, especially in real estate, but when you’ve moved the property into an LLC the terms are different.

In this scenario, you’re looking at a commercial loan as opposed to a personal loan. These terms are likely to be far less favorable than the terms you had on the original mortgage. The expectation on businesses (such as an LLC) is much higher than it is on individuals, and you’re going to be on the hook for that if you aren’t careful in executing your real estate plans.

Homeowners insurance policies

Another risk is the need for a new homeowners insurance policy. This policy has your name on it, just as the mortgage does, and covers YOU as the owner of the real estate. When you change the ownership by transferring your property into an LLC, you will need a new policy that indicates the LLC as the owner of the property.

While the LLC will provide you with liability protection, it’s not an insurance policy on its own. You’re going to want to cover the real estate just the same as you would if you owned the property without an LLC. The terms of the insurance policy may differ as the policy is now covering a commercial entity (the LLC) as opposed to an individual.

These are all considerations some real estate investors don’t understand until it’s too late. At Bryant Taylor Law, we work with clients frequently who need to navigate and mitigate risks like this. We know real estate law, mortgages, and the ins and outs of managing real estate portfolios of any size. If you need help protecting your Florida real estate portfolio, contact our team today.

The following two tabs change content below.

ventus

Latest posts by ventus (see all)

%d bloggers like this: