Looking to become a first time home buyer. I only plan on being in the first house for five to seven years then upgrade. At that point I'd like to rent the first house. What at are my options to have the house as an LLC for protection going forward?

I am a real estate agent in the Houston/CS area. My advice to you as a realtor and a person who is planning to start an investment company (AND ABSOLUTELY NOT AS A LAWYER) is that your best bet is to protect your personal assets, regardless of what type of business entity you choose. Most investors that I deal with like to use the LLC because it is cheap to start/maintain and does not carry the burden of double taxation. Some feel corporations, LLP's, LP's and the like work better for them that is fine and really the entity depends on what you (and your attorney feel works best). No matter what happens you do not want your rental properties in any way tied to your personal assets (as far as I am concerned) for your financial protection. It should be fairly simple to transfer the property from your name to that of the LLC after it is created, I'm sure the title company can handle it. If you want to make it easier I'm sure you can create the LLC ahead of time and name yourself as the only partner, and buy it that way; however if you are going to finance the house in any way other than cash, I would check with your mortgage broker to see if that will have any effect on your loan. P.S. I think that it might affect the process if you do this, particularly if you are seeking FHA/VA financing (even still it might affect your required down payment). So make sure you cover all of those fronts before you make any move.
I hope this helps.
BTW advice is free, but I am running a business, so if you are not working with a realtor I would love to help you (call/text 713-315-1628, or email walkroger@gmail.com) and if you are no big deal; I hope I was helpful!

I'll be look at FHA or double lien note (somewhere from 3-5% down) so I assume I can't just purchase it outright through the LLC.

The focus of my question is, how easy is it to transfer the home to an LLC once we move out and into a new home.

Also, let's say we sell the rental 5 years after. Do we have normal capital gains if I take depreciation?

Does the home begin depreciating when I make it a rental?

These are more attorney/tax CPA questions.

You're assumption about financing is true. Be aware that FHA has both upfront and monthly mortgage insurance and the monthly portion is now for the life of the loan.

Look carefully at 4 possible low down payment options.

1. 95% loan with mortgage insurance. In spite of what feedback you may get here it shouldn't be eliminated as the most cost effective solution. MI drops off once you can substantiate loan to value is 80% or below. This can be through pay fown, appreciation or both. Upfront rate is better than with combo financing.

2. 97% conventional loans will be available soon. Same as above.

3. Lender paid MI technically shift the burden from you but the rate is premium priced and remains even after 80% or lower LTV is reached.

4. Combo financing using 5% down payment avoids MI but the first lien rate will be slightly higher than options 1 and 2. The 2nd lien rate will be probably 200 basis points higher than the first and carry a second set of closing costs.

My email is on my profile and I'd be glad to discuss the options more specifically with you.

AggieFanatic...

It's very easy to transfer a home into an LLC from a personal name. I've done it with 3 rentals before. I simply had an attorney (at a Title Company but could be any attorney) draft a General Warranty Deed. Sign, get notarized, record...done. I don't remember exactly what I paid but it wasn't much. I did have loans on these properties and I failed to inform my lender I was doing this (not on purpose...just never crossed my mind at the time) so I would recommend reaching out to them before making the transfer just to verify it won't trigger the 'due on sale' clause or anything like that. In my case none of my lenders said anything and I've since sold all 3 properties.

As to your capital gains question...yes, you would have normal capital gains if sold 5 years down the road. It would be long term capital gains and taxed accordingly. More info here. The only way to avoid paying taxes would be to do a 1031 Exchange. If you held the property for 3 years after moving out and kept your homestead exemption on that property...then when you sell you'd meet the homestead exemption (have to have lived in the property for 2 out of the previous 5 years) and gains would be tax free.

*This is not legal advice...just sharing from personal experience.

You cannot claim the homestead exemption if you take title in an LLC, which will be worth several hundred dollars a year to you in savings.

You will also incur expense of formation and annual margins tax.

I would wait until you are closer to making it a rental.

Great info. I just want to make sure I can transfer the title to an LLC once we move out and I start cash flowing it.
Sounds like that is my best option. Although I did the ppa program, tax wasn't my forte. I'll consult a CPA for tax planning purposes.

Are the "due on sale" clauses very common and can I get them negotiated out?

AggieAtty...if you initially take title in your personal name and you claim the property as your homestead, can you transfer it into an LLC later on down the road and keep the homestead exemption or do you lose the homestead once the transfer into the LLC occurs?

AggieFanatic...I'm pretty sure most all loans/mortgages have a due on sale clause. I highly doubt it's a negotiable item with a lender...it's there for their protection. But perhaps a loan officer/mortgage broker can chime in on this.

If I were a bank I'd allow average joes to transfer loans into LLCs as long as interest rates are low. But if they ever go back up, if absolutely use that as a reason to call the loan.

(I actually wouldn't do this personally but I think it'll happen if rates ever go up.)

The homestead exemption is only available to families and single adult persons (and some trusts) who own a home AND intend to use it as their primary residence. Since the LLC is treated as a separate legal entity that fits neither of those categories, it would not be entitled to claim the homestead exemption. Once conveyed into the LLC, the homestead exempt goes away. Full disclosure, how that happens at each tax assessor/appraisal district, I do not know.

I have seen some cases where the sole member of the LLC that owned the home tried to "reverse pierce" the veil of the LLC to opportunistically claim the homestead exemption - not because of the homestead exemption itself, but because of the protections afforded exempt property in the bankruptcy context. Not something that you want to hang your hat on, to be sure.

On the subject of due on sale clauses, you will not have any luck getting rid of those. The lender always wants to know who its borrower is, and that clause allows them to keep borrowers from conducting prohibited loan assumptions, wraparound mortgages, etc.

My experience is that a lender will not go out and confirm that no sales/covneyances have happened unless it is a non-performing loan. It is simply too expensive for a servicer to affirmively monitor those types of things.

Once there is a problem with the loan, however, that will be one of a handful of provisions that they will look to determine their leverage over the borrower to pay the debt in full.

Thank you kindly. Good info.

I've actually had a lender call my loan due on a wrap-around seller finance deal I did. I had a loan servicing company handling the seller finance aspect and the ball got dropped with an insurance renewal for my buyers. That triggered my lender calling me and asking why the insurance wasn't in my name. And down went the ship. It was 2.5 years in too...crazy. Luckily I had a plan B in place and all worked out just fine. Still have the seller finance note today and it's my best one.

Another question by the OP.

I'm looking to buy the home with my girlfriend and we want to both be borrowers on the note. I know, i know, don't buy unless you're married, yadda yadda. She just finished grad school and I recently got promoted, so in lieu of saving for a ring and planning a wedding, we've decided to buy a home together first.

Long story short, if we're both on the note, will it combine as joint property once married and still easily transferred to an LLC? (So's long as I don't tell the bank i'm transferring to not trigger the due-on-sale clause) .

Additionally, in regards to this "due-on-sale" scenario," is there any work around where the LLC can obtain additional insurance or the like? I understand that I can't really "guarantee" the LLC, as that's the whole point of moving it to a separate entity (they can't come after my personal assets). Are there options where I would just heavily insure the property once we move out and not move it to an LLC?

As you can presume, I intend to continue buying monopoly properties and renting them down the road. In the future, I'll have to obtain more traditional financing (i.e. not first time home buyer); are there options where an LLC can be the lender? I assume i'll have to prove debt coverage with rents and maybe contribute additional collateral?

Also, what if we don't end up qualifying together as co-borrowers (she's a teacher and we're looking to buy something more than she would qualify for on her own) and I'm the only borrower, can I easily transfer the home/note/title into her name as well? She'll be contributing cash and the like on the purchase and doesn't like the idea of not actually "owning" the home. We're intending to get married in the next 2 years. Has anyone done this before? Would we have to refinance the note and transfer the title after marriage?

Lots of questions here but any help would be great !

TIA