California residents who wish to invest in a piece of real estate often set up a limited liability company to protect themselves and their earnings. The limited liability company insulates their personal property from any incidents that may befall their real estate venture, and there are tax advantages offered by this type of entity as well.
However, it can be exceeding difficult to find a lender who is willing to extend credit to a limited liability company. There is a strong preference among residential loan providers to work with those whose loans are secured by their personal assets.
One way to enjoy the advantages of a LLC while still being able to find debt financing is to purchase the property as an individual and then lease it to an LLC owned by the investor. This LLC would act as the landlord for any tenants or other people renting the residential property, which could free the owner from liability in any number of ways.
The precise way in which this legal structure can be erected is complex. The points at which the lender must be consulted, informed or asked for permission to proceed might also be a challenge to negotiate, and thorough familiarity with the relevant laws will be necessary to perform this task properly. As a result, it might be advisable to have the assistance of an experienced real estate attorney. There are a variety of documents that must be drafted, and any mistakes in the timing of each step of the transaction may cause problems down the road.
Source: Dans Papers, “The New Way to Own Residential Real Estate Investments”, Andrew Lieb, Oct. 29, 2016