Author Topic: New rental property owner; sole proprietorship vs LLC, taxes and liability  (Read 628 times)

YoungStache

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  • Location: Washington
So I just closed on a property in Pennsylvania, and the deed was transferred my name after paying all cash.

It is a duplex that is currently being rented out. There are 3 leases as the garage is being rented out as well. I am planning to rehab the basement to convert it into a full rental unit. It is currently a granny-flat but needs some repairs and improvements. I am planning to have the property managed professionally.

I am wondering if I should start an LLC, and then transfer the deed to the company, or stay a sole proprietor. The conventional wisdom seems to be that an LLC provides much more liability protection in the event of a lawsuit, so that your personal assets outside of the rental properties can't be affected.

What do you guys think?

Another Reader

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Look into an umbrella liability policy.  I have a lot of rentals, and I rely on that.  LLC's are an unnecessary level of complexity for most people.  The corporate veil can be pierced in some situations if you can be found personally liable for the damages.  In California, they are very expensive to form and maintain.

YoungStache

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  • Location: Washington
Look into an umbrella liability policy.  I have a lot of rentals, and I rely on that.  LLC's are an unnecessary level of complexity for most people.  The corporate veil can be pierced in some situations if you can be found personally liable for the damages.  In California, they are very expensive to form and maintain.

I have homeowner's insurance now. So I should get umbrella liability policy now? Or when I have more rentals? What is the annual cost?

Another Reader

  • Magnum Stache
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Look into an umbrella liability policy.  I have a lot of rentals, and I rely on that.  LLC's are an unnecessary level of complexity for most people.  The corporate veil can be pierced in some situations if you can be found personally liable for the damages.  In California, they are very expensive to form and maintain.

I have homeowner's insurance now. So I should get umbrella liability policy now? Or when I have more rentals? What is the annual cost?

It will depend on what your risks are.  Start by calling your homeowner's agent.  It generally ranges between a few hundred and a couple of thousand, depending on how many properties and the risks.  I personally would not own any rentals without an umbrella policy covering the likely maximum damages, or my net worth, whichever is higher.

YoungStache

  • 5 O'Clock Shadow
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  • Posts: 80
  • Location: Washington
Look into an umbrella liability policy.  I have a lot of rentals, and I rely on that.  LLC's are an unnecessary level of complexity for most people.  The corporate veil can be pierced in some situations if you can be found personally liable for the damages.  In California, they are very expensive to form and maintain.

I have homeowner's insurance now. So I should get umbrella liability policy now? Or when I have more rentals? What is the annual cost?

It will depend on what your risks are.  Start by calling your homeowner's agent.  It generally ranges between a few hundred and a couple of thousand, depending on how many properties and the risks.  I personally would not own any rentals without an umbrella policy covering the likely maximum damages, or my net worth, whichever is higher.

I'll look into that. Do you know of a good insurance company for that?

Also, do you know about how zoning works, with regards to converting the basement? Like what the process is? Newbie here

Another Reader

  • Magnum Stache
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Look into an umbrella liability policy.  I have a lot of rentals, and I rely on that.  LLC's are an unnecessary level of complexity for most people.  The corporate veil can be pierced in some situations if you can be found personally liable for the damages.  In California, they are very expensive to form and maintain.

I have homeowner's insurance now. So I should get umbrella liability policy now? Or when I have more rentals? What is the annual cost?

It will depend on what your risks are.  Start by calling your homeowner's agent.  It generally ranges between a few hundred and a couple of thousand, depending on how many properties and the risks.  I personally would not own any rentals without an umbrella policy covering the likely maximum damages, or my net worth, whichever is higher.

I'll look into that. Do you know of a good insurance company for that?

Also, do you know about how zoning works, with regards to converting the basement? Like what the process is? Newbie here

In SF, it's Byzantine.  I can't help you there.

WRT insurance, I kept everything with State Farm.  I'm likely overpaying a little, but claims will be coordinated.  I have umbrella policies in two states, and it was just easier.

MaikoTsumi

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Umbrella policy now.  A million dollar policy is cheap.  Insurance will settle for the lowest amount and leave you out to dry.  With an umbrella policy, you've bought a million dollar lawyer on the cheap.

YoungStache

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  • Location: Washington
Umbrella policy now.  A million dollar policy is cheap.  Insurance will settle for the lowest amount and leave you out to dry.  With an umbrella policy, you've bought a million dollar lawyer on the cheap.

Okay now I have the sense of urgency. Any recommendations for providers? Will call asap.

tralfamadorian

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Umbrella policy now.  A million dollar policy is cheap.  Insurance will settle for the lowest amount and leave you out to dry.  With an umbrella policy, you've bought a million dollar lawyer on the cheap.

Okay now I have the sense of urgency. Any recommendations for providers? Will call asap.

I also use State Farm but would start with your current property insurer. My cost is less for $200/yr for $5m of coverage.

Regarding LLC vs sole prop, all other things being equal LLC > sole prop for the asset protection. But first check and see how much LLCs cost in your area. As mentioned above, CA is the priciest at $800/each/yr. My state (mid-atlantic) is $50/each/yr. You will not be able to borrow cheap fannie/freddie money with a LLC if you decide to pull out equity later; you will be restricted to portfolio loans. Take some time to learn how to avoid "piercing the veil" or your LLC will be useless.