Author Topic: How do you guys handle your rental business? Are you an LLC, or something else?  (Read 5526 times)

the_fella

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I am not yet a landlord, but this is a topic I'm interested in. The lady who owns my building owns several in the area. I know she has at least two different LLCs. How do you guys handle this? Do you have an LLC or something similar?

SwordGuy

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We have an LLC.  Just one for now.    If we end up with a bunch more properties, we'll divvy them up between 2 companies.   

It would cost us an extra $120 a year to do that, but it's cheap insurance against losing everything to one lawsuit.

Alim Nassor

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We have 10 rent houses. No LLC.   We have a million dollar umbrella policy.  I think the security of an LLC is way overstated.   A good lawyer can penetrate it easily and still go after your assets.

the_fella

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We have 10 rent houses. No LLC.   We have a million dollar umbrella policy.  I think the security of an LLC is way overstated.   A good lawyer can penetrate it easily and still go after your assets.

Oh, cool. I wasn't aware of that. So do you just count the rental income as your personal income on your taxes?

tralfamadorian

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Oh, cool. I wasn't aware of that. So do you just count the rental income as your personal income on your taxes?

LLCs are pass-throughs so the income is Sch E regardless of whether the properties are owned directly or through a LLC(s).  You can chose to treat your LLCs as a C or S corp tax wise but you would lose your real estate tax benefits.  In general only flippers benefit from S corp taxation.  Personally, I have an umbrella policy and use LLCs when I feel like there is enough equity in a property to need shielding. 

YttriumNitrate

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I've got an LLC for my side hustle, but my rental is NOT** in it because A) it was bought as my primary residence, and B) I plan on holding the mortgage for the full 30 years and I suspect interest rates will rise and some smart bankers will realize they can raise the rates on people who have transferred their rentals into LLCs and violated the due on sale clause.

That being said, if I were to buy another rental it would be put into the LLC. Of course, I live in a state where LLCs are dirt cheap; if I was in California lots of insurance would probably be a better use of the money.

**Thanks Radman for catching that typo!
« Last Edit: June 26, 2017, 09:06:23 AM by YttriumNitrate »

radram

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I've got an LLC for my side hustle, but my rental is in it because A) it was bought as my primary residence, and B) I plan on holding the mortgage for the full 30 years and I suspect interest rates will rise and some smart bankers will realize they can raise the rates on people who have transferred their rentals into LLCs and violated the due on sale clause.

That being said, if I were to buy another rental it would be put into the LLC. Of course, I live in a state where LLCs are dirt cheap; if I was in California lots of insurance would probably be a better use of the money.

Did you mean to say " ... but my rental is NOT in it."?

TimmyTightWad

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Semi related but does anyone know if it's worth leasing a car via a LLC and writing it off as a business expense?
A quick google search says that you have to fraction "business use" vs. personal use but I'm guessing you can put whatever you want there. May be another advantage of having a LLC perhaps

anonymouscow

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I only have one new rental. I set it up as an LLC. It cost 99 dollars to set up.

I think it makes things seem more professional. And it is pretty much a business, so why not set it up as much as possible as one, business checking account, etc?

Bruinguy

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A good lawyer can penetrate it easily and still go after your assets.

Cite, please?

My understanding is that it may be too expensive given what you can get via insurance, but I have not heard that it is easy to penetrate, assuming you actually treat it like a separate entity from yourself. 



Cwadda

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I own a multi family property and owner-occupy (it's also my primary). No LLC or umbrella policy but I be getting an umbrella policy the moment I move out and it becomes and investment property.

Bobberth

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A good lawyer can penetrate it easily and still go after your assets.

Cite, please?

My understanding is that it may be too expensive given what you can get via insurance, but I have not heard that it is easy to penetrate, assuming you actually treat it like a separate entity from yourself.

Not that it can't be done, but actuallytreating an LLC as a separate entity can be rigorous. Especially since we're talking about it only mattering in the worst case scenario-this coming out in the court of law by an opposing lawyer. Setting up an LLC is the easy part, keeping up with the ongoing annual reporting can trip some up. If you're a single member LLC, that can make it easy to pierce as an opposing lawyer has a good argument that it's not truly a separate entity. Even if you're set up as Husband & Wife it can be easy to pierce with the same argument.

A Duke law acquaintance told me that "Piercing LLCs is law school 101" FWIW.

I own 11 properties in my name and use liability insurance to protect myself. In the unlikely event of being sued by a tenant, the ambulance-chasing lawyer who only gets paid when they win will have to make the choice between taking a relatively quick and easy $1mm settlement from my insurance company or to go to court, actually have to put in lots of time and expense, hope to win and try to collect a larger amount from my personal assets before I file bankruptcy.

tralfamadorian

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A Duke law acquaintance told me that "Piercing LLCs is law school 101" FWIW.

I've heard similar things. For example, something as simple as signing your name on a document or an email as "Bob Smith" instead of "Bob Smith : President of 123 Main St LLC" constitutes piercing a veil.  This is because a lawyer can argue that by signing your name only, you are acting as a private person instead of on the LLC's behalf.

Personally, I use LLCs for asset shielding instead of asset protection.  I don't want a scummy lawyer to be able to do a simple search on me and find any and all the real estate I own.

shawndoggy

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where are all of the diy dental work threads?

There's so much bad advice in this thread.  Like a lot.  Wanna know who is most likely to screw up an LLC and get the veil pierced?  Someone DIY'ing it.  The distrust of experts that permeates this forum is pennywise and pound foolish.

The most frequent screwup I see is that someone sets up an LLC but never actually deeds the property into it.

Personally, I use LLCs for asset shielding instead of asset protection.  I don't want a scummy lawyer to be able to do a simple search on me and find any and all the real estate I own.

So what about regular (not scummy) lawyer who searches your name with your state's Secretary of State, finds your LLC, then searches your LLC name to find out what properties it owns?

tralfamadorian

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So what about regular (not scummy) lawyer who searches your name with your state's Secretary of State, finds your LLC, then searches your LLC name to find out what properties it owns?

That's why you have the LLC registered in a state with strong privacy laws where reverse searches are not available.  WY, DE and NV are the most oft cited.

And where in the thread did I say that you shouldn't have the LLC set up by a lawyer?  I read a bunch about taxes so when I meet with my accountant, I have a plan of action to discuss with her and hear her opinions.  I research about asset protection so I have an acceptable baseline of knowledge to discuss with my RE lawyer.  I don't need to pay a lawyer $200/hr to explain the basics to me. 

There's so much bad advice in this thread.  Like a lot.

And what is this bad advice?  Umbrella policies as risk mitigation?  Or that LLC property ownership is not a guaranteed shield against liability? 

shawndoggy

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That's why you have the LLC registered in a state with strong privacy laws where reverse searches are not available.  WY, DE and NV are the most oft cited.


We are talking about single member LLCs, right? 

I'm most familiar with NV LLCs and it works just like I said.  With a single member, member-managed LLC, the name and address of the member will be right there for all to see.  For manager-managed LLCs, the name and address of the manager is public. 

DE is the same.

WY is potentially slightly less transparent, but I just went and looked up the couple of LLCs that I've seen in deals I've worked on, and in each case the name of the responsible individual is easily discoverable.

but you don't have to take my word for it, look for yourself:

http://nvsos.gov/sosentitysearch/
https://icis.corp.delaware.gov/Ecorp/EntitySearch/NameSearch.aspx
https://wyobiz.wy.gov/business/filingsearch.aspx

There has been a very strong push from the feds to make entity information MORE transparent not less.  The feds are leaning on the states very hard to adopt transparency policies at the state level or else have very broad transparency standards mandated from the feds.

Then you also need to think about using a foreign LLC in your home state for business purposes.  While owning property may not constitute business, engaging in the business of leasing real estate definitely would (at least in NV), so you'd need to qualify your foreign LLC in the home state too (effectively doubling your annual carrying costs by paying annual fees in the foreign jurisdiction and in your home state).

No not all of the advise is bad.  Good advice:

1.  Insurance first (though if you are relying on umbrella, make sure it covers your business liabilities, not just personal liability).
2.  LLC second
3.  Be cognizant of veil piercing/alter ego, and work with your legal advisor to minimize those risks

Midwest

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In my state a single member LLC is $200 to set up.  I'm sure an enterprising lawyer could attempt to pierce it, but if you don't have an LLC they don't even need to try.  No fees beyond that.

My rental is in an LLC.  We have a large umbrella as well.

CareCPA

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Mine are in an LLC. I'm a tax accountant, annual compliance costs me nothing extra (well, I guess technically the $20 for the extra return in my software).
I think a good (or maybe even a bad?) lawyer would pierce it. Those aren't the people I'm worried about. The LLC creates another barrier for someone to overcome. A tenant looking for a quick buck is, in my mind, less likely to take me to court if they see a company name. They're more likely to move onto another target.
I also don't neglect my properties. They aren't high end, but they're safe. The possibility of being sued is pretty low. Management is contracted out, so I'm not going to be taken to court for improper landlording, either.
The LLC makes it easier for investors to come in an out and to transfer assets between generations. That's my main goal.

tralfamadorian

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While owning property may not constitute business, engaging in the business of leasing real estate definitely would (at least in NV),

And this is the purpose of the two LLC structure, no?  There is a holding LLC(s) registered in another state that owns the asset(s) and an operating LLC registered in the state that the real estate is in that conducts the management business. 

WY is potentially slightly less transparent, but I just went and looked up the couple of LLCs that I've seen in deals I've worked on, and in each case the name of the responsible individual is easily discoverable.

Is the information below out of date then?
"Wyoming does not require that we list the member or manager of an LLC on the State records.  Though we are required, as Registered Agents, to know who the person is behind an LLC and must provide this information to the State or Federal authorities, if they request it.  It is not however public information that can be accessed by anyone via a web browser."1

1:https://wyomingcompany.com/privacy-2/

shawndoggy

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While owning property may not constitute business, engaging in the business of leasing real estate definitely would (at least in NV),

And this is the purpose of the two LLC structure, no?  There is a holding LLC(s) registered in another state that owns the asset(s) and an operating LLC registered in the state that the real estate is in that conducts the management business. 

WY is potentially slightly less transparent, but I just went and looked up the couple of LLCs that I've seen in deals I've worked on, and in each case the name of the responsible individual is easily discoverable.

Is the information below out of date then?
"Wyoming does not require that we list the member or manager of an LLC on the State records.  Though we are required, as Registered Agents, to know who the person is behind an LLC and must provide this information to the State or Federal authorities, if they request it.  It is not however public information that can be accessed by anyone via a web browser."1

1:https://wyomingcompany.com/privacy-2/

haha lawyers = "scummy" but professional RAs (which are clearly engaged in the unauthorized practice of law) are 100% legit.

I'm not familiar enough with WY law to know whether it's legal or advisable to have a third party file a company's annual report.  Seems like a bad idea to me, and I'd certainly want to discuss that with a Wyoming lawyer and not rely on a professional RA's sales pitch. 

I don't know any lawyers that would suggest a two state LLC setup like the one you are suggesting.  Could you do it that way?
  Sure!  But it's certainly an approach that's fraught with peril for the DIY person and has many many ways to screw it up, and even if done "correctly," I see this secrecy approach being used as a cudgel against you if push ever comes to shove. 

Having a portfolio of secret LLCs would certainly come out in litigation if you were sued.  And it's not the sort of fact that works in your favor when discovered.



Lmoot

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But if the landlord/ property manager (you) is sued for liability, for example, consequences based on decisions or maintenance you completed, couldn't they come after you/ your personal assets if they decide to sue you instead of the LLC?

shawndoggy

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But if the landlord/ property manager (you) is sued for liability, for example, consequences based on decisions or maintenance you completed, couldn't they come after you/ your personal assets if they decide to sue you instead of the LLC?

Yes. This is why insurance should be purchased first, before spending money to organize an LLC.


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Chiron

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A Duke law acquaintance told me that "Piercing LLCs is law school 101" FWIW.

I've heard similar things. For example, something as simple as signing your name on a document or an email as "Bob Smith" instead of "Bob Smith : President of 123 Main St LLC" constitutes piercing a veil.  This is because a lawyer can argue that by signing your name only, you are acting as a private person instead of on the LLC's behalf.

Personally, I use LLCs for asset shielding instead of asset protection.  I don't want a scummy lawyer to be able to do a simple search on me and find any and all the real estate I own.

This is simply not accurate.  There are arguments for piercing LLCs, but they are not "easy" to win.  State legislatures have gone through the trouble to create LLCs for the primary purpose of limiting the liability of the owners.  They are not easy to pierce if even modest efforts are taken to maintain their separate existence and operation from the owners.

Chiron

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But if the landlord/ property manager (you) is sued for liability, for example, consequences based on decisions or maintenance you completed, couldn't they come after you/ your personal assets if they decide to sue you instead of the LLC?

Yes. This is why insurance should be purchased first, before spending money to organize an LLC.


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Yep, if managing your rentals, LLCs will not protect you from negligent actions taken as the manager.  Always best to have a liability + excess policy to protect you.

shawndoggy

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This is simply not accurate.  There are arguments for piercing LLCs, but they are not "easy" to win.  State legislatures have gone through the trouble to create LLCs for the primary purpose of limiting the liability of the owners.  They are not easy to pierce if even modest efforts are taken to maintain their separate existence and operation from the owners.

Agree, calling it veil piercing isn't accurate.  But in this context:

Quote
by signing your name only, you are acting as a private person instead of on the LLC's behalf.

 signing a contract in your own name rather than on behalf of the LLC would bind you not the LLC.  It's not really a veil piercing thing, it's more of a "who is the party to the contract" kinds of things.  It's the kind of fundamental basic screwup that I see from the nolo-rocketlaywer-legalzoom crowd every single time.


the_fella

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This is simply not accurate.  There are arguments for piercing LLCs, but they are not "easy" to win.  State legislatures have gone through the trouble to create LLCs for the primary purpose of limiting the liability of the owners.  They are not easy to pierce if even modest efforts are taken to maintain their separate existence and operation from the owners.

Agree, calling it veil piercing isn't accurate.  But in this context:

Quote
by signing your name only, you are acting as a private person instead of on the LLC's behalf.

I noticed on my union's CBA, the signature page contains the text "For The Union" and then signatures of the relevant union officials, and another side that says, "For Management" and contains several signatures of the relevant company officials. It sounds like this is similar?

 signing a contract in your own name rather than on behalf of the LLC would bind you not the LLC.  It's not really a veil piercing thing, it's more of a "who is the party to the contract" kinds of things.  It's the kind of fundamental basic screwup that I see from the nolo-rocketlaywer-legalzoom crowd every single time.

NoNonsenseLandlord

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I have each property in an LLC.  A S-Corp to manage them.  A master LLC that distributes loses and gains.

http://www.nononsenselandlord.com/2016/08/hold-rental-property/