Author Topic: Investment/rental properties in an LLC?  (Read 311 times)

CoffeeR

  • Stubble
  • **
  • Posts: 223
  • Location: Southwest
Investment/rental properties in an LLC?
« on: August 26, 2020, 01:53:13 PM »
Do owners (here) of investment/rental properties place them in an LLC or some other kind of structure? I am (probably) going to purchase a rental property, but I'm not sure if the best way is to create a legal structure to hold the property or not. At least initially...

Montecarlo

  • Pencil Stache
  • ****
  • Posts: 635
Re: Investment/rental properties in an LLC?
« Reply #1 on: August 26, 2020, 02:56:50 PM »
If you don't create a legal structure, you can wind up bankrupt and owning nothing from one incident

srad

  • Stubble
  • **
  • Posts: 135
Re: Investment/rental properties in an LLC?
« Reply #2 on: August 26, 2020, 03:27:04 PM »
First off, if you want one get it.  But know you can't buy a property with a loan in the name of an LLC.  So you'll buy it in your name then transfer it into the LLC.

Here's my take on LLC vs No LLC.  If you only have one or two highly leveraged properties and you don't have millions in the bank, an LLC isn't needed right away.  Good property management (ie, fix sh1t before it becomes a hazard), and a 2 or 3 million dollar umbrella policy can be enough.

If you are really negligent and someone gets hurt on your property, good luck keeping their lawyers away from your stash with or without an LLC. 

I went a solid decade before I got an LLC.  It took me that long to get to where i'd be considered a target.  I also have a 3 mill umbrella policy along with the LLC.

Oh, i'm not a lawyer so if someone has real world examples of when an umbrella policy didn't work and someone got wiped out,  i'd love to hear it.

YttriumNitrate

  • Handlebar Stache
  • *****
  • Posts: 1078
  • Location: Northwest Indiana
Re: Investment/rental properties in an LLC?
« Reply #3 on: August 26, 2020, 03:49:00 PM »
$800 (the annual fee for having an LLC in California) can buy a lot of insurance if you only have a property or two. Forming a legal entity can help mitigate the risk, but if you want it to be worthwhile it's more involved than simply paying a fee to the state every now and then.

YankeeSaver

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Location: Northern New England
Re: Investment/rental properties in an LLC?
« Reply #4 on: August 27, 2020, 12:38:28 PM »
First off, if you want one get it.  But know you can't buy a property with a loan in the name of an LLC.  So you'll buy it in your name then transfer it into the LLC.

Here's my take on LLC vs No LLC.  If you only have one or two highly leveraged properties and you don't have millions in the bank, an LLC isn't needed right away.  Good property management (ie, fix sh1t before it becomes a hazard), and a 2 or 3 million dollar umbrella policy can be enough.

If you are really negligent and someone gets hurt on your property, good luck keeping their lawyers away from your stash with or without an LLC. 

I went a solid decade before I got an LLC.  It took me that long to get to where i'd be considered a target.  I also have a 3 mill umbrella policy along with the LLC.

Oh, i'm not a lawyer so if someone has real world examples of when an umbrella policy didn't work and someone got wiped out,  i'd love to hear it.

You can buy a property in the name of an LLC with a commercial loan. The other option is to buy the property and quitclaim it to an LLC that you've set up, making it subject to all mortgages.

And if you are blatantly negligent, I wouldn't even count on an umbrella policy protecting you. Usually insurance policies exempt claims that are due to lack of maintenance to the property for example.

My suggestion: use an LLC and get commercial insurance from a company that specializes in insuring rental properties. My insurance covers the property to the rebuild value and provides $2 million of general liability coverage. Maybe you don't need this for the first property, maybe you can get away with just umbrella insurance at first. I would definitely go this route as you acquire more buildings.

Have you ever seen an apartment complex or a management company that wasn't incorporated as an LLC or S corp? I haven't. There is a reason for that...
« Last Edit: August 27, 2020, 12:42:02 PM by YankeeSaver »

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1607
  • Age: 61
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Investment/rental properties in an LLC?
« Reply #5 on: August 27, 2020, 02:01:32 PM »
For what it's worth, we now give away for free the LLC formation kits we used to sell.

You can just get to a page of instructions and links here: https://evergreensmallbusiness.com/all-states-real-estate-investor-llc-formation-kit/

Or you can download one of the free "kits" which includes a little ebook and also sample LLC operating agreements. (Just click on the state.)