Investment/rental properties in an LLC?

[CoffeeR]

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]

If you don't create a legal structure, you can wind up bankrupt and owning nothing from one incident

[srad]

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]

$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]

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...

[SeattleCPA]

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.)

[elysianfields]

Reviving this old thread.  It's the lucky winner, because there are sooooooo maaaaaany real estate threads with LLC in them.

WRT out-of-state rental properties, should the LLC be created in the state where the rental property resides, in the state in which one is a resident, or both with one LLC owning the other?

I agree that an umbrella policy is an inexpensive and reasonable step in any case.

[GilesMM]

What are your objectives with the LLC?    Unless you have a lot of rentals, I don't see any value.

[Valvore]

Sounds like depending on your state and net worth, you should get an LLC for your rental property. Honestly, it seems like it's worth the short term hassle to get it all set up correctly.

I have more questions though in addition to OPs

1. Once an LLC is created, do you have to transfer the deed to the LLC? How does that effect the mortgage repayment?
2. I believe you get to keep the tax benefit of mortgage interest tax dedcutions on your personal return. Is this correct?
3. Do you reccomend seperate bank accounts and LLCs for each property?

In the state of Arizona, it's only $50 to creat an LLC so super easy. I have 2. I did not creat an LLC for my rental originally since it was my primary residence turned into a rental and our CPA said we didn't need one. However, 3 years later I am thinking getting it in an LLC is the wiser option. The deed transfer, if that happens, makes me nervous. We also have a VA loan on it so it may not even be possible if there are restrictions. I know I could do a google deep dive on this but I'd rather hear from experienced FIRE minded people.