Author Topic: Rental Property LLC  (Read 3094 times)

eyerishgold

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Rental Property LLC
« on: April 12, 2017, 09:25:59 AM »
I've owned one rental unit for about 7 years. It'll be paid off by this summer. For liability reasons, I was thinking about transferring ownership to an LLC as additional protection to my other assets.

Has anybody done this? Any downside that I'm missing?

Coach Carson

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Re: Rental Property LLC
« Reply #1 on: April 12, 2017, 10:16:38 PM »
Ownership in an LLC is the normal next step in protection most attorneys recommend. I certainly have my rentals in an LLC.  It won't necessarily protect your equity in the rental from being lost to a judgement/lawsuit, but if done correctly it's supposed to protect your other assets by keeping it separate.

You could also check your liability insurance that comes with your landlord policy to make sure it's at a high enough level to keep you comfortable. That's your first line of defense and most likely to be needed. And it's often very cheap for extra coverage.

Another Reader

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Re: Rental Property LLC
« Reply #2 on: April 15, 2017, 03:06:32 PM »
LLC's are pretty easy to disregard.  It's expensive to set them up and to do the annual reporting in many states as well.  I maintain umbrella liability insurance that is near my net worth and should cover almost any judgement.

CptCool

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Re: Rental Property LLC
« Reply #3 on: April 21, 2017, 09:25:22 AM »
LLC's are pretty easy to disregard.  It's expensive to set them up and to do the annual reporting in many states as well.  I maintain umbrella liability insurance that is near my net worth and should cover almost any judgement.

Many may disagree, but in general this is the best way to do it. It is extremely unlikely that people will push for a settlement higher than $1-2M and that much in liability coverage is dirt cheap & requires no effort compared to filing requirements of an LLC

Cwadda

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Re: Rental Property LLC
« Reply #4 on: April 21, 2017, 09:48:15 AM »
I have a related question. Is it advantageous to establish an LLC for receiving loans for banks? In other words, does it make you look like more of an established business and more likely to receive a loan?

CptCool

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Re: Rental Property LLC
« Reply #5 on: April 21, 2017, 09:54:40 AM »
I have a related question. Is it advantageous to establish an LLC for receiving loans for banks? In other words, does it make you look like more of an established business and more likely to receive a loan?

Generally the opposite. Most banks won't loan to an LLC/business without 2 years of accounting statements showing net income that meets their requirements.

Assuming it's a conventional loan (first 10 properties per person), most people get it in their own name, then transfer it to the LLC. However, most banks will have a "due on sale" clause which means the bank can ask for the loaned money back since the transfer is a "sale" from you personally, to the LLC. In reality, banks don't really care and it's more of a don't ask, don't tell type of situation.

Cwadda

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Re: Rental Property LLC
« Reply #6 on: April 21, 2017, 01:23:37 PM »
I have a related question. Is it advantageous to establish an LLC for receiving loans for banks? In other words, does it make you look like more of an established business and more likely to receive a loan?

Generally the opposite. Most banks won't loan to an LLC/business without 2 years of accounting statements showing net income that meets their requirements.

Assuming it's a conventional loan (first 10 properties per person), most people get it in their own name, then transfer it to the LLC. However, most banks will have a "due on sale" clause which means the bank can ask for the loaned money back since the transfer is a "sale" from you personally, to the LLC. In reality, banks don't really care and it's more of a don't ask, don't tell type of situation.

Thanks for your reply.

Coach Carson

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Re: Rental Property LLC
« Reply #7 on: April 22, 2017, 11:05:58 PM »
LLC's are pretty easy to disregard.  It's expensive to set them up and to do the annual reporting in many states as well.  I maintain umbrella liability insurance that is near my net worth and should cover almost any judgement.

I agree liability insurance is the #1 thing to look into. But not sure I agree LLCs are easy to disregard when setup properly. Why do so many multimillion dollar holding companies use them, then? ROI is the answer. They do offer some logical protection and planning purposes. And my state, SC, for example, has no annual filing fee, and an attorney would charge $500-1000 to setup. So check on that or yourself.

If you have a few properties, this may still not be worth it. But when you start getting more properties and/or have bigger net worth exposed to liability, LLC could be worthwhile to ask an attorney about.

Another Reader

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Re: Rental Property LLC
« Reply #8 on: April 23, 2017, 05:19:37 AM »
LLC's are pretty easy to disregard.  It's expensive to set them up and to do the annual reporting in many states as well.  I maintain umbrella liability insurance that is near my net worth and should cover almost any judgement.

I agree liability insurance is the #1 thing to look into. But not sure I agree LLCs are easy to disregard when setup properly. Why do so many multimillion dollar holding companies use them, then? ROI is the answer. They do offer some logical protection and planning purposes. And my state, SC, for example, has no annual filing fee, and an attorney would charge $500-1000 to setup. So check on that or yourself.

If you have a few properties, this may still not be worth it. But when you start getting more properties and/or have bigger net worth exposed to liability, LLC could be worthwhile to ask an attorney about.

I see we have another self-appointed real estate guru trying to make a buck "coaching" people.  Keep that in mind while you read this material.  If you want to learn about investing in real estate, you need to start with the numbers.  Read the book Sword Guy recommends, Gallinelli's book, What Every Real Estate Investor Needs to Know About Cash Flow.  When the math is clear, then start thinking seriously about writing checks.  Get to know some of your local investing community.  Ask the successful folks there how they handle liability.  There is a great deal of variability among the states.

Yes, I probably would not hold a 120 unit apartment building in my name.  However, I would not set up an LLC with the idea it would afford me a lot of liability protection.  Unless you can separate yourself from the operation of the property and demonstrate a high level of professional responsibility, a good attorney will get past the legal entity.  A knowledgeable commercial insurance agent is your friend here, as is a real estate attorney that deals with investors.

Someone that wants to "sell" you an LLC is no different than an insurance salesman.  Both play on your fear to make their money.  What multi-million dollar holding companies do and why they do it is likely not pertinent to your situation.  Find the right solution for you.  Don't blindly accept what you are being sold.


MommyCake

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Re: Rental Property LLC
« Reply #9 on: April 24, 2017, 04:51:50 AM »
I just registered an LLC for rental properties.  I see no down side.  It cost $125.  My first property, possibly first two properties, have to be smaller/less expensive since my LLC now has no history/assets/income to get a regular mortgage.  My plan is to pay cash for the first small property to get started.  I have one rental under my name, and don't plan to transfer to LLC until it's paid off. 

Thedudeabides

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Re: Rental Property LLC
« Reply #10 on: May 13, 2017, 01:34:49 AM »
I see we have another self-appointed real estate guru trying to make a buck "coaching" people.

While I respect your viewpoint on what your saying here about LLCs (even though my perspective differs), I think the borderline ad hominem attacks are uncalled for here.

Coach Carson has some great info out there and if I recall correctly, the origin story of the title coach derives more from his background in sports and his desire to help people.

I've learned a lot from Coach Carson's material, and have gained a lot from his perspective.

At any rate, I don't think it's productive to call others names on the forum and assume the advice they are giving is because they have something to sell.

shawndoggy

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Re: Rental Property LLC
« Reply #11 on: May 13, 2017, 07:16:11 AM »
I set these up LLCs for property owners as a part of my lawyerin' job.

If money is tight, I absolutely agree that it makes sense to buy insurance first.  This is what I advise people too, even though I "have something to sell."  I like to use the analogy of the castle fortifications... the insurance is your wall (more insurance, higher wall), the LLC is your moat.  Neither is impenetrable or foolproof, and together they can sometimes be more effective than the sum of their parts.

If you own a single rental or maybe a couple, and you do all of the work on them, then it really is unlikely that an LLC would protect you if push comes to shove.  You cannot shield yourself from your own personal negligence with a corp or LLC.  That being said, many plaintiffs lawyers can be pretty lazy and not look past the insurance policy (getting to personal assets is way more work than cashing an insurance check).

The idea that it's easy to disregard an LLC is only kind of true.  A single owner entity (be it a corp or an LLC) is more subject to scrutiny that something with multiple members/stockholders (and a single owner LLC should be no easier to disregard than a single stockholder corp).  So that means that you need to be very diligent about respecting the formalities of the LLC and always treat it as a separate entity. 

... which is where paying a lawyer can really help over DIY.  LLCs are terribly easy to organize, which leads to the mistaken notion that they are just terribly easy.  The setup isn't the hard part.  The hard part is making sure that you've done the work to survive a challenge if it comes to that.  Of course you could also read that as me trying to scare you into buying something, I guess.

If people didn't keep screwing things up, I'd be out of a job too.  So in a way I have a vested interest in the perpetuation of bad advice and poor LLC setup and record keeping.

OMark

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Re: Rental Property LLC
« Reply #12 on: May 13, 2017, 09:31:29 AM »
I went the step of making my rentals an LLC, just for that extra buffer of protection or at least a bit more peace of mind. Plus, it takes not so much time and is a small investment.

dogboyslim

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Re: Rental Property LLC
« Reply #13 on: May 18, 2017, 11:24:02 AM »
I work in insurance and we pay careful attention to LLCs and how they are related to personal policies.  LLCs are indeed very difficult to pierce if they are operated properly, but it is very easy to slip up.  The most common example where our clients slip up and put their personal assets on the line is the intermingling of funds or assets between the LLC and their personal accounts.  As soon as the plaintiffs attorney sees cash transfers to a personal account in the register, they are going to try and reach through the LLC to your personal assets.

Note, I am not a lawyer so this isn't legal advice, but if you are going to go through the effort to set up an LLC, make sure you speak with an attorney about the acceptable ways to transfer assets and liabilities from your personal name to the LLC and/or back.  These transfers is where the majority of our clients put us on the hook for both the LLC policy and their personal policies in liability suits.

I suspect that the folks advising not doing it for a limited rental exposure are doing so because while the LLC itself may be easy to set up, the process of keeping the protections in place make it inconvenient and tempting to disregard them, making the set-up all but worthless anyway.

Bobberth

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Re: Rental Property LLC
« Reply #14 on: May 18, 2017, 01:35:23 PM »
I agree with Another Reader. LLCs are easily pierced if not handled correctly. That means paperwork. Which means it's easy to make a mistake on that and you won't find out about until you really need it. If you're of a certain size, it can be worthwhile to do this, like the million dollar investors. With one property it doesn't make sense to me. I have 11 properties and I don't think it makes sense for me as it would be single owner (just me or me and my wife won't matter much) and I do all of my management. That would be easy to pierce.

Think about what liability you are trying to protect yourself from: Most likely somebody gets hurt on your property. Those people use personal injury lawyers. The ones you see on billboard ads and phone books. Those lawyers get paid by taking a percentage of the payout. What's one of these lawyers going to do?

A. Accept an easy $1 million settlement from the liability insurance company to earn $300k or so by making some phone calls and writing letters with relatively little money out of pocket.
Or
B. Risk going to court and losing/getting less for the chance to make more. Then if they win, the lawyer is going to have to collect which, if they are suing a landlord, could be a very long and hard process to collect from someone with illiquid assets. Plus, depending on the state, there are ways to shelter assets plus the risk of bankruptcy wiping the award out. All this time the lawyer will have to prepare for court which will take much more time and money out of their pocket.

$200k

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Re: Rental Property LLC
« Reply #15 on: May 18, 2017, 05:45:00 PM »
In principle, sure, we can all "say" it's easy to pierce an LLC.  But in actual practice, it's harder than you think to do and it represents a significant financial investment to overcome that hurdle. 

To make the case that the LLC should be pierced, you need evidence, and that evidence needs to come after discovery, and possible depositions.  You might need to hire experts to provide testimony on what an LLC should and should not do.  Experts are not cheap.  The attorneys will file motions challenging this type of evidence, and there'll be papers going back and forth trying to exclude it or not.  None of this money spent is related to the ultimate question of liability.  It is just a side skirmish.
 Even for the "good" plaintiffs' attorneys, they won't consider this "easy".  I bet this whole process costs $50,000 in fees in California. 

I look at it this way, if using an LLC will eliminate 30-40% of unsophisticated, lazy, or financially challenged plaintiffs and their attorneys, would you do it?  Probably yes.