BiggerPockets

While I agree that porper insurance is a must and can be a quality way to operate your rental biz, there are a few extra advantages to the LLC format.

1. How do you know how much of an umbrella policy to get? 1 million, 3 M, 5M? What if you choose 1M and the law suit is for 5M? Plus the cost of going really big to CYA could be in excess of the cost to simply have an LLC.

2. Your identity: While an LLC does not give you full protection from others knowing your name and who onws the LLC, it does allow you to bill your tenants under your LLC name or other corporate entity making it a bit more professional and most tenants will not take the time or have the knowledge to research who owns the LLC. This way, your tenants are not paying Joe Smith, but JS, LLC

3. While there are costs involved in starting and operating an LLC (state fees, accounting costs, etc), these costs can be spead over a few properties making the cost very little per property (of course I also recommend not having to much equity exposed with multiple properties in an LLC)

4. LLC gives you one extra layer of protection in addition to the insurance. As an investor, I look to add as many layers as possible for protection. Why not? Of course the liability protection in an LLC is only one way protecting you form the asset, but not the asset from you.

While it can be argued either way, I too choose to use entities for my business.

I understand the advantages of an LLC, but there are disadvantages to them as well especially when starting out.

Other than the cost, what possible disadvantage could there be?

It's very difficult to get financing with no assets or credit history in the newly formed LLC

Thats true which is why you would still need to personally guarantee the loan unless you use a non-recourse lender.

Is it possible to do a DBA, so you can have your tenants pay your business name?

Of course you can. I just prefer to have the extra layer of protection via the LLC and there are disadvatages to a DBA such as the city wanting to tax your receipts.

From what I've been told when I asked a similar question to RE investors, most investors go without an LLC for the first few properties (5-10), and then once you have a few, you could transfer them into an LLC or put all new properties in an LLC.

I would not say "most", but you are correct that many do start off without the entity and then once they have multiple properties, transfer them into an entity.

When I first starting learning and reading about REI, all the books/gurus said to put 1 property in 1 LLC

That is simply bad information. Only a person who sells entity formation services would suggest such a thing. You can have 100 properties in one LLC, it is not the number of properties that should be the determining factor but the amount of equity exposure you are willing to "risk".

when I talk to real investors, they suggest determining a set number of properties or property worth and then once that LLC is full, open another one.

Again, the set number of properties is incorrect, as is a set amount of worth. It is the amount of equity at risk that is the determining factor. :D

It's very difficult to get financing with no assets or credit history in the newly formed LLC.

I have had a few people say this to me. It isn't hard or more expensive to obtain financing when you have an LLC. I think you are under the impression that if you have an LLC you have to get financing through it. Yes, if you are going to obtain financing in the name of the LLC this is going to be difficult and more expensive. What most people do is hold the deed in the name of the LLC but finance it in their own name.

@ Joe and Nationwide -

What are the legal ramifications for owning a property in the LLC name and getting the financing in your personal name?

Also If I have a property financed in my personal anem should I Warranty Deed the title to my LLC and leave the financing in my own name?

I have heard about the 'due on sale clause".
Is this something to really be concerned about...I have heard that it really is not a major issue...although I suppose legally it could be.

Any thoughts, help or suggestinos?

Originally posted by E Grigg

@ Joe and Nationwide -
What are the legal ramifications for owning a property in the LLC name and getting the financing in your personal name?

I am under the impression that this is a legit way to do it. I still think you have the seperation that the LLC provides to you. Now you are breaking that seperation of you and the property a little bit but I think this is the way most investors do it. The only way to know would be to have an attorney comment on past cases and whether or not it holds up in court. All of this stuff is just theory so there is really no telling for sure what will happen but hoepfully you will never have to find out.

Originally posted by E Grigg

Also If I have a property financed in my personal anem should I Warranty Deed the title to my LLC and leave the financing in my own name?

I have heard about the 'due on sale clause".
Is this something to really be concerned about...I have heard that it really is not a major issue...although I suppose legally it could be.

Any thoughts, help or suggestinos?

I haven't done this but I have heard that it is very unlikely for this to happen. Especially if you are paying on time. Do they really want to call the loan due and risk a foreclosure in this market?

Originally posted by nationwidepi

While I agree that porper insurance is a must and can be a quality way to operate your rental biz, there are a few extra advantages to the LLC format.

1. How do you know how much of an umbrella policy to get? 1 million, 3 M, 5M? What if you choose 1M and the law suit is for 5M? Plus the cost of going really big to CYA could be in excess of the cost to simply have an LLC..

I haven't done either yet, but based on my research but I think the umbrella is a lot cheaper, if you don't have a huge amount of properties. With LLC you've got the initial cost to set up, separate biz bank account, registered agent if you choose to pay one, possible separate tax return to prepare if you use EIN or s-corp election, and your annual state fee which can go up over time, and with the current propblems states are having they try to raise revenue that way. Multiply those costs by the number of LLCs you have. Plus you still need to pay for some kind of liability insurance on top of your LLC protections.

I think the real issue with using umbrella alone is if some event is excluded in the policy.

Originally posted by Josh Layhue

He told me this: In general, people are going to go after the person that did the work because it's easier to prove them negligent. So, if you do all of your repairs yourself then the LLC doesn't provide you much protection because you (as an individual) can be sued for negligent work. However, if you hire out the work or have employees it is most likely that the company will be sued.

Thanks Josh. I know this is why it makes it better to have a PM do the managing if you own an LLC.

But did your attorney say whether this works if you own in your own name too? For example, if you own the property in your own name, have a contractor do some improper work that causes an injury to the tenant later on--will only the contractor and his company get sued or will you (property owner) automatically get added to the suit, since you own in your own name?

*** This is not legal advice ***

There are certain benefits to having an LLC, but for the new investor, "asset" or "liability" protection is not very high on the list. Sounding professional and tax benefits (perhaps) are some of the top benefits.

LLCs may protect you from personal liability in many circumstances, but if you don't have any money, what are you protecting? If all your wealth is in the LLC, then you don't want the LLC to be sued.

Plus if you do have an LLC or corp., you want it to be completely separate from you personally. Buying a property with an LLC but borrowing against it in your own name basically erases the line between entity and individual, so your protection goes away.

If you are doing your first deal(s), do the deals and tack on some liability insurance to your properties. It's cheap. Once you have built up some personal wealth, then worry about LLCs.

Originally posted by Scott M.

No offense but it would simply silly not to do both.

You can set up your own LLC in most states for under $100.

Seriously - do yourself a favor and do both.

Second that! DO both as I do. I always use entities and I always back it up with insurance policies. If the cost is too much, then you didn't buy right!