Hi BP Friends,
I would like to setup my investment property under an entity or corporation. I want to protect myself against tenant liability and asset separation protection.
Does any BP friend know of a good attorney/lawyer that resides near Lowell, Leominster or Worcester MA that familiar with this process (setup LLC)?
If you do, would you be able to share their contact information with me?
I met this attorney who attended my local real estate meeting, but she was busy all the time when I called. I left her two messages already, but she did not return my call yet.
Thank you ahead of time.
Hi Chan Kim, sorry, I know this is a little off topic for you, but as far as using a LLC for liability protection, I have found that having good insurance is probably as or more important than the company structure itself.
@Chan Khim, If you're looking to acquire a property, you may want one lawyer to help you through the purchase process and help you set up the LLC. Setting up an LLC is very simple to do although if you're new to the process you will probably feel more comfortable having a professional there to assist you. The LLC will cost $500 in Massachusetts to file a Certificate of Organization. Lawyer's fees for helping you with this will vary but $300 is a reasonable estimate. If you want to use the same lawyer to set up your business entity and represent you through the P&S and closing, you're looking at lawyer's fees in the $1,000 ballpark. I recommend spending the money to learn and benefit from the professional's experience. If you're also engaging the lawyer to help acquire the property, the type of property becomes a bigger factor in deciding who to go with. Are you acquiring a property too, and what type?
Chan are you looking to deed a current property into the LLC, to acquire a new one in the name of an LLC, or many both?
One word of caution if you want to buy straight into an LLC is that you won't be able to get conventional financing. Only option will be portfolio (maybe), commercial, or private/creative options.
Only put your rental into an LLC when you don't anticipate refinancing within the next year or so. Banks will not give a conforming 30-year mortgage to an LLC, and many more exotic lending products like HELOCs are not available.
If you've got your financing in place, I definitely recommend it--not only does it provide some extra tail-end risk protection, it forces us to be more organized and professional as to how we do business. I know there are quite a few people on this site who simply deposit rent checks into their primary personal account--that's a bad idea for controlling and tracking profit/loss.
I already have the investment property. Currently, I have a conventional 30 fixed rate on it. I want to put this house into an LLC. I contacted the lawyer this morning, and she will charge me $1000 for labor just to help me set it up in addition to the filing fee.
@CK Hwang Some people said similar thing about LLC vs high insurance liability coverage. The thing is, every educational book and audio book I listened to recommend LLC. I will pursue LLC concept rather the insurance liability. I guess I will weight the benefit as I became more experience in the field.
@Shaun Reilly Thank you for the clarification regarding buying straight into an LLC up front. Something that I will need to know in the future.
@Charles Gillis It is good to know that it will only cost me less than $1000 for an going sustainability.
@Christian Carson You mentioned that I will have a hard time refinance and pursue HELOC within the next year or so - I don't plan on doing any of this in the near future, because I don't have much equity yet.
But, will I have this problem (refinance and HELOC) in the next few years (2-3)?
I definitely want that tail-end protection. Most of the 3-4 Units properties are old. Things can slip, fall and break over the tenant. In the case of a lawsuit, I want to make sure that I am covered.
Another question I have is that once I go LLC, can I revert it back (no LLC - just a regular investment property)?
Just my quick 2 cents, Some Mortgage companies can call the mortgage due when you transfer ownership. I know people say it rarely happens, but wanted to make sure you were aware. I have one under my LLC (Paid Cash) and am waiting till I'm closer to paying off my other property before transferring to LLC just in case. I recall hearing if bank does call the note, you can just cancel the transfer or switch it back, but I haven't investigated that myself.
Doing a LLC is fine but I would not skimp on the insurance, this should be your first line of defense if something goes wrong.
You will need to pay pay a $500 filing fee for your LLC's annual report every year in Massachusetts. I'm not saying this to try and discourage you, just to give you the facts. You need to judge for yourself how this fits into your budget and whether the benefits are worth the cost. It's good that you're concerned about protecting your investment, but I would think of the business entity as just one layer of your protection strategy. The other layers are your investment property's insurance, your own homeowners insurance with umbrella coverage (assuming you own your principal residence), homestead declaration (again assuming you own your principal residence), and of course the first and most important layer: your brain and your professionalism.
Some additional considerations for you: when you deed the property into the LLC, you will probably activate an acceleration clause on your mortgage, and the lender would be within their right to call it due in full. Also, the LLC structure does not automatically grant you liability protection-only in the case where you are truly using the structure properly. You need to be very careful about your day to day business operations, to ensure that you are actually operating the business properly and not merely attempting to use the LLC as a shield. There are some excellent discussions elsewhere on this site on this very topic.
@Kiwi Mills I guess that is not good if the lender call the "Due on Sale" (something like that) clause upon setting up the LLC. I hope the lender allows me to cancel it (LLC) in this case, because I don't have cash to pay all the principal. I have to double check with my attorney then. Thanks - great point
@Bob E. and @Charles Gillis I do have landlord insurance on the property. The liability coverage is not much ~$300k. I guess it could run up pretty fast on multifamily in the event of a lawsuit. I will really need to ask my attorney how to follow the LLC structure fully as mentioned by Charles - hmmm.
@Chan Khim You can form the LLC with no issue, it may only become an issue when you transfer the property title into the LLC's name. Sorry for the confusion. I also have insurance and an umbrella policy on my properties like they suggested above.
Please keep us posted on your findings. I am interested in whether the entity versus additional liability (umbrella) policy makes sense for you.
@Chan K. : If your property is in an LLC, a bank will make you convey it back into your own personal name before it will write a conventional loan or HELOC. Some banks may restart the clock on the seasoning period and make you wait another 6 months as well, though I have not personally been through this process.
Get a good insurance policy and forget about the LLC Guru hype.
@Joe Gore I agree and read the policies!
@Chan K. How much equity do you have now to protect?
@Mike Hurney I have between 25-35% in equity for each of my investment property and primary resident.
So, I guess you would recommend a landlord policy and an umbrella policy on the top, instead of the LLC as it is difficult to finance. In addition to liability protection, I feel that LLC is a good asset separation protection in the future if I adopt this model as I accumulate more properties in the future.
I have a landlord policy on my duplex (mortgage note) with an umbrella under my name, and a landlord policy on my SF (paid cash). I have an additional umbrella policy for the SF which is under my LLC name not mine. A local credit union in KS will allow me to close in my LLC name with 30% down 10k loan minimum, so just remember each state / bank has different rules. I'd contact some local banks and see what they say regarding refinance, heloc, etc. as what cant be done with xyz bank may be done with another. For example I didn't know about the $500 a year filing fee mentioned above for your state wow.
@Chan K. 25-35% is significant, to jeopardize.
At one time my policies were $250. deductible and $100,000. personal liability so I changed, at almost no cost, to $2500. deductible (I never put in claims) and $1,000,000. personal liability. Then an Umbrella, with those underlying higher limits is cost effective.
You can check your Dec page for the limits...
@Mike Hurney My liability limit is about $200k. I think I am going to pursue the limit increase and umbrella policy, while I am waiting to setup the LLC.
I still want to utilize the refinance/HELOC to help me finance more money to accumulate more properties. In this case, I think I might wait for a while with the LLC as the increase in liability and the umbrella might just do the job with small residential.
If we decided to proceed with the LLC in the near future, I will ping the attorney you recommended. The one I am working with now is not responsive. I sent her a list of LLC name to search for availability like on Monday, but I have not heard anything back yet. It is already Friday - What the heck??
Mike, are you familiar with around MA? Do you know which towns have a decent rent market and low purchase price?
Chan, it is very expensive for you to pay an attorney to search for LLC name availability. You can do it yourself, and much faster:
It will pay in the long run for you to become self sufficient. The more you learn, the more you find the things you want to do yourself, and the things you want to pay someone to do. That varies for everyone. But when you are first starting out, unless you have money to burn, you might want to become familiar with all the resources of the mass.gov website. It has a great deal of information about landlord tenant law also.
Searching for name availability might end up as a low priority item (compared to an actual closing) for a real estate attorney attorney, especially since Monday was the last day of the month when they are swamped with closings. Many of those details for those closings flow over to the next couple of days, so you chose the busiest time for them.
To circumvent the "due on sale" clause, you can create a Land Trust, deed the property to the trust, then assign the beneficial interest over to your LLC. From what I've been told, if your mortgage is with a bank that does business in more then one state, you should be OK with this approach. If you can find an attorney that knows how to do land trusts in your state, they can also complete your LLC paperwork, and hopefully get a package deal on pricing. We did this with one Florida property we have a conventional mortgage on, a few years back.
As previous posters suggested you wil still need an adequate liability insurance for your LLC. For our 2 LLC's with 3 properties in each, we looked at
liability + umbrella ( yes, they have umbrella's for LLC's as well as personal ones), and found that just increasing each policy to 1 mill was less expensive then going that route, your mileage may vary; so get more then a few quotes. you really want to layer your protection, and not count on one approach to cover you completely.
You will need to create and maintain a checking account for each corp entity you create, so don't go overboard with too many. Ensure to have tenants write their checks out to your LLC, and put your rental checks in that account, and pay any taxes, expenses from there as well. If you don't you're entity will not hold up under scrutiny, if you are unfortunate enough to get sued, that's the 1st place they will attack, and no $300k isn't enough even for a SFR.
@Chan K. Good move to change Liability and Deductible!
I thought you could search LLC names and form one on line by yourself?
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