Which Business Model and Now or Later?

Question

I currently own two single family homes which I rent out.  They are both in my personal name.  My "real" job involves a high chance of litigation sometime in my career and I want to shield my rental properties from this.  (All I currently have is an umbrella policy for protection).

I am currently planning on selling my single family homes to take out the equity and start buying multi-family homes.

My question is, what is the best type of business to put my properties into and how do I go about transferring the titles over to the new "business".  Should I put my single family homes in there now, or just wait until I purchase the multi-family homes?

Tara Kinney · Answer

Thank you for your comments. :)  I have run my two rentals that I currently have like a business already.  Separate account for my rental income and expenses than my personal account.  Keeping all the receipts.  Documenting visits to the units in order to deduct mileage.  I just don't have them currently under an LLC... I know I'm "going" to put them in an LLC, I just wasn't sure if I should do it now, or after I sell and purchase the new properties.  Not sure if there are pro's or con's to doing it now or waiting.

Jason V. Henderson · Answer

Creating a separate entity such as an LLC will never provide 100% asset protection. If managed correctly they can add additional layers between the different areas of potential liability. It will all come down to whether you truly managed separate accounts within mixing funds, did you maintain the proper business filings for every separate entity, or where the business just created to defraud creditors, etc. There are all sorts of possible attacks that can be used to attack your various assets, and their ability to succeed largely depend on your state laws. Sometimes parties will go for easy money and settle, other times they will attack insurance and personal assets and stop, sometimes they will go for everything possible. The degree to which you want to plan ahead and consult professionals depends on your risk tolerance.

Trent Honea · Answer

You will probably get a lot of opinions on this topic, or find other threads that cover it.  There are many in the LLC camp and others in the hold in your name camp.  There are also some who suggest against talking to a lawyer because they always seem to steer you towards the option that generates the most fees for them.  I'd say you do need to talk to a lawyer, and a good CPA as well.  Your situation sounds like a candidate for LLC protection, but I'm no lawyer.

There are some good books on entity structures as well, and I think there's a webinar or pod cast on the topic here at BiggerPockets.