LLC To Manage House Hack

[Account Closed]

I am interested in getting into rental investments via house hacking. My eventual goal is to own a portfolio of properties outside of my personal residence, but the first two properties I buy will likely be house hack duplexes to get the ball rolling with low down payments.

I understand that in house hacking and FHA loans, I will need to own the property in my own name. I understand the implications of that--not a problem. My question here is whether it's worthwhile to establish an LLC to manage (but not own) my house hack(s).

I want to do this for a few primary reasons. First, I want to have some separation between myself and my tenant. Presenting the property for rent from Property Management, LLC allows me to hold myself out as the "property manager" who happens to live next door rather than the owner of the building that lives on-site. I know there is no legitimate legal separation here since the property would be titled in my name, but it does provide a bit of social distance between myself and my tenant. The tenant's lease would say Property Management, LLC, not my own name, which would mitigate some social awkwardness of the tenant knowing that I am also the owner of the property.

Likewise, if Property Management, LLC is the entity collecting rent and dealing with the tenant, it may provide asset protection benefits in addition to the privacy benefits. If a tenant sues Property Management, LLC, but not myself personally, Property Management, LLC would have very few assets. I know any competent lawyer would search and see that I own the property, but you never know. This is a marginal benefit that gives the outward appearance of separation.

Finally, the last reason I am interested in doing this is to scale it later. My goal is to buy probably two house hack duplexes, then move into a single family residence and keep the two duplexes on the side. I will then scale up my rental portfolio over time with rental properties that will be owned in (most likely) a series LLC. Once I am able, the two original duplexes will also be moved into the series LLC. However, all the while, the properties (both the house hacks and any new investment properties) will be managed by the same Property Management, LLC. No matter if the properties are re-titled, owned by me personally, or owned by a series LLC I control, they all appear the same to my tenants: "Managed by Property Management, LLC." This allows Property Management, LLC to establish brand equity as a landlord from my very first house hack, and it also simplifies some of the accounting / rent collection / etc since I will, for a time, have some properties owned by me personally and some not, but they will all be managed by the same management LLC.

Has anyone pursued this strategy? Is it worthwhile? Keep in mind my intentions to scale later into a more robust network of rentals. The house hacking component will be only the first ~6 years or so. After that I will stop house hacking and start buying rental units with investment property mortgages rather than FHA loans.

[Greg Scott]

Ian:

Thank you for having really thought through this issue. I see so many people here say thing about LLCs that make no sense. "I'm broke, and want to become a real estate investor, so how do I form an LLC?" (BTW, I'm not a lawyer.)

It is easier to hold SF rentals in your name since you don't have to worry about due on sale clause and you can refi without having to move title back and forth.  Just be sure to get good liability insurance and consider an umbrella policy. Most importantly, run the property well in a legal and safe manner.

I have formed LLCs to manage my properties too. Just draw up a contract between you and the LLC for managing the property. One other benefit of this is that you can now write-off reasonable expenses toward managing your property through the LLC. For example, stamps, paper, toner, and the like can be purchased by the LLC as a business expense. As you grow, more and more of those things are legitimately deductible. My wife and I go to dinner every Friday and discuss business. Some of those dinners are inexpensive and some very nice but all are deductible. Talk with your CPA about it.