Best Way to Start Short Term Renting With an LLC ?

Question

My husband and I would like to start doing Short Term and/or Mid Term Rentals. Could it be possible to open an LLC, and put some of the down payment with a business credit card? We have savings, but my husband is very hesitant to touch them (3-6 month emergency job loss savings).

Need help with the best approach to a low down payment. We do own a home so wouldn't benefit from first time home loan. Any advice would help! (:

Chris Davidson · Answer

@Nori Sandoval short answer no. The days of being able to put down payments on credit cards have passed at least from my experience. Also does your LLC have income already or is this a new company? Your most likely place for funds would be a Heloc or cash out refi, and with rates going up probably a heloc.

Fulton Abraham Sanchez · Answer

@Nori Sandoval, there are very competent, real estate friendly CPAs in Biggerpockets working with clients all across the country. Reach out to one that is familiar with STRs and entity formation for your real estate business structure.

Nathan Gesner · Answer

You don't need an LLC to start investing. The need is greatly exaggerated. What you do need is financial discipline, hustle, and savings. You can't borrow your way to wealth with credit cards.

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.

Garrett Crosby · Answer

I would also consider having a conversation about the 3-6 months of savings. I completely understand not wanting to touch them, but depending on your job history, length employed, and industry you are in, you may find that your money sitting in a low-yielding interest account is in more danger of losing its value than if it's invested in a cash flowing asset. :) This completely depends on the amount of money that is saved and your expenses, so I would need more information before assuming anything though.

In terms of STR, I can say that a lot of clients I've worked with have had incredible luck out here in CA. Getting connected with a creative lender can make for a world of difference. I've see people find ways to fund their down many ways.

Best of luck!

Best Way to Start Short Term Renting With an LLC ?

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