Getting LLC for first investment? Getting mortgage?
I'm considering getting a first rental. I'm considering getting an LLC mostly to protect current personal assets. Would you suggest to get the LLC or not and why? Is it possible to get a mortgage for the LLC?
Quote from @Honza Vosalik:
I'm considering getting a first rental. I'm considering getting an LLC mostly to protect current personal assets. Would you suggest to get the LLC or not and why? Is it possible to get a mortgage for the LLC?
Welcome to the BiggerPockets forums!
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.
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Get a LLC, it won't protect you, but it will make accounting easier.
You will have to use DSCR, Hard money, and commercial lending if you are under a LLC
At some point you will grow to where you need one, so why not start with one now? Best wishes to you.
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because you must use DSCR when you are using LLC, then it's best to buy in DSCR only market. See the reverse way of thinking?
If you only buy 1 SFR in Toledo for 150k, then LLC is overkill.
I use LLC when it's an absolute necessary
Agreement with @NateSanow
Hard money lenders generally only lend to non owner-occupied, not natural persons [read that as an LLC] entities.
Also, in NY for example, no members names are published by the Secretary of State ... each state has its own rules.
Much success.
Bob
I established an LLC for our rental property, but not to hold title or get a loan.
Mainly for bookkeeping, and as a "management" company. Essentially, the LLC collected the rent and paid all the bills (mortgage including escrow for taxes and insurance, water, and HOA). Any repairs or services required, etc. came from the business LLC account.
At some point, we might refinance and transfer title to the LLC. But then again, the current loan terms won't be beat for quite a while.
Anyway, there is some great advice here in the thread. LLCs tend to get overblown, and hyped-up. But there is more than one way to use an LLC.
I read this book and it was super easy to read. You would think a tax book would be boring, but it was in everyday terms and talked quite a bit about the advantages and disadvantages of creating an LLC. https://store.biggerpockets.co...
Hi Honza,
As seen in the posts above, there are a variation of opinions on this issue. I think that the issue on whether or not you want an LLC comes down to risk aversion. Even with a single rental, there are potential liabilities that come with owning a property that can occur that would exceed your insurance coverage or where insurance coverage could be denied. This is called an external liability. If this happened, your primary residence and other personal assets can become part of the settlement of a judgement. This is not common, but it is a possibility. A properly formed and managed LLC that owns a property can protect you and your personal property from an external liability. However, this LLC may not be able to protect you from something called internal liability. An example of this would be a car accident that you caused.
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Quote from @Honza Vosalik:
I'm considering getting a first rental. I'm considering getting an LLC mostly to protect current personal assets. Would you suggest to get the LLC or not and why? Is it possible to get a mortgage for the LLC?
Contrary to what many are saying, you don't need an LLC to do a DSCR loan anymore. We do a ton of them without LLC's. I'm not an attorney so taking advice from me on the matter shouldn't be viewed as legal advice, but until you've got a ton of properties and you're going to treat the whole thing like a separate business, then you don't need an LLC. If you get one, more than likely you're going to co-mingle funds and that will allow the "corporate veil" to be pierced. Get an umbrella liability insurance policy instead.
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Thank you everyone, this is valuable information!
Quote from @Stephanie P.:
Quote from @Honza Vosalik:
I'm considering getting a first rental. I'm considering getting an LLC mostly to protect current personal assets. Would you suggest to get the LLC or not and why? Is it possible to get a mortgage for the LLC?
Contrary to what many are saying, you don't need an LLC to do a DSCR loan anymore. We do a ton of them without LLC's. I'm not an attorney so taking advice from me on the matter shouldn't be viewed as legal advice, but until you've got a ton of properties and you're going to treat the whole thing like a separate business, then you don't need an LLC. If you get one, more than likely you're going to co-mingle funds and that will allow the "corporate veil" to be pierced. Get an umbrella liability insurance policy instead.
Is it possible to qualify for mortgage (while having LLC) based on my w2 job rather than DSCR?
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@Honza Vosalik
Sure. You can do a conventional loan (and you should) before you do a dscr loan
Rates, terms and fees are better
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Quote from @Stephanie P.:
@Honza Vosalik
Sure. You can do a conventional loan (and you should) before you do a dscr loan
Rates, terms and fees are better
Does that mean I can have the property titled under the LLC while having a conventional loan?
sorry for the newbie questions...