Primary Residence turned into first rental...Now what?

Question

Hey all, Id like to get some direction/guidance from those who are/were in a similar situation. Me and my wife have a house that was our primary residence (no mortgage), and looking to rent it out. I created an LLC, and Im not quite sure what our next step should be. Do we transfer ownership from our name to the LLC? If so, what does this process look like? Or do we even need an LLC for one door?

Brian Kilpatrick · Answer

Thank you Sam and Bryce on some jam up info! Really helpful and thorough next steps.

Bryce Jamison · Answer

You don't need an LLC to rent out one property. Many people claim you need one for risk mitigation, but you can get an umbrella policy on your homeowners insurance and mandate your tenants get renter's insurance with you included as an interest or insured to help mitigate this. The horror stories you hear are kind of like the boogey man. You'll hear people say something like, "what if someone falls in a hole on your property and sues you?". Yes, these things do happen, but people win the lottery too and I'm not buying lottery tickets.

Also, if you're not running your LLC correctly a judge can still hold you personally liable. It's called piercing the veil.

This may not apply to you since you own the home outright, but in today's market with the margins on properties being so thin I personally wouldn't want to assume the extra cost for only 1 property.

As far as next steps, get the place ready to rent, take, or have a pro take, lots of great pictures, create a solid lease, and list it on Zillow for free. You'll still need to do some of your own leg work when vetting tenants, but it's easy enough and will save you the ~10% management fee. Plus you'll gain invaluable experience being on the front lines.

Sam Bagwell · Answer

An LLC is a useful first step, both for liability and for accounting.  As noted, good insurance is a far better liability protection than the LLC, but I find the LLC useful in keeping my books separate.  Anyway, the process of getting up and running as a landlord in Georgia isn't super complicated.

Step 1, form the LLC (done!).

Step 2, open a bank account (you'll need an EIN, which you can get online from the IRS at this link https://sa.www4.irs.gov/modiein/individual/index.jsp.)

Step 3, sign a deed of your property into the LLC.  DO NOT USE FORMS YOU FIND ONLINE!!! Different states have different rules, and saving a buck here is stupid.  Literally any closing attorney you know will take care of this for you for $150 bucks (I know, because I do this for my clients).

Step 4, If you will be self-managing, get 3 documents ready to go: a lease, a deficiency notice, and a non-renewal letter.  These aren't that hard, and I guarantee that the closing attorney who prepares your deed will be able to prepare these as well, or send you to someone who can. (again, I know this because I do this for my clients)  Eventually you will probably want to get more detailed, but start with the basics.

Step 5, once any necessary renovations are done (that could be its own thread), either start posting ads to get applications, or start interviewing property managers.  If you are going to be significantly cash-flow positive, given that the mortgage is paid off, I'd lean toward hiring a manager.  I've done self-managing, and had managers.  A bad manager made me want to never use one, and self manage everything, and then I found a good manager, and I've never looked back!

Don't be reluctant to talk to attorneys.  The things you need are very formulaic, and most competent real estate attorneys can do these very cheaply, in the hopes that if you ever have a "more expensive" need, that you'll contact them for that, too.

Congrats on getting up and rolling, and best of luck!

Jeremy Horton · Answer

I did an LLC so I could build a brand - it's to limit your liability, it's really up to you. Not necessary, but easy/cheap enough to do and helps me think of the business as more separate. Also easier to separate bank accounts etc

You don't need to put the rental in an LLC. I personally would transfer it through a title company - costs about $150. Your loan probably technically doesn't allow this because there is a "due on sale clause" but I have never heard of a loan being called as long as it's being paid

My advice to you would be to screen potential property managers, read reviews then set it up to be managed by them.

Open a bank account for your rental and keep 4-6 months of reserves - could be a HYSA.

What's your long term goal?

Preston Dean · Answer

@Brian Kilpatrick

You 100% do not need an LLC (speaking for Texas)

I have 1 primary residence turned rental and now live in another primary. Both conventional loans are in my name and not in an LLC.

Putting it in an LLC is obviously to limit your liability, I personally don't think its necessary for 1 but that's just me.

Hector Escobar · Answer

Congrats on owning a rental with zero debt. I would scale a bit by either pulling out your money and flipping a property to make a bit more money in order to buy another rental with a good amount of money down or just outright buy another rental. I prefer to buy homes that i can add value to before renting them, either by renovating a kitchen or bathrooms or making the curbside appeal slightly better. Google and Pinterest are your #1 friends when it comes to ideas. As for the LLC, I wouldn't bother, you can do that if you want to for "protection" but you only have one door so its not a huge deal.

Dean Valadez · Answer

Would you recommend letting the mortgage lender know the LLC will be paying or is it safe most of the time to not say anything and just start paying from the LLC?

Brian Kilpatrick · Answer

Thanks for the reply! We paid of the mortgage about 2-3 years ago, so I’m assuming we would only have to pay for the title transfer.

As far as setting up a business account at a bank, I’m curious on how that works. We are currently in the process of fixing everything up and getting it rentable, so all the repairs are coming out of our pockets. However I feel like we are missing out on tax deductions for the business, since those transactions are not being made from the business’s account. Obviously with it being vacant and getting ready to rent, it’s not making any cash flow, so how does that work. Am I missing something or not understanding the process?

Sorry for what may seem like very basic questions but my wife and I are truly “green” to the rental world.

Primary Residence turned into first rental...Now what?

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