When and why to put my rental in an LLC

[Kevin Reilly]

Greetings, 

I am new to investing and currently have had my first rental property for almost two years now. It was my wife's house prior to our marriage and instead of selling we decided to rent the property out. We own a substantial amount of equity (about 90 percent) in the home as it was purchased back in 2012. We are looking into borrowing against the house to invest in another rental property later on down the line. My question is, is it beneficial to put the house in an LLC prior to refinancing, or after (does it make a difference?) , tax purposes or even liability purposes. I have been trying to locate a good real estate accountant that could assist me prior to pulling the trigger on the refinance and it seems most referred accountants I have looked into all specialize in small business accounting as well. What are the pros and cons of an LLC is my current situation. Any and all help is much appreciated.

[JD Martin]

Not necessary at this point. LLCs are generally for one real thing - personal asset protection. If you get found liable for something, the LLC should expose only the company's assets to forfeiture rather than your personal assets. In theory, for example, you could have 10 LLCs with 10 rentals, and if you do something heinous with one your worst-case scenario is losing that one house rather than 10 homes.

In reality, if you keep good insurance this is virtually guaranteed to never happen. Huge gross negligence verdicts against individual landlords are ridiculously rare and punitives are often capped anyway. Putting the property in an LLC might allow you to buy other properties with the LLC as the note guarantor, rather than you, since you say you have so much equity in it, but in reality you are going to sign on the line if you want to buy more properties. And LLCs are not guaranteed shields. Courts have found them to be shams before, devoid of any real assets or doings other than trying to shield you from liability.

Now if you have a partner/partners, it can be a great way of having a formal business structure to build a property portfolio and can also stand as a real, functional business for liability purposes.