Want to purchase rental property, do I need an LLC?

Question

I hear mixed comments on purchasing rental property with an LLC?  Any information appreciated!

John Petersen · Answer

@George Despotopoulos great, simple summary of why an LLC is important. Simply said: asset protection

George Despotopoulos · Answer

If you have first-hand accounts of this then you may have a better handle on it. In my experience, I'm only presented with insurance the during the underwriting process/prior to closing. That happens when the borrower/investor provides us with their EOI (evidence of insurance). On occasion, even though the borrower/investor is taking the property into an LLC, they'll make the mistake of the EOI being in their personl name and not the LLC name, as is required. When the borrower/investor goes back to have this corrected (and have the insured be the LLC) I've never seen the cost go up.

But again, if you're soliciting quotes/talking to insurance agents then you may have a better gauge on things here.

Reggie Rearden · Answer

I personally have multiple LLC's. I have an LLC that receives rents from my properties. I also have a few small businesses that are their separate LLCs which pay rent to the building I own, which is in an LLC. Any loans I have for business or investments are all in an LLC name. I have an attorney I work with that sets the majority of my stuff up. There are multiple ways to provide asset protection. It all depends on the way you and your advisors decide to set it up. One of my businesses I have is a tax and bookkeeping office. Having multiple LLCs is not costly as far as tax returns are concerned and I have everything set up that best fits me. There are a lot of good answers on here. Hope this helps as well.

Annu Zer · Answer

George, as a rough estimate, is it correct that insuring a property under llc costs more then doing it as personal/umbrella.

I could be wrong but talking to few agents, this is what I found out. I was given numbers ranging from 20 to 40% and even higher to insure a property under llc

Todd Robertson · Answer

@George Despotopoulos

I appreciate the expertise!

George Despotopoulos · Answer

@Todd Robertson others have given great responses. If you're not working with a lender that requires you to take the property as an individual, then it's probably better to invest through an LLC and of course have insurance on top of it. The LLC will provide you with asset protection. There are only limited situations in which the LLC can be pierced ("piercing the corporate veil"). It's not easy to do. So LLC + appropriate insurance is the way to go.

Todd Robertson · Answer

@George Fischer

Thank you! I may bounce a few questions off you in the near future being that we are both in Atlanta.

George Fischer · Answer

You can purchase a rental without an LLC. Just make sure you have a solid insurance policy of at least $1MM, preferably $2MM worth of coverage. It's also important to put in your lease that the tenant must purchase renters insurance with at a minimum coverage amount. I require $100,000 which costs the tenant around $15 a month.

If you have a higher net worth, you may want to consider an umbrella policy as well, just depends on your situation.

Todd Robertson · Answer

@Annu Zer

Very good, thank you!

Annu Zer · Answer

One word answer, Umbrella, okay should be two, Umbrella Insurance. LLC, series LLC while interesting concept in Real Estate world, but unless you follow proper guidelines, you will not be able to use them to protect anything. Also with LLC you will need to get commercial insurance, and also for loans, many banks might not give loan for an LLC, if you still put your name there, you will be on the hook (searching for piercing the veil). And even when done right, they only provide inside out protection best case, and not outside in(or atleast not cheaply).

You will also hear about anonymous LLC, out of state LLC(like Wyoming, delaware), all kinds of complicated stuff, which will result in annual costs, besides all the extra work, and all this will cut into your cash flow.

Umbrella insurance, is simple, easy to get. Once you are doing big investments and especially looking to have partners, definitely go for it, until then, my $.02, you do not need one. Also try not be slum lord and do everything in writing.

Want to purchase rental property, do I need an LLC?

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