LLC or Umbrella policy? financing?

Question

I have been researching how to finance my business for awhile and frankly I've come to a conclusion already, but I'd like some insight nonetheless. I plan to leave the area (VA) within the next  year and a half (on military orders) and rent my house out. Now originally I wanted to start an LLC to do it under for liability purposes to protect myself and my assets, here's where my issues lie.  Rather than have one property, I wanted to have at least two before I leave, but financing is hard to come by for an LLC, if not impossible. Not to mention all the fees associated with the LLC, and small business lawyer fees to accommodate. I figured I could transfer the title of the one I already own to the LLC and then do business that way, but I found out that the loan becomes "callable" at that point and I could have to pay the remainder of the loan in full if the lender so chooses. It is a VA loan I'm using, and it is not "Assumable" and even if it was I'm told the LLC would have to qualify for it and I would more than likely end up co-signing personally for it since I already have established credit. All of that would make using the LLC to acquire property strenuous and time consuming.   So now I've considered doing everything in my name since I already have established credit and a great loan history, this would leave me without the safe haven of asset protection and personal liability that an LLC provides,  but I could get an umbrella policy and have my properties insured up to one million dollars and protect myself that way. Eventually I want to grow my brand to the point where I don't just own a few houses, I want to venture into apartment complexes and neighborhoods, obviously if I get to that point, doing it all in my name wouldn't cut it. Is there a better way that I haven't explored?

John Chapman · Answer

I've got to agree with Robert Steele.  Just get the umbrella.  The asset protection of LLCs is vastly overblown if you're involved in any way in the property management.  (I can say this with some level of authority as I'm a plaintiff's lawyer.)  Financing for individuals is way, way better than for an LLC.  Finally, the administrative hassle of an LLC is annoying at best.

The only reason I would do an LLC is if I had another business and I was worried about getting sued with regard to that business and having the judgment creditor grab the property that's hanging out there in my name.

Robert Steele · Answer

Get the umbrella. You can go the LLC route later when your SFRs are paid off or you are buying all cash then the lenders don't even matter no more.

Andy Chu · Answer

Carla Carvalho The purpose of an LLC is for people like yourself. In the event you get sued, your properties are in its own bubble. LLCs are fairly easily pierce-able because it can be found at the secretary of state's office. Once the plaintiff finds it, they will find ways to show that funds were commingled, etc etc etc.

Scott Meredith · Answer

Another option that is really inexpensive to help with the asset protection by adding privacy is to transfer the properties into a land trust with you as the beneficiary with the umbrella.  This will not trigger the due on sale clause of your personal mortgage.  This makes it more difficult to find the actual owner of the property and less likely for a lawyer to take a case on contingency for a plaintiff, requiring a person to pony up cash upfront for their lawyer.

Carla Carvalho · Answer

Interesting discussion, I think about this almost daily for my 3 properties that have an umbrella policy. @johnchapman, wondering if you think my scenario is any different than your rec for straight umbrella coverage: I'm a surgeon who one day WILL get sued. (I live in CA). I have 3 rental properties in different states (none in CA) and I wonder if, in my profession, I should have my properties in a LLC? Or does the same idea of LLCs being over-hyped in terms of asset protection still apply to me? We have a high umbrella.

Dan Buck · Answer

Why do you use the liability insurance in lieu of the LLC?

Mehran K. · Answer

I just use high liability insurance for each property, $1m/$2m aggregate.

Probably will end up getting an umbrella policy on top of this, since it's so cheap.

Lynn McGeein · Answer

Lots of conversations here about this exact thing, so search the forums and you'll find some great information and opinions.  My take on it all was LLCs don't really protect you liability wise, anyway, if you are sole owner or owner with spouse, banks don't lend to new LLCs, at least not without your personal liability attached, and are usually worse terms and higher rates than conventional investor loans, and while loans rarely seem to get called in real life, it is a possibility and some have talked about it happening to them where they had to scramble to find an investor loan.  We ended up dissolving the LLC that our lawyer told us was a great idea to get and ended up with an umbrella policy, and we've decided to keep it that way until we get a few paid off and then we'll find out the best entity for estate purposes and do it that way.

David Morrow · Answer

I have a similar situation.  In order to finance in the name of my LLC, I would have to go to commercial lending, which has less favorable terms than what I qualify for on my personal credit.  I've been qualifying and purchasing as an individual, then transferring ownership to my LLC via quick-claim.  
The mortgage, while in my name, is paid by my LLC and the property is officially owned by the LLC.  My legal professional tells me that this arrangement maintains my asset protection.
I'm curious if other members have advice on a better way to do it. . .

LLC or Umbrella policy? financing?

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