I recently bought a residential property and now am in the process of looking into setting up a company structure to protect my interest and assets. I live in California state. I'm thinking to do some remodelling. However, I might want to do a several more remodel projects in the future.
My questions are:
1) Should I set up two separate LLCs? One for holding the property and the other for dealing with contractors.
2) If I have multiple projects in the future, is there any benefit if I set up a holding company to hold those LLC?
Rental Property Investor · Northern Virginia · Member since 2019 · 793 posts · 620 votes
5y
@Gav Chen Congrats on purchasing a rental property!
An entity is not necessary to own real estate to protect your interest and assets. When you start scaling into more properties, then it will be useful to have an entity in place. Many who own in their own name purchase an umbrella policy to protect against liability. California taxes can also be a burden and entities are no exception. You'll want to see the annual taxes and fees on owning in an LLC and ensure you keep these in mind. Also, if you try to get financing for properties owned in an LLC, then you will be applying for commercial loans that carry higher rates versus residential loans.
I don't think you need a separate entity to deal with contractors but that is something you can talk to your attorney or accountant about. You can probably own multiple properties in an LLC and create additional ones after you put a certain amount in one. This will also help spread the liability in case you are sued on one property, they will only be able to sue the one LLC.
Real Estate Agent · San Francisco · Member since 2018 · 42 posts · 13 votes
5y
@Gav Chen. AJ is correct about the loan process for residential rentals in California. Adding that even if you find a lender that allows you to hold title in your LLC, you'll likely be signing a personal guarantee that eliminates the liability protections of the LLC in the instance of foreclosure.
For tenant/general home liability, an umbrella policy will be your best line of defense. Even with an LLC set up, you could lose the home in a major lawsuit.
For contractor disputes, your best protection is your due diligence and the contract you sign. There are a lot of lessons to be learned working with contractors. A few golden rules to follow, always work with licensed and insured contractors and put everything into the contract, no matter how minute the detail is. There are plenty of examples online of what language to include in a contract. It wouldn't help to have lawyer referrals ready to go incase you run into issues. Lastly, payment schedules are extremely important in making sure the work gets accomplished to your standards.
Best of luck with your current and future investments.
@Aaron W. @Michael C Williams I have talked with my lender. It seems, if I have transfer the property title to the entity with the same owner, it doesn't really impact on the current mortgage. In this case, I do not need to apply for any commercial loans. I have also did some research on umbrella policy (e.g. https://royallegalsolutions.co...) after reading your replies. I think I definitely need to consider to purchase an umbrella policy even if I have a LLC to hold the asset. Thanks!
If I do not hold the asset using a LLC, umbrella insurance seems to be necessary for me.