Creating an LLC to operate the rental business worth it?

Question

I currently have the mortgage of my townhome i own in my name, and is currently my primary residence. I plan to turn this into a STR/MTR in March 2023 fulltime. My lender was not clear about what would happen if I transferred my mortgage to an LLC so i will not be doing that, also dont want to lose my low interest rate. An insurance provider mentioned briefly that some of his clients set up an LLC to manage the operations of the rental business but keep the home/ mortgage in their name. What are some of the benefits of this as far as asset protection goes? How would this look from a tax and financial management stand point? Any information would be helpful! thank you!

Jason Marino · Answer

Hi Alyssa,

Creating an Operating Company to act as a rental manager is a common part of many asset protection structures. The concept is to try to separate the liability of interacting from the liability of owning something. This Operating Company would typically sign leases and hire contractors. Many lawsuits involving an issue with the lease or contract signed by this Operating Company would have to list that entity as a party to the law suit rather than the owner of the property. Based on this, the Operating should only have the funds it needs to pay the expenses related to the property and not own any assets itself.

Alyssa Magyar · Answer

Thank you Jason! That is very helpful. Would I also be able to set up the LLC to pay the mortgage from the LLC's checking account?

Nate Sanow · Answer

I prefer holding in an llc, but if the question is using one to manage, there could be some typical business ownership benefits like keeping business and personal separate and further write offs. For specifics I’d seek out a CPA, they are worth their weight in gold.

David M. · Answer

@Alyssa Magyar

The LLC topic comes up nearly daily, so poke around the board...

You don't really need a LLC, but maybe its more warranted for a STR/MTR --- its up to you.  Just remember that for the limited liablity protection it does cost you, and not just the annual state filing fee.  Your tax returns will be a little more complicated and you'll need more diligent bookkeeping and operations to keep the LLC separate from yourself.  Also, legal entities such as a LLC's are not eligible for conforming residential loans.  So, you'll have to rely on commercial, i.e. non-residential financing.

As for your situation, while piercing the corporate veil is all facts and circumstances (of course, consult a qualified professional or two about any of this...), by "frankensteining" your Title and Mortgage just leans towards using the LLC as an alter-ego.  Its supposed to be another legal entity, like a stranger.  Since most people don't generate more paper, how does it make sense that you transfer the deed to a stranger and expect them to pay everything for you?  Also, the mortgage is in your name, so the payments should be drafted from your account and you should take the interest deductions, somehow, instead of the LLC since you should be making the payments.

Yes, its common to have a Mgt LLC.  Usually, its more so when people use LLC's to hold Title.  The "title holding LLC's" basically stay dormant while the Mgt LLC leasing out the property, collects rents, maintains the property, etc.  Obviously, you'll need to have a mgt contract signed between the two LLC's.  Now that the landlord is the Mgt LLC, there isn't much for somebody to sue after.  However, we had a discussion years ago where if you still hold the properties personally and its "your" Mgt LLC, then you lose the limited liability protection.  I think its a "self-management" issue...

If you do keep the mortgage and transfer Title, make sure you homeowner's insurance it updated (i.e. the insured party), your Title Insurance (I am assuming you won't be doing warranty deed), and your loan servicer/lender.  That's how they usually find out about the transfer.  Apparently, their calling in the Due on Sale clause is extremely rare.  Basically, if you are making payments there is no reason to call the loan in.  Also, Fannie guidelines changed a few years ago that basically allows single member LLC transfers.

Hope this helps good luck.

Creating an LLC to operate the rental business worth it?

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