LLC or Umbrella Policy, HELP!

7 Replies

Ok. We have just signed our first contract on a SFH! We are so excited.

Here is a decision we have to make and really need your advice. Since we started this our plan was to open an LLC and put our rental properties in there. As we started doing research on financing, we are finding it is VERY difficult if not impossible to find a lender that will finance to an LLC (even if we are the guarantors). We have gotten a lot of conflicting info. Obviously our lawyers want us to have an LLC and that would give us the most peace. We know many of you have LLCs. How did you do it? We have heard that some people that run into this issue close the deal and then move the property into their LLC. But we have heard that doing this puts you at risk for your loan to be called.

Another option is purchase a $1 million umbrella policy that they use to cover liability risks.

We do not want our family, our home, our cars, etc to be at risk. We want to be smart. But we are about 5 weeks from closing and need to lock in a lender. After meeting with many bankers it looks like we can get loans but getting them into an LLC seems to be the issue. Any advice?

@Jonathan Gregori,

Lenders have been burnt many times with LLC fraud, and that is the reason they will not finance to an LLC. Forget about the LLC route and finance in your name and get a good insurance policy for protection and forget about transferring into an LLC after you buy in your name the lender could call the note due.


Joe Gore

I am in a minority in these forums. I believe that the LLC should only be considered when your net worth is in the high seven figures. At that point, your net worth is greater than most umbrella insurance policy coverage limits. Until you have a great deal of wealth to protect, insurance should be adequate. Also, the LLC is not a replacement or substitute for insurance. Even if you have the LLC in place, you still need insurance.

  

LLC's are oversold to the REI community in my opinion. I don't feel like it is necessary for a single family investor. A broad underlying insurance policy and an umbrella is less expensive and provides more flexibility. Personally, I hold my home/other assets in a Trust and my investment properties in my individual name.

Applicants attorney's take the path of least resistance. If you are not completely negligent, there are very few reasons why they will bother to chase your personal assets with a umbrella sitting there. They want to collect their 33% fee as quickly as possible, not spend years chasing your personal assets.

Yup, they are two very different things.  

I wouldn't worry about the LLC so much on one rental property. You should always carry insurance. Usually the normal limits will cover stuff, I don't have an umbrella, but I'm covered in other ways. Umbrellas are cheap- they are cheap because they rarely get used, btw. If you are buying a million dollars worth of coverage for $200, how often do you think they ever get hit to pay a big claim? The risk is simply pretty darn low of you getting into something that they'd go after personal assets anyway. It'd take a pretty major event to go past the limits of your liability policy.

Saying that I personally don't have anything in my own name. I love my LLC's. I have several and like the tax advantages and anonymity and control they give me. I don't do bank financing, though. I'm lining things up to buy some more rentals, though, and I anticipate buying them in my name to get the cheap money, then deeding them to a land trust and having an LLC as the beneficial interest of the LLC. If I do get a loan called due (which is a very rare event), I can just deed it back and/or refi it into a commercial loan based on the income and tax returns and such. They'll lend to an LLC that has 2 years worth of tax returns, they just dont want to loan to one you just created with no history and no income.

Again, first house, worry more about getting the house and tenant, then when you get the business going you'll want to learn all about the LLC's. You can always sell the house to the LLC later.

Originally posted by @Darrell Shepherd:

Saying that I personally don't have anything in my own name. I love my LLC's. I have several and like the tax advantages and anonymity and control they give me.

As a general rule, the pass-through entity LLC is tax neutral. That is, your tax liability is the same with or without the LLC.

I'm an international investor, and I'm having the same dilemma.

LLCs cost more, have more admin overhead, and require one LLC per property, or one LLC per state. Besides which, may not offer the protection that it's supposed to have, and doesn't protect me against estate taxes. I'm really thinking of just buying the first few properties under my personal name, and just getting an umbrella policy.

At least, I can start this way, and like @Darrell Shepherd says, restructure in the future after I get a few properties under my name.

Was this the way you ultimately went ahead with, @Jonathan Gregori ?

Here's an extensive article that hits on exactly what you are asking about. More than the article even, read all the comments from people.

http://www.biggerpockets.com/renewsblog/2013/08/17/rental-properties-llc/

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