1st rental LLC OR UMBRELLA? BOTH? NONE?

Question

hey I am currently in contract for my first rental which I am buying for 45k, worth about 60-65k now and will have a loan of about 34k on it. I will buy and hold the property and it has 2 units, my question is I do not have my own house (live at home with parents) am 22 years old, have a paid off car in my name though worth about 11k , and a savings account. What should I get to protect me or should I not bother with an LLC or the umbrella policy at 1million in liabilty becuase I do not have many assets yet? I think I should protect myself somehow but I am not sure what the best way is especially since I don't have my own house yet but do have good amount of savings for my age. thanks

Matt R. · Answer

Hi John,
I'm not a doctor, a lawyer, or a plumber, etc. etc.

You're off to a great start.
Since your assets are basically the rental itself and your own cash, it's unlikely you need an LLC for protection of assets.
An umbrella policy would be a good idea, just to make sure you do have some coverage in case some dorkhead slips and falls on your property. They're not too expensive (the policy, not the dorkhead 8^).
Hopefully, you'll accumulate more in the future and then you can start to think about LLCs when your assets get into 6 figures.

Matt R. · Answer

Hi John,
unfortunately, a LLC doesn't save you from paperwork - quite the contrary.
You still need all your receipts to substantiate your expenses to the IRS (if it comes to defending an audit).
You definitely want to have separate accounts to show that the LLC is indeed a distinct entity and you definitely do not want to mix your and the LLC moneys.
Mixing personal and business funds more or less automatically kills the point and benefit of the LLC since it needs to documented as a separate, business entity.

There's a ton of LLC related discussions on BP, plus I found the NOLO books on dealing with Tax for Landlords to be outstanding.
You have plenty of time to ramp up on this aspect.
Get a bunch more rentals under your belt to build up your net worth. Once you get to the point of having enough assets to worry about, paying a lawyer $1k to correctly set up your LLC will be money well spent. And it's a valid business expense 8^)

David Beard · Answer

Dave -- it sounds like you're stating that liability that stems from your LLC-owned rental property can't be shielded from your personal assets if you manage the property.

My understanding was that you have personal liability if you acted in a negligent or fraudulent manner with respect to your rental property.  I would think that many successful lawsuits do not entail negligence or fraud, and my understanding is that your LLC would in fact provide some limited protection from these type of lawsuits.

Please clarify.  Thanks.

Dave Toelkes · Answer

John,

An umbrella policy requires that there be some underlying liability policy in place.  Think of an umbrella policy as a second layer of insurance for the other insurance policies you already have in place.  Umbrella policies do not insure your property, but instead, provide an extra layer of liability insurance when your first layer of coverage is not adequate for your needs.

Since your mortgage lender already requires hazard insurance on your property, just have your insurance agent increase the liability coverage to $1 million or more if available.  Doing this will add about $25 to your policy premium.

Forget the umbrella policy until your net worth is more than the liability limit on your hazard insurance policy.

Also, bear in mind that a single member LLC for rental property you will manage yourself offers no asset protection.  I would forego the LLC until you have a few million $ to your name.  Consult your own attorney for specific guidance on this and other legal questions.

If you are thinking that the LLC for your rental property gives you some tax advantages you would not have otherwise, then you are misinformed.  The rental property LLC is tax neutral.  That is, you get the same rental deductions and have the same tax bill with the LLC that you would have if the LLC did not exist.

Steve Babiak · Answer

Do open the separate bank account. Do save EVERY receipt.  Do record your mileage travelling to and from the rental for whatever activity you need to do there.

Not sure if you need the separate LLC to achieve any tax breaks in the situation you've described.

Steve M. · Answer

if you move your property in to the LLC from your name (assuming the loan is under your name) you quit claim it.  Essentially, if the bank ever calls you on that loan, you will have to pay the full balance or they will foreclose on the property.

1)  either deed it properly and don't quit claim it
2)  have enough cash reserves "just in case" you get called on it, and move it in to your LLC

investment conventional conforming loans are few and far between (if they even exist this day in age)

i've gone with option #2.  i quit claim my financed properties in to my LCC, and have yet to be called out for it.  Assuming payments are always on time, and everything "looks" kosher, i highly doubt they ever will call on it.  either way, I have cash reserves high enough to where I can pay for the property then & there if I ever do.

my suggestion .... hold the title & loan in your name and get an umbrella.

i have an LLC, and S-Corp, and props just under my name with a $2M umbrella.  The umbrella costs me $162/year.  BUT, you do have to keep certain coverage limits everywhere else (IE:  Car is and houses are at $500k limits)

sorry for the ramble, its 2:30am ...

Mitch Kronowit · Answer

I've never heard of such a thing. You're not getting a new loan when you transfer title over to your LLC, at least, you shouldn't be.

Account Closed · Answer

ok well the start up fee's for an LLC aren't too bad anyways but I was going to request a quote to increase my liability from 300k to 1 mil. 
Also I have heard from another investor that if I move my property into an LLC right away my mortgage loan interest would increase as the banks have to provide a new loan? if I wait until the end of the year this won't happen? I was confused and he also recommended I get a gas card and use it for all my gas then deduct that amount as long as I have the expenses on my card to back it up. I felt the IRS would view that as too much gas I am using right?

Rob Gillespie · Answer

A simple answer is to put it into an LLC or a trust. It is nice to just remain a ghost on public records. It is good because you can play good cop, bad cop with your tenants. You are just a manager, and running it for an LLC, they are the pricks that wanna throw you out for not paying. Trust me, you will love me for that advice after dealing with a few knuckleheads! As for insurance, you should be more than fine with a standard policy.

Dave Toelkes · Answer

Not exactly.  The scenario is that you personally manage the rental property owned by your member-managed LLC.  I am saying that if you and your LLC are sued because of something you did, or should have done but did not, the liability stems from your personal actions.  If you are personally liable, your personal assets are exposed in spite of the LLC.

If we go back to the oriiginal post, the original poster implies that his sole purpose in establishing the LLC and transferring his rental property to the LLC is for asset protection in the event of a lawsuit.  This would be a fraudulent transfer in violation of the Uniform Fraudulent Transfer Act and creates another opportunity for the plaintiff in a lawsuit to pierce the LLC liability shield.

These are discussions you should be having with your own attorney.

1st rental LLC OR UMBRELLA? BOTH? NONE?

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