Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
5y
Never used one in 20 years, and I've avoided all the expense of setting them up, costs of maintaining them and the cumbersome and convoluted administrative aspects of operating with them.
But I must admit I have missed all the benefits of being able to hobnob with those pretending to be players by showing off my all my LLCs. It's been really rough in that regard, but I'm working through it.
Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
5y
Originally posted by @Account Closed:
@Christopher Smith the cost in California is ridiculous.
Right.
I actually think that was a very concious effort by the Ca state legislature to put into place punitive measures for landlords who are seen to be attempting to shield themselves from liability for conducting irresponsible rental activities.
Quite likely a trend to be seen in other states in the future and another reason not to have an LLC for most mom and pop landlords.
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
5y
@Misael Carlos Vera Yes. Owned many properties never had an LLC. The only reaaon for an LLC is if you are partnering on multiple properties with other people. Then an LLC may be a good way to share ownership pf the assets. If its just you then no need.
Rental Property Investor · Member since 2020 · 215 posts · 137 votes
5y
@Dane Silchenstedt
Another aspect to take into consideration, if you have a property under your name and move to a LLC, you might be pushed to pay HOA transfer fee. I opened my LLC and later transfer one property to that LLC. Cost me almost $1000 to transfer from my name to the LLC. They considered it was a normal transfer of ownership, even being my own LLC.
I dont regret opening. Yearly maintenance cost is very low. Problem is this ridiculous fee charged by some Associations.
How would having an LLC protected you in your situation? Would it simply be due to the fact that they sued you over a year after sale, and you would have dissolved the LLC at the next filing deadline (before they sued)? I assume you mean have one LLC per property? These people here saying one LLC for multiple properties confuses me - I thought the idea was to isolate the assest from other properties and yourself as much as possible. Personally I would pay for an LLC and umbrella - but I have mortgages on my properties and I wouldn't want the bank to call in the loan if I put it in an LLC (I know this is super rare -but still).
About being sued - something similar happened to my friend that owns a business in terms of settling due to it being cheaper. The insurance company settled with the guy they fired, even though they had incident reports of him coming in late, no showing. Also had video tape of the guy being fired, and him threatening them, etc. His lawyer would settle for 5k, and the insurance knew it was cheaper than fighting and winning. Sucks how that is.
Rental Property Investor · Orange County, CA · Member since 2020 · 19 posts · 7 votes
5y
@Christopher Smith I agree with you but I do have one sorry Someone close to me right now is being sued for wrongful death for mold in a rental. Totally bogus, but it does happen. The tenants husband died (not of mold) but the lawsuit is causing a lot of financial burden....
Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
5y
@Timothy Young
Mold is tricky but if you look at my list of risk mitigation factors in my second response above you'll note I specifically mention acquiring newer well built properties in appropriate locations (as well as buying in neighborhoods that attract responsible and contentious tenants).
That's the whole point nearly everyone misses, i.e., risk mitigation begins with every meaningful "business" decision you make, not wrap around legal gimmicks. If you're operating your business with risk mitigation built into every step of your business processes there is likely very little need for a mom and pop passive rental activity to have an LLC to begin with (assuming you have appropriate insurance coverage from reputable vendors).
Or alternatively, you can throw caution to the wind and operate your business recklessly and bank on having an LLC to shield from whatever may come. That's precisely the mentality that will get you into trouble, not bail you out of trouble. First poor business decision making is not only an invitation to claims, but also an invitation to having your LLC 's purported legal protection vitiated or voided entirely.
If all you are avoiding by having an LLC are the very minimal legal fees from the cases noted above, then you've just effectively acquired the most expensive insurance coverage on the planet and you don't even realize it. Stick to running your business intelligently, and leave the LLCs to active businesses that face truly serious product liability issues, and can easily justify the cost of LLC establishment and maintenance.
As an outsider to your business, with a law degree, and properties of my own, I will disagree.
I’m not going to assume and get into nuisances, but there’s certainly a reason behind protecting your investments (legally speaking). Think of it as added insurance, etc., but this is of course on a per case basis.
Typically you can have one LLC for all of your properties, if ownership interests are the same, but again, everyone's situation is different.
The best advice I can proffer is to check with professionals in your state, as sweeping generalizations here can be incorrect.
If I sought you out for legal advice, I would hope that one of the first questions you'd ask me is what my risk tolerance is before you told me that you disagree. LLCs are not fluid, but the choice to transfer your assets into an LLC are. Meaning, there are a few variables that would determine if an LLC is the best for a particular individual considering for example his net worth or his LTV, which no one is mentioning in these comments. Putting all of your properties into one LLC makes no sense unless its a series-LLC, but those aren't available in all states. Agreed, there are sweeping generalizations being given here.
I agree with most points here that the LLC is really just for asset protection. Unless you are investing with a nonspousal partner, it provides no tax advantages. Generally, a landlord policy with an umbrella insurance policy are sufficient to cover your liability as long as you keep your properties in good repair. Your expenses with a LLC only go up vs buying personally since you are just tacking on the overhead of the LLC including having to use commercial lending. You'll need insurance either way to help defend against a lawsuit. Obviously, it would be good to find an insurer who has better service than claiming the policy doesn't cover you...
As I've posted on before, while people can "do" anything they want, but we here haven't heard of somebody who has successfully defended a lawsuit after having purchased the property personally and quit claim deeded to a LLC. As I posted below in my layman's opinion, it doesn't make sense. We've had other discussions in BP (I can't find that thread right now) where its been pretty much stated how the mortgage and Title need to be both be by the LLC. Having it split doesn't provide full limited liability protection as a best practice. While you have the Due on Sale clause to consider, but its sort of the least of your worries as it regards to your attempt to obtain the asset protection of the LLC. Obviously, if you just refi into a commercial loan as you make the deeding it doesn't matter.
If you hold a lot of properties or basically commercial properties (which includes properties with more than 4 residential units), your liability risk does go up and it would be more advisable to have a LLC. Furthermore, as part of your analysis of whether you need a LLC, if you are heavily leveraged, you have very little asset to actually protect at the time... Somebody can sue you all they want, but they can't get passed the 1st lien (unless perhaps its some Government entity). Otherwise, its been posted on BP about usually putting about $1M in "property value" into a LLC before starting another. With a "larger" (its all relative) your eggs aren't in one basket and you have segmented your liability without driving yourself crazy with one bank account and debit/credit cards for each property you own and the associated bookkeeping.
Using conforming residential loans (which a legal entity is not eligible) can be a powerful tool. Just remember that most of them have a owner-occupied component. So, the "investment" conventional loan is pretty much your only option if you aren't moving it. Its generally 20% down min and about 1%+ more than a owner-occupied conventional loan. Your rental income can actually "hurt" your dti thus lower your available credit to borrow. Just about any lender will recalc your profitability by taking 75% of your rent (NOT your profit/loss) then subtracting your expenses. Usually, they will back out your depreciation, but will average in your other expenses (you'll have to provide your tax returns so they'll see your SchE).
At the end of the day, one really needs to consult at least one qualified individual to determine the cost/benefit to using LLC's and whether its right for them. As another accountant on BP has posted a few times, you can have 100 properties personally, 100 properties in a LLC, or 100 properties and 100 LLC's. There is no right answer.
Indianapolis, IN · Member since 2017 · 11 posts · 3 votes
5y
What about the anonymity? Is there a better way to own the property so tenants or other can't research me and or find my home address through property records?
Accountant · Brainerd, MN · Member since 2017 · 17 posts · 11 votes
5y
@Misael Carlos Vera
I just bought my first multi-family property and we acquired personally so that we could get solid conventional financing terms (30yrs, 2.875%). Then after closing, we quick claim deeded the property into an LLC. Our lender suggested and approved of this. But we have to close initially with the property in our name so that the loan complies with secondary market regs.
While Christopher Smith is probably right, good insurance is better than any LLC.
I opt for both. Solid insurance and the protection of an LLC to keep my personal assets separated.
Rental Property Investor · Maitland, FL · Member since 2017 · 11 posts · 2 votes
5y
@Matthew Radniecki Nice the lender was up front about it. Since the title has changed names, the mortgage still remains in your name correct? Which also means it must be paid from your personal account and not your llc’s business account correct?
That's a whole nightmare. Title changed.. Title Insurance policy may no longer be valid.. You personally are paying for a mortgage that is owned by another entity... There was another discussion a little while back on this and its pretty messy trying to see how the corporate veil could be maintained...
I don't do much with anonymity. I fyou read Kohler's book, he says its not really worth it as a screen for asset protection since in court you'd pretty much have to disclose your assets. Also, when trying to "hide" assets it can bring a negative viewpoint on yourself...
But, normally I believe you'd form a LLC in a State with anonymity favorable laws such as WY or DE. Then, you'd form the LLC that will take Title in the corresponding State withe anonymity LLC being the member. Now, when somebody tries to track down the owner, they should run into a dead end. The other way I hear is through a trust. Since Trust documents don't need to be filed, they won't know...
Are you trying for asset protection or to "hide" from your tenants so they just don't show up on your doorstep? If you self-manage or meet them in anyway, they might be able to just lookup your name in public records (depending on how your area is setup) and find your home anyway.
Oh okay.. Well, then definitely do something else as well to make sure the lease isn't written in your name either. I'm not sure if a Property Manager would help as to whether that would change/hide the landlord.
Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
5y
If this is your first deal it won't make sense to put a single family house in an LLC as you have the set up cost, annual filing fee costs, and extra CPA cost to file second returns forever. Buy a sound property with no health or safety code violations. Check on it with your own eyes on a schedule. Vet tenants carefully not just credit but the income and where they lived prior. Don't discriminate. Get excellent insurance. Learn to fix everything as you build equity. Keep learning as you go
If your loan is conventional Fannie/Freddie/FHA or has MI coverage there is a due on sale clause that you signed. The verbal statement from lender to go change the deed (sell the real estate) to your LLC is worthless in any real estate transaction. If you miss a payment or change the insurance they will look and call the loan due and payable. If the bees think you cheated they will sting you. Government backed low interest rate residential mortgages are not for entity vesting. It is bad advice to post your name here saying you did this as it opens you up to due on sale and your entity may not be removed from your personal name in using a conventional loan and making payments from your personal bank account
That's sort of a catch-22... If you tell the servicer (since the lender most likely doesn't own the loan anymore) that you are doing something to violate/trigger the Due on Sale clause, they might call it in. Personally, I'm sure if I'd trust the general people answering on the 800 number and have no idea who or how to get a great answer.
There has been statements that Fannie Mae loans are okay with change in Title as long as the two parties effectively are the same, e.g. you are transfering to a LLC that you wholly own. However, I'm not sure if that is a loan originated by Fannie Mae or one that was sold off to them in the secondary market.
You really should just transfer Title and refi under the LLC with a commercial loan to fully realize the asset protection / limited liability of the LLC.
Rental Property Investor · Stevens Point, WI · Member since 2020 · 23 posts · 3 votes
5y
This has been a great post and I’ve found a lot of value in it. I’m wondering if purchasing in your own name leaves your personal assets vulnerable to lenders in the case of a loan default though?