Being advised to start an LLC? drawbacks?

Question

Hello,

Visited a lawyer today to update some wills. He advised we start a trust and also put my 3 rental properties into a LLC.

I see the pro's that he mentions but any con's that I just dont see other than this initial hassle of setting it up?

I am completely debt free with umbrella policy. Not sellling and the looooong term plan is to give them to the kids and they would then receive properties with a stepped up basis (assuming the laws dont change in the future).

Live in Ohio if that makes any difference.

Might add another rental when, if, the market pulls back.

This whole conversation caught me by surprise so I am trying to process it.

I have emailed my insurance agent, property manager, and researched IRS issues (I do my own taxes).

Thanks!

Greg Scott · Answer

Agency = government backed loan, like Fannie Mae

For a rent property, interest expense is 100% deductible.  Between interest expense and depreciation, that is why it is almost always more profitable to have more property leveraged than less property with no debt.

Michael Redmon · Answer

Thanks for the reply and information

I don’t understand the term agency debt.

I get taking a loan out against the rentals but that loan interest isn’t tax deductible as an expense (I think).

Joseph Gozlan · Answer

If you don’t plan on refinancing in the future, then the LLC won’t be an issue with getting a loan.

The added protection is really the only value you get out of this. If anything happens on the properties and you get sued the maximum they would be able to pursue is the total assets that are in that LLC (e.g. all properties and the company bank accounts).

The down side (other than the above mentioned financing) is in the additional tax work and keeping separate accounting from your personal assets (or you risk piercing the vail and losing all the LLC protection).

As for leaving it to the kids, you might want to look into trusts. Save your kids/wife the pain of probate court.

Greg Scott · Answer

One of the major downsides of using an LLC is that you cannot get agency debt on those properties.  You would have to use a commercial lender so, you cannot get the best financing in an LLC.

You indicated you are debt-free so you may not have any loans on these properties, nor want them.  Lawyers don't like leveraged properties because it often isn't worth their time to sue for 25% of an asset.  On the other hand, if you have no debt, you have become a more enticing target for a lawsuit, in which case an LLC probably makes sense. In fact, if this is your situation, you might want to even create 3 LLCs to separate the assets from each other.

Alternatively, put some agency debt on them, go buy more properties.  By doing this you'd probably improve your cash flow, decrease your taxes and benefit even more from appreciation.  I slept pretty well at night with leveraged rent properties and a wall of good insurance.