LLC for Short-Term Rentals?

Question

We are actively pursuing the purchase of our first STR with a plan to add more. We've been advised by our accountant that each should be purchased in the name of an LLC to protect our assets.

The STR experts here advise using a 10% vacation/second home loan when purchasing these (in order to scale quicker), but they would have to be in our name then, not an LLC.

Any insight on this? Do other STR owners use an LLC?

Thanks.

David M. · Answer

@Felicia Lucco

You might be interested in this thread:  https://www.biggerpockets.com/...

While its a little different, the point about how if they had to do it over they wouldn't have bothered with the LLC.  Also, note how they used personal loans and quit claim deeded the properties, and in their way pierced their corporate veil.  I also referenced one of my posts that I keep sending around regarding quit claim deeding, and its issues.

Yes, many investors use their own name with standard homeowners/landlord insurance, umbrella insurance policy, and keeping their properties in good repair.  Good luck.

Felicia Lucco · Answer

Thank you for all of your tips. I will revisit this with my lender and realtor. I was also advised that should I get a really good insurance policy (like Proper), that would offer the same protection.

Chad McMahan · Answer

Hi Felicia.

Talk with your realtor about it. You may be able to simply purchase in your name, and then move it over to a LLC after COE. I do recommend protecting yourself with 1+ LLC. I have seen it go bad, too often, for people that don't layer their protection and form a corporate veil/shield.

David M. · Answer

@Felicia Lucco

Many will say that LLC is a cheap way to gain extra liability protection.  However, realize the direct and indirect costs associated with having one.

As mentioned, you will need to keep the entity as separate to protect its corporate veil so don't co-mingle your funds and use it as an alter-ego for example.

Also, legal entities such as LLC's are not eligible for conforming residential loans.  You will have to get commercial financing which is generally more expensive and poorer terms.

If you want the limited liability protection of the LLC, then the business/operations need to be under the auspices, i.e. owned, by the LLC.  Remember, it is its own legal entity...  So, treat it like another person (that only exists in the State it was formed).  "frankensteingin" the loan as I keep calling it is a poor idea in my layman's point of view as I keep point out.  People keep recommending it, but none that has a fiduciary responsibility to your LLC.

The "LLC question" comes up daily on bp.  look around at some of the threads.  Here are two threads you might useful.  Definitely educate yourself and consult with some qualified professionals.  I'd be happy to chat with you if you'd like.  Good luck.

https://www.biggerpockets.com/...

Alexander Szikla · Answer

Clean accounting is key with an LLC. Commingling personal expenses totally defeats the purpose.

An LLC is very cheap insurance and insulates your asset(s). However, financing will certainly be more difficult and more expensive.

This can be circumvented by transferring property to an LLC after closing the loan, but you need to make sure that is fine with your lender beforehand. Some lenders have a due on sale / transfer clause which you must be mindful of.

Overall, I highly recommend using an LLC

Travis Timmons · Answer

It really depends on your overall asset portfolio. It's obviously easier to buy the first property with 10% to conserve cash; however, there are some 15% investment loan options out there if you can get to 15%. The risk-reward also depends on your assets outside of this particular property. Obviously, you would be insured to mitigate risk. You can also get an umbrella policy for a reasonable price as a catch all to protect you from liability. If you can come up with 15-20%, my advice would be to purchase using an LLC. If not, 10% second home loan is the only option. You can transfer the property to an LLC via a quitclaim deed at a later date (consult a real estate attorney, but it's a pretty standard process so long as your lender approves it). Hope that helps!

Just selfish curiosity here - What market(s) are you looking at for this property?