Asset protection for new landlord

[Brittany Baird]

Hi there, I have a single rooftop with three units fully rented in PA. I'm a NJ resident and have an LLC incorporated in the state of NJ. I made the LLC to use for my consulting business but accepted a w-2 position right after I made it so it's never been used. The LLC is in good standing. I have a mortgage on my rental in my personal name. I currently comingle my rental funds but use an advanced budgeting app so everything is tracked. I know I should open a new account. Should I/can I open a bank account in my LLC to collect rent - essential making the LLC the proper manager? Is there a good reason to do this even if the house stays in my personal name? I'm not sure if it matters that I created my LLC for one reason and would use it for another. Beyond this, I'm working on getting an umbrella policy set-up. Any advice welcome, thanks.

[Bjorn Ahlblad]

@Brittany Baird You can use the existing LLC but you need a resolution to change your current operating agreement for your business and a resolution for the new bank accounts. Make sure you are adequately and properly insured. All the best!

[Nathan Gesner]

Quote from @Brittany Baird:

The best way to protect yourself: know and obey the law, and treat tenants honestly and fairly. That will cover you 99% of the time. Umbrella insurance is my second recommendation. LLC is my last.

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.

If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.

[Eliott Elias]

You should open a separate bank account for your rental property in the name of your LLC. This will create a clear separation between your personal finances and your rental business.

Also helps you maintain accurate records of your rental income and expenses, which can make tax time easier. It's possible to keep the property in your personal name even if you use an LLC to manage the property.

[Jason Marino]

Hi Brittany,

You can use a rental management LLC and own a property personally. You are separating the liability of interacting from the liability of owning a property. This is done with properties that are owned by limited liability entities as well when the owner uses an Operating Company and a Holding Company. I agree with the post above that you should have a separate bank account for the LLC. It should not matter that the LLC was not created for this purpose initially. Despite this, you should confirm that your Operating Agreement does not include any limitation on the type of business that the LLC can do. To get a bank account, you will need to show the Certificate of Formation (or other similar document), the Operating Agreement, and the EIN for the LLC.

[Tim Delaney]

It's probably worth consulting with an accountant and or attorney. If you own the property in your name then the lease is probably in your name anyway, so the LLC in and of itself is going to do little to protect you. However, since you already have it set up it wouldn't hurt to open the bank account and start keeping everything separate. At some point you can switch the property over to the LLC and you'll already be set up. The reason I suggest talking to an attorney is that there can be issues with using an LLC in one state to do business in another - you may need to register your LLC as a foreign entity in PA.