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General Landlording & Rental Properties

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Vijay Anandh
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Looking to rent out my property, best practices

Vijay Anandh
Posted Apr 21 2023, 12:30

Hi, 

Am new to renting out my property in US. 

I will be moving out of state from Santa Rosa, California, and need to rent out my property through a local property manager.

I am working on setting up an LLC, transfer the title to the LLC and then rent it out. The property is under a mortgage. So i will have to work with the lender as well - I did check with them, they do not seem to have any issues with it as i will still be the primary responsible person for the mortgage.

What do i need to keep in mind in the process?  Is there anything i am missing?  Should i rather hire someone to help me with this whole process. if yes should it be an real estate attorney or a CPA?

Any thoughts here will be helpful.

thank you in advance

Vijay

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Katie Balatbat
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  • San Diego, CA
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Katie Balatbat
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Replied Apr 21 2023, 15:20

@Vijay Anandh

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc. Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.

California is generally more cumbersome than other states when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don't buy CA property as a CA resident.

Any lawsuits should be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. Or, a charging order may be granted.

If you're going the umbrella insurance route, perhaps see if it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

Creating an LLC in California could cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation. California does not recognize series LLCs.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a fairly new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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Alecia Loveless
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Alecia Loveless
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Replied Apr 22 2023, 01:55

@Vijay Anandh The first post nailed it. If you don’t have that much equity in the property or a huge amount of assets yet then you will be fine with the house in your personal name and lots of insurance and an umbrella policy. This is not legal advice.

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Basit Siddiqi
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Basit Siddiqi
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Replied Jul 7 2023, 11:28

Just be mindful that California has a $800 annual filing fee for LLC's which will eat into your cash flow.
It may be required if you are looking for additional asset protection(Consult an attorney).

I think having a discussion with your PM company will provide you most of the guidance needed to convert your property into a rental.

If you are moving out of the property, it should be atleast in livable condition which should make repairs / renovations to turn it into a rental on the lower end.

best of luck.