I own a property in Philadelphia and I am now planning to rent it out (I moved in with my fiancÃ©). I have been searching google for HOURS trying to find out how to do this. I started an LLC and planned to transfer the title to the LLC (and even got written permission from my mortgage company)....only later to find out that transferring the title in PA and Philadelphia would trigger a 4% transfer tax (which I cannot afford to pay). I hate PA!!
So now I'm in a stupor....I don't know whether to:
1) Use the LLC as a 'property manager company' (and then if I go that route, does that require a broker's license in PA)?
2) Lease my property to the LLC and then have the LLC sub-lease to the tenants (and then if I go that route, would I need separate bank accounts for both the LLC's rental business, my rental business, and then need to get business licenses and housing inspections for both me and the LLC. I couldn't find any specific information about sub-leasing in Philadelphia)
3) Rent directly to the tenant - seems like the simplest option at this point.
I originally reached out to Steve Babiak with this question (awaiting feedback) - he seems like the PA/Philly guru when it comes to this stuff. If anyone else has any recommended guidance though, I would greatly appreciate it. This issue is causing me so much anxiety at this point I just want to sell my house haha
I've come to love bigger pockets. I'm a newby but I've already read hundreds of different posts on here and I've learned so much from everyone. You guys are great!
Thank you very much for taking the time to read this message.
Not sure why you need the LLC. I would probably let the LLC dissolve after this year unless you find a better use for it. Then just rent out the property with you as the owner. It is the cleanest path and I don't see a good reason not to.
There is no need to have an LLC to rent out a property. Just make sure you have more than enough liability insurance and you'll be fine.
In just about every state to have a "property management company" you would need a broker's license if you are managing any properties that are not owned by the company itself. That sounds like way more paperwork than you need anyway to rent out a single property.
Forget about all the Guru LLC hype and do the right thing and rent it out. Get a good insurance policy.
I've got 3 rentals and am just now forming llc for my management company. If you want to run management through that, then understand that you will always be personally liable for any work you do yourself, regardless of entity type. I do most maintenance myself and outsource when the job is too big or I just don't have the time. Just do the right thing and don't cut corners and you should be fine with plenty of insurance. I am starting the venture into property managent and am looking to get broker license to see about doing this for other landlords. Only time will tell if there is any money in that. If you want anonymity, you can just register as a dba and rent mailbox somewhere. You can give appearance of being a company without the hassle of a llc.
Just rent it out in your name. Make sure you carry a good insurance policy. We carry 300k liability on all of our properties.
The LLC will not give you much liability protection in the event you loose a lawsuit as you were the one personally managing the property.
You would not need a broker license to do any renting or management with the property as it is owned by you.
@Sean Treston also, welcome to the site.
You may be over-complicating this. Have you talked to any professional property management companies? They will charge maybe 10% of the rent, but you don't have to deal with creating a lease, advertising for tenants, arranging showings, organizing maintenance calls...
Unless you've got a burning desire to "be a landlord", it's money well spent. And if you're getting the investing bug- which it sounds like! you should know that there are lots of investors who find that doing their own management is not the best use of their energy. If you're getting anxiety thinking about it, I can pretty much guarantee doing it will generate at least as much stress ;)
I have a similar situation my 100% own S-Corp that I use as a manager company (In GA it is not require to have broker's license if you are managing your own property).
In my opinion I felt it will be advantageous in the 3 following areas:
1. Legal: I did a contract with the entity to do the acquisition/disposition, renovation and property management of my properties. All money that I put in my RE company I do a promissory note for the money to be paid back to me (with interest) when it becomes profitable. A UCC form is also filled and filed to have a 1st or 2nd position lean of the assets incase I get sewed by a contractor during renovation or tenant in case of an inside attack. There are some other legal benefits but too long to explain and I am not a lawyer.
2. Taxes: A business can claim much more deductions than an individual (this is a fact) in addition it is much easier for a LLC or S-Corp to qualify as a Real Estate Professional than an individual (the details in IRS publication 925 look for qualification of "Active participation"). The benefit is that your entity may not be subject to the Passive Activity Limits for deductible loss established by IRS.
3 Financial: If you are properly running your LLC (minutes, filling, separate bank account, filing taxes, EIN, getting your DUNS number, Getting Business Credit Cards, etc.). It will help you to establish business credit and therefore help the separate your personal finances from your business finances. As you grow, the entity will be able to get Business lines of credit, business loans and other benefits that eventually you will be evele to do with out a personal guarantee.
Long Post but I hope you get the Big Picture.. I little more work but it may be worth it...
I agree with others who say just keep it in your own name, get good insurance coverage, and forget the LLC for now. Your LLC was probably a single member LLC anyway, which means you end up getting the blame one way or the other for any type of mishap. And I'll venture a guess that you will be doing some work along the way your self too. Since you are now in Southampton, I'll guess that your rental is in NE Phila so probably not going to be lowlife tenant types there.
Now, you should set up a separate bank account for your rental property and also separate bookkeeping. Because this is in the City of Philadelphia, you will have to get a CAL - Commercial Activity License (used to be called a Business Privilege License) - in addition to getting a license for renting (housing inspection license IRC). The Phila Dept of Revenue will be looking to collect two distinct taxes - basically gross receipts tax and net profits tax from the CAL account number (usually the owner). So you want to not have any extra income showing up on your rental's books or else you pay the City in taxes.
Let's also discuss another reason to not have the property in your LLC: the need for funding - whether an equity line of credit, equity loan, or refi - funding from a bank will be easier to come by in your own name and more affordable as well. Especially important to somebody who has posted "cannot afford to pay" the 4% ... My guess is that you aren't sitting on enough cash reserves right now to cover major expenses that might pop up while holding a rental.
The other benefit of keeping it in your own name happens if you don't cut it as a landlord and decide to sell. You can still get the Section 121 exclusion on capital gains if you still own it since it was your main residence (you will have to comply with IRS timelines for that of course); the LLC won't get that benefit.
So maybe best for you to keep things simple at first.
Originally posted by @Steve Babiak :
I'll guess that your rental is in NE Phila so probably not going to be lowlife tenant types there.
I must have a skewed definition of "lowlife"... :)
This is a popular topic in the forums so you can browse and find other posts for more advice.
I like @Jean Bolger 's idea of looking into a management company if you're uncomfortable with dealing w/tenants directly. Other than that, any solution would involve pretending to be someone other than the owner, which is generally frowned upon.
I agree that transfer tax @ 4% of fair market value is ridiculous.
@James Wise Hey man I've got a few quick questions~ Is the 300k liability insurance there to protect you from a lawsuit? Is it expensive and do you mind sharing the monthly premium? Do you simply own your rentals as a Sole P w/ liability insurance or under an entity? Land trusts for anonymity?
Ok... So I might be asking for a lot. Thanks in advance James. :)
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