Should I create an LLC?

Question

Chris Simmons · Answer

Ok, I will tell you how it works in my area and you will have to determine the variance, if any, from your area.

First, anything 4 units or less is considered single family, residential and is NOT considered commercial.  There is a special section in the Landlord Tenant Act that covers duties of both parties for each scenario.  The demands and expectations of landlords is much lower on the 4 unit or less, residential side.

Second, insurance is much easier and cheaper on the residential side.  I assume on your current rental, you have something called a landlord rider....or something similar.  Again, in my parts, my rentals are covered by the same company that insures my house and cars.  It is a landlord version of a homeowners policy that covers the structure and a few basic contents in the event the landlord keeps anything over there.  It also covers liability etc.  This is pretty much like a typical homeowners policy except it does not cover anything of the tenants.  In fact, I can't get a rental covered this way unless i first have my primary residence covered with this company.  So I have my two cars, primary residence and 3 rentals under one master policy....each with their own limits, deductibles etc.  I have pretty high liability coverage...i think $500,000 for each property.

On top of that, I have a $1,000,000 umbrella policy that covers me in case anything happens and the other insurance runs out of money.  Since I own these rentals and a private individual, along with my cars and primary house....I have beefed up insurance to cover ME.  This umbrella policy covers me if I hit a school bus on the way home, if someone gets hurt at a rental or even my primary residence.

So basically, unless someone sues me....I get legal defense provided by insurance company since the are on the hook for potentially $1,500,000.00, and I lose...or at request of insurance company settle....the first $1,500,000 is covered by insurance.

What are the odds that i will get hit for more than that?  As my assets increase, I will up the umbrella policy to $5,000,000 etc.  After that, I guess they could garnish my wages from my day job, but my sizable 401K and IRA's....can't touch it.  They are exempt assets.  My primary residence...protected by the homestead exemption law.  My 6 year old truck....take it.  I will lease one.  At the end of the day....if and after they prevail against insurance company for $1,500,000, they will find out that there is not much money they can get from me personally.  So there is not a ton of benefit to be gained by an LLC and that is before factoring everything that is required to have a properly maintained LLC that can have a chance at protecting you and not getting pierced and thus worthless anyway.

Don't get me wrong.  I run a tight ship, properly screen tenants, maintain properties and make sure repairs are made correctly.  Sometimes I hire licensed tradesmen, sometimes I do it myself.  If you do what you are supposed to do and don't cut corners...there really isn't a ton of liability in owning a house and letting someone else pay you to live there.  What can and occasionally will happen is covered by insurance.  If you want to be a slum lord that only fixes things with duct tape and bailing wire....well, that's a different ball game entirely.

Chris Simmons · Answer

No.  I own three, am working to acquire number 4 and still have yet to form one.  I thought I needed one due to the "gurus" and their fear based sales pitch.  Fortunately, I consulted two good attorneys I have dealt with in the past and they both advised it would not really accomplish anything for me.

That said, every situation is different and you should at least get a free consul with an attorney or so.   Most likely though, you will find out plenty of liability insurance will be more than adequate.  Additionally, getting financing in your own name is easier and cheaper than with a corporate entity.

Chris Simmons · Answer

Account Closed

Yes...I would like to know how your LLC saved you.  I posted last month looking for examples of how people were saved from disaster by their LLC's and alas....no one that replied had been.

Chris Simmons · Answer

Where did i post it was not easy to get a loan as an LLC?  I said "good luck getting a long term, fixed rate"...not good luck getting a loan.  I am a commercial lender.  I am not worried about obtaining financing as an LLC.  Due to my buy and hold investment strategy, I am concerned about long term rates, minimum requirements regarding loan covenants, appraisals and underwriting, etc.  You want a variable rate, 20 year amm, 5 year loan with a balloon payment and rights of the creditor to call the note due without notice,  by all means, go ahead and finance your rentals as an LLC.  You want easier credit terms, no loan covenants, consumer protectionism, a lower, long term fixed rate, no future appraisals or requests for updated financials....then proceed on to consumer mortgage lending.

Account Closed · Answer

I'm not sure what bankers Chris is referring to about not being as easy to get a loan thur a LLC but that is Hog wash. I just flipped 3 and used a bank for the purchases, I paid out of pocket for the rehab. I have done hundreds of these type of loans and never have had a issue.

@ChrisSimmons

I never saw your question! would be happy to tell you, But to much to type. lol

email and set up a time to talk and I would be glade to tell you.

Account Closed · Answer

Bumping to follow discussion.

Chris Simmons · Answer

And to clarify....the LLC i am slowly forming is to create a Property Management company.  The thought being tenants deal with the property management company, not the property owners.  In my case....at least for now...they are the same person.  This is the best strategy identified for me so far....but again, as long as i make repairs...including plumbing and electric, I will still be personally liable so the true amount of protection is debatable.  My long term plan is to get realtor license, then broker license and manage rentals for others so that's the main driver for forming the property management LLC.  Specific to owning real estate and letting someone else pay to live there...again, play by the rules...do what you are supposed to do....and there is not much liability that insurance won't cover.  Act with reckless disregard or violate the law....you are screwed no matter what and no LLC can protect you from that.

Chris Simmons · Answer

No one but you can decide what is best for your situation.  Talk to bankers on the consumer side and commercial side.  Get a feel for what their lending appetite is and what it will cost you on each side.  You can get a loan as an individual on the consumer side or commercial side....but as soon as you are an LLC, you are locked in to commercial only.  Good luck getting a long term, fixed rate loan...not to mention anything that can compare rate wise to a consumer loan.  I am doing another cash out refi on the consumer side and they know it is a rental property.  I am limited to 10 so i still have room left.  Then...i may be forced over to the commercial side.  Of course, I will load my wife up with loans in her name first so I still have quite a while to worry about that.

People say, get the loan in your name, then quit claim the deed to LLC.  Due on sale clause....some people have issues...some don't.  But insurance....that's the kicker.  Mortgage servicer may not notice the quit claim deed....but the change in insurace....oh yeah.  That will get their attention real quick.  Not only is an LLC more to insure....it may not offer you the coverage you think....more on that later.  Perhaps you are smart enough to just transfer the deed to the LLC but keep the cheaper insurance in your name....nice try.  I can hear the corporate veil getting pierced now.  Why?  Not only is it insured in your name and directly linked to you personally....the ENTITY was not properly capitalized by due to the lack of insurance.  An LLC to simply hold an asset for liability protections is not a valid LLC.  It needs to be properly maintained and capitalized.  Run it right, keep all proceeds in it's name with occasional, minimal, justifiable withdrawals or distributions...you should be ok.  Anything else....POP!

And back to the coverage you expect to have.  In my case specifically, I manage my own rentals and as I mentioned earlier, I occasionally do repairs along with much of the original rehab when i buy the unit.  LLC or no LLC....you are ALWAYS personally liable for any work you do yourself.  If you buy units and outsource all the repairs and rehab and then outsource the management....then you should be covered.  That is not the case for me and a big part of why i have not formed one yet.

I am in the process of forming one to hold my property management company....but as far as holding my mortgage encumbered properties....those are in my own name for now.  They will get moved into individual land trusts later as I navigate this maze of estate planning, but my wife and i will still be the beneficiaries/trustees.  It will add a layer of privacy regarding my growing empire and that's about it.  I will still have access to consumer loan products etc.

Go consult with an attorney and ask questions.  Find the biggest, baddest one you can find and possibly afford.  One that sues other people and is accustomed to piecing corporate veils and knows the ins and outs of llc's.  Then describe what you are hoping to accomplish, your fears, desires etc.  He can then advise you as to course of action or in my case, inaction.  If you just call up an attorney and tell him you want to form an LLC, they will likely just take your order, fulfill your request and let you pay your bill on the way out.  It's like they say...the best defense is a good offense.  That's why i consulted two attorneys I use to sue other people as part of my day job and found out that in my case, for many of the reasons listed above, both now and for the foreseeable future, an LLC is mostly a waste of effort, time and money.

Joseph Zanazan · Answer

Sydney makes a good point about need one under specific circumstances. An LLC does more than just provide you insurance. The LLC creates a shelter which allows you to allocate the cash you use to purchase and the loans you leverage for the financing of the properties in your portfolio that you've decided to acquire throughout the years. Think of it like creating an entity that exists specifically to play the role of the character conducting business activity in your best interest, that will also play as the role of the filter for anything earned or owed. Besides liability protection and overall insurance, an LLC can help you structure your acquisitions in the most tax effective way, ofcourse assuming that without it you would be in a much more pressing circumstance. If you're highly leveraged on your properties, don't really have much personal cash or assets, then i suppose rushing to get an LLC might not be in your best interest. Just like everything else, forming an LLC costs money. You can argue that the money spent on forming an LLC and the annual renewal fee might be more efficiently allocated as money for down payment and/or closing costs until you get a property under your belt and to a point where there is enough equity to protect. I guess just like most business decisions, there is more than one way to look at things. Some people are comfortable having their rentals channel straight through their personal tax returns into their schedule E without the LLC shelter, and some always end-up purchasing the property from themselves with their LLC and position themselves that way. I think if you're eventually planning on making a business out of this, just like any business, you're probably going to want to create some sort of entity sooner or later. Find a good CPA that your business contacts,friends or family members have been using for years and have good things to say about. Contact them, explain your situation and see what they say.

Account Closed · Answer

@MichaelMcdermott

@ChrisSimmons

YES you do need a LLC, The question you should be asking is WHEN do I need one?

The answer to this lies in you! it's call Risk tolerance, How much wealth and equity you have built up and how much are you willing to lose.

Example: If I had a rental unit that I just got a $100,000 loan on and and I rented my own house and had no net worth to speak of then I would not get a llc. Now if I had the same unit with maybe $50,000 in equity and I had a net worth of say another $50,000, and owned my own house for the last 5 years, now I would not want to lose that so I would get a llc.

Your LLC is kinda like insurance but not. It's there to protect your other assets  not like normal insurance were it covers you for a certain amount of loss. Liability insurance will not protect your other assets.

I personal keep 3-6 properties per LLC depending on numbers. I have been saved by my LLC twice in the last 20 years and so glade I got one.

If you would like to talk more let me know.

Should I create an LLC?

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