LLC for rental property?-Still undecided

19 Replies

Good afternoon BP Members,

I am in the process of acquiring my second buy and hold long term rental investment property. I am still undecided on whether or not to start an LLC at this point. For my first property, the tenants are friends of mine and I was less experienced so i never even considered it. I am aware that i can not get financing through a new LLC with no track record, this necessitates that the financing be in my name and thus property ownership as well. Then there is the challenge that of the due on sale clause in most mortgages that will not allow transfer of the property into the LLC. I have been told by an investor i know that even though the property will not be owned by the LLC that it can still still be ran by the LLC. I'm not sure entirely how this would work. I like this idea due to the fact that the rental seems more official and may look better in the eyes of tenants. The lease agreement would be between the LLC and the tenants, however i would act as the landlord and not use a property manager.

Has anyone had experience with using an LLC in this fashion? Also, the process of starting an LLC on the Colorado secretary of state website seem simple but does anyone have any advice on the process? Are there any benefits of using a lawyer to form the LLC considering the scale of my current holdings(just 2 properties)?

I still plan on getting an umbrella insurance policy for both properties for protection there and i figure any Possible LLC liability protection is good idea as well

I am not an attorney -

I have used my personal name for financing on conventional loans for almost every property I own (10+) and later deeded into my entity. I put asset protection above, in my opinion, the nearly zero chance of the due on sale clause being called.

Also very important to know that creating an entity on the SOS site is only one of many steps in operating an entity and the supporting docs must follow - operating agreement, resolutions, minutes, bank account etc. Attorney will cost money but if you are serious about continuing to acquire rental property the cost is necessary. There are enough firms in our market that churn these out for a minimal cost to you. With out the supporting docs you have next to zero protection in your entity.

I formed my LLC and deeded my vacation rental property into it only recently. I did this for the liability protection, and I did not need a lawyer for the LLC creation or for the deed. It's a little bit of work, but nothing that I couldn't handle, with a little research. I watched a few videos too, from Aiden Kramer. She's a Colorado lawyer that does YouTube videos on this stuff.

The first step after creating the LLC is a bank account. For this, you'll also need an employer identification number (EIN). I think Ms. Kramer has a video on Top 10 things that every LLC needs, so be sure to check that out. She also recommends a separate LLC for each property as best practice. I haven't decided if I plan to go this route yet (I'm leaning towards not), but I'll cross that bridge when I acquire my next property.

I have formed two LLC's with properties from my Dad's estate. The paperwork is not that bad. Think about the other advantages too..... continuity, governance (especially if you have other members)

So what kind of 'investment property' is this @Jeff Metzger ?  A strip mall?  Mobile home park?  Self-storage?  Restaurant franchise? A house? An apt bld?  Worth what? $500k?  $50k? All suggestions so far are based on an assumption of some sort I'd imagine.   The proper answer could be different for any of the above. GIGO.

A very important 'legal' advice question has been posed that has ramifications that could last for generations.  Every time someone wants to get sophisticated with little houses it boggles the mind the quantity of potential problems with financing, insuring, title insurance, etc that could be deemed invalid when transferring an asset out of one's name into an entity.   At least talk to your lender, your hazard insurance provider, your title co, etc about the potential problems prior to acting.

After seeking competent legal advice, I formed a multi-member LLC with my wife to buy (from the beginning) any 'commercial' apt bld 5+ units. Strong op agreement and no surprise gotcha's later after quitclaiming it. We own all of our little houses personally with good liability insurance. Seek legal advice on this, but be aware that their job is to protect you from the worst-case scenario, even if the probability of it is less than one in a million.

Your investor friend is probably referring to establishing a mgt co in the form of an LLC to manage your property(s). I've formed mine as an S-corp. Another question for a pro. Cheers!

 @Steve Vaughan

The property would be a Single family home in the 300K range. Do you think going through the process of starting an LLC for this property now(as a learning experience) would benefit me in the future as i hope to move into larger scale "commercial" properties at some point in my career?

From reading forum posts there is a lot of controversy on this topic and strong opinions on both sides of the argument, can you give a few examples of how starting an LLC for a SFR rental property may be a disadvantage?

Can you elaborate a little more on starting and LLC as the management company and how that would work? also would that be beneficial for a small 2 property operation?

I appreciate the advice, just trying to gather as much information as i can to make the most informed decision

Llc only has value re liability containment if the Llc is on title. Banks won't allow you to quit claim into an Llc usually.  They'll not say y/n just complain if you do.  And it may take some time for the bank to react.  

The llc or not question mainly applies to cash held rentals and commercial props like MF etc. 

@Jeff Metzger  'can you give a few examples of how starting an LLC for a SFR rental property may be a disadvantage?'

Search - 'What do I do now that the title insurance policy and my hazard insurance policies are no longer valid because I transferred ownership out of my name?"

Also search - 'My lender has called my loan due for violating my DOS clause. What do I do now?"

Also search- 'Future buyers of my property will no longer be able to obtain title insurance because I filed an incorrect and invalid quitclaim deed. It clouded and completely screwed up the title chain. What do I do with an unmarketable title?

Potential problems transferring out of your name after the fact.  Lots of info on here about the pluses and minuses.   

"Can you elaborate a little more on starting and LLC as the managemnt company and how that would work?"  Nope.  Mine is an S-corp.  I hold passive activity in LLCs, Active activity in an S-corp.  Will need more in-depth analysis than I am qualified to or want to give. Good luck with your decisions!

Originally posted by @Account Closed :

when u put your property into an llc, you have an added layer of protection should someone decide to sue you. if you do not take any profits from entity(llc) the person suing cannot collect. and if they do try, they have to pay taxes on property till they collect. most lawyers will not file against an llc as there is no money to be made. if they can prove you negligent as manager claim can only be made on propertys in that specific llc.

I'm not going to get involved in the whole LLC debate again, lest some cowboy come along and accuse me of wanting to deprive the children of landlords of their college funds. However, this statement: "most lawyers will not file against an llc as there is no money to be made" is simply false.

Okay, I'll add my $.02 in Bullet form: 

1. Get an LLC - the last thing you want is to lose everything you own from some bonehead tenant and his attorney who feel they can get something for nothing. Liability is limited to that company (the llc which holds the rental) should they "win" a claim. DO IT NOW!

2.  STOP trying to sidestep the attorneys - the investing landscape is littered with broke people from the BiggerPocket Tribe who feel they can do anything without paying for professional help.  Continue to Treat this as a hobby, and you'll eventually regret it.  If you want to own a business, then it's time to put your big boy pants on and become a business owner, and stop listening to others on this forum who are rookies at best.  

3. Before I sold my 400 rentals, we held each house, apartment, etc. in a separate LLC. No bank screamed foul, and I didn't have to file separate Tax Returns, or have any insurance or other issues people claimed above. They all fed into my S-Corp, which is the active Management company (see somebody's post above).

Not ranting, just giving you a professional push to hire an attorney to give you the framework that fits your situation.  

Out.....

Originally posted by @Account Closed :

when u put your property into an llc, you have an added layer of protection should someone decide to sue you. if you do not take any profits from entity(llc) the person suing cannot collect. and if they do try, they have to pay taxes on property till they collect. most lawyers will not file against an llc as there is no money to be made. if they can prove you negligent as manager claim can only be made on propertys in that specific llc.

 Not to be too harsh, but literally none of this is correct.

Originally posted by @Travis Sperr :

I am not an attorney -

I have used my personal name for financing on conventional loans for almost every property I own (10+) and later deeded into my entity. I put asset protection above, in my opinion, the nearly zero chance of the due on sale clause being called.

Also very important to know that creating an entity on the SOS site is only one of many steps in operating an entity and the supporting docs must follow - operating agreement, resolutions, minutes, bank account etc. Attorney will cost money but if you are serious about continuing to acquire rental property the cost is necessary. There are enough firms in our market that churn these out for a minimal cost to you. With out the supporting docs you have next to zero protection in your entity.

This is good advice. There are a lot of ways to avoid issues with the DOS clause. One would be to buy the property in the LLC and guarantee the loan personally. Whatever you do, don't do it yourself - use an attorney. You're looking at a few hundred dollars to ensure that it's done right. At least that way there's someone to sue if it gets screwed up!

Don't be discouraged by the generally held belief that banks won't loan to a new LLC. I am a new investor and purchased my first six properties June - October of this year. None were purchased with conventional financing. I spent about 2-3 weeks meeting with banks to find one willing to work with a new LLC. Two local banks came through, although both have required personal guarantees to this point.

The first house was purchased with cash, so no problem getting that one with the LLC.

The second one was a foreclosure and the selling bank (JP Morgan Chase) refused to allow the Buyer to be an entity. I simply spoke with the bank to allow the purchase in my name and then immediately Quit Claim deed the property into the LLC with the financing in the LLC's name.

The last four purchases were bought and financed by the LLC.

My limited experience is that only the local banks will work with a new LLC like this. The loan terms are not as favorable as a conventional loan, but I have the liability protection I want.

The loans have been between 4.5% to 5.15%, 20 year amortization, with a balloon payment in 3-5 years.

I would definitely start the LLC now even if you don't use for awhile. Get a bank account and credit card and start building the LLC's credit history. I'm not familiar with CO entity law, but no operating agreement or minutes are required in my state. As a precaution, I do draft a resolution authorizing the LLC to purchase each property and have all members sign each resolution.

Cheers!