Investor · St. Johns, MI · Member since 2016 · 72 posts · 20 votes
Up until this point, I have only flipped houses, but I want to begin searching for rental units to purchase. I have heard it is best to start an LLC for each rental property you purchase, so that if you get sued, they can only go after the value of one property, instead of all of them. Is this true? If so, how do you make this happen logistically, because you would have to put the offer in on the house, and once it was accepted, file for an LLC, but that can take a lot of time. So what is the best way to make this happen?
Rental Property Investor · Huntsville, AL · Member since 2013 · 419 posts · 323 votes
10y
When your LLC gets sued, who pays for the lawyer to represent the LLC? If your asset does not maintain enough insurance to cover a claim or you don't keep up with the added expenses to maintain the LLC as a separate entity (comingled accounts, personal checks paying for expenses, etc.) will a judge pierce the corporate veil and come after you anyway? For most situations, and until you get to a certain size, an umbrella policy makes more sense. If you have a $1,$2, or $3 million dollar umbrella policy, you have a $1,$2, or $3 million dollar legal team that will go to court to reduce or eliminate your liability. If you pay for sufficient coverage on your insurance and umbrella policy, then why do you need the overhead of the LLC? If you don't have this coverage, then the judge is going to start looking at you personally.
Real Estate Agent · Grand Rapids, MI · Member since 2014 · 493 posts · 200 votes
10y
Still scratching my head on why a lender that just loaned you money would tell you that? The Due on Sale clause is at (typically) the discretion of the lender, i.e. they don't have to execute it if they don't want to. And, for heaven's sake, why would they? They just made a loan to you to earn interest? Maybe they were talking about "uncapping" your tax assessment? That still isn't a problem if done correctly.
Professional · Roselle, NJ · Member since 2016 · 25 posts · 4 votes
10y
I wanted to add some additional information to @Joe Splitrock excellent real-world scenario, and @Susan M. statement regarding member managed LLCs
The very nature of an LLC is to provide asset protection. This protection is not absolute, and it takes careful management. However, the protection does extend to members of LLCs even if they manage their own operations.
Can the owner of an LLC be sued personally? Yes, however the level of fault is higher to make them personally liable.
In states that follow traditional premises liability laws, a property owner has a duty to all customers who enter the property to conduct business. This responsibility is to fix problems on the property they either knew or should have known about. For example, when you walk into the grocery store and there is a spill in one of the isles, the store owner has a responsibility to clean up the spill. That being said, there is a degree of "reasonableness" at play. The court will need to determine if the store acted reasonably in cleaning up the spill? How long did it take the store to discover the spill, what steps were taken once discovered? Was there a wet floor warning sign placed while they went to retrieve a mop? Property owners are not expected to know what is happening instantaneously, they have a "reasonable" time to respond under the circumstances. Property owners will lose a lawsuit if the court determines that the property owner did not live up to this "reasonable" standard and determines that they "should" have inspected the area more frequently or fixed the problem sooner.
Owners of the LLC are held to a different standard when determining their personal liability. In these situations the court asks if the owner acted intentionally or recklessly. Recklessness is a harder standard to prove. Reckless behavior is when drive 40 miles over the speed limit, or when you smell gas and decide to check by lighting a match. It is not merely that you "shouldn't" do something, it is when the action is downright dangerous.
Assuming you have a LLC setup for each property and you've exhausted all of the insurance money, the plaintiff's attorney is going to attempt to go after the assets of the LLC itself. In order to show that the LLC, as owner of the property, should pay, the lawyer only needs to show that the LLC owner "should have done a better job" in order for the lawyer to go after the personal assets of the owners of the LLC the lawyer needs to show that owners were acting intentionally or recklessly.
The difference between whether you want to be judged by a "should have done better" standard or a "downright dangerous" standard is the difference between whether you feel the modest annual filing fee for the LLC is worth the risk to you.
Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
10y
@Kurt Bouma That is correct. It's a necessary risk you have to take. Pretty standard stuff...exists with every institutional mortgage. The general concept is that the bank won't call a performing note due...but it does happen.
Investor · Mahopac, NY · Member since 2015 · 110 posts · 32 votes
10y
I read through most of the comments, and not sure anyone mentioned the risks of an acceleration clause. If in the deed the lender included an acceleration clause, and you happen to transfer the deed without approval from the lender they may force you to pay the remainder of the loan.
Edit: Well never mind I did not see the second page it was mentioned. Sorry!
Real Estate Agent · Grand Rapids, MI · Member since 2014 · 493 posts · 200 votes
10y
I've actually only heard of one case where a lender threatened to use the due on sale clause--the investor said, "go ahead." It never happened. I'm certainly not saying it wouldn't ever happen as they generally have the right to do so but most won't as long as the loan is current, etc. I suppose they might if they feel like your portfolio is getting too risky for them. But, this would seem very odd with a nearly refinanced loan. (And, no, I'm not saying you can get around the due on sale clause if they choose to enforce...I've just haven't heard of it happening if you show that the LLC is a single member LLC in the investor's name.)
Residential Real Estate Broker · Chicago Suburbs, IL · Member since 2013 · 1k+ posts · 594 votes
10y
@Ethan Painter I can't find lawyers who have the same answers with regards to LLCs, much less landlords on this website. And then series LLC, single member LLC, lots of debate there too. What @Joe Splitrock said above makes sense. There are also a zillion other threads on here debating LLCs. It really depends on what assets you have to protect, really, *if* you have assets to protect. Lawyers like to sue deep pockets. Why? Because lawyers don't like working for free. LLCs and land trusts can slow down lawyers from taking smaller cases because they fear they won't get paid if there is no money behind the LLC, landtrust, ect.
Lawyers will sell you LLCs and landtrusts and insurers will sell you millions of insurance coverage by playing up your fears and worries. And they will *forget* to tell you after they set up your ten LLCs for your ten houses that you now need to have ten bank accounts.
If you do go the LLC route, you won't be able to get a traditional mortgage if the property is titled in an LLC. You'll need to wait until after your financing to put it in the LLC. Unless you want to close in the LLC, pay to take it out to get your mortgage, and put it back in. And then you get to worry about the "due on transfer clause" and all the opinions on that as well.
I'd love to meet an actuary who can actually tell me the odds of any of the things we investors worry and debate about actually happening. We are all worried about all this stuff, and we are all probably a zillion times more likely to die in a car accident...
Attorney · Orlando, FL · Member since 2014 · 94 posts · 85 votes
10y
I have heard of investors using land trusts to get around due on sale clauses and posted a blog article about it on the Facebook group Land Trusts for Investors. There was a little back and forth with somoene who does quite a few of these. You all might find it useful in the discussion.
