Is forming LLC for my rental properties a good option?

Question

I am currently owning two rental properties, and I am planning soon to expand my little empire by buying a few additional properties. I have done a little research, and it seems like there are many benefits of running it under LLC, and there are none cons. Do you think it is wise to do so? Are there any drawbacks of running the business under LLC instead of personal business?

Justin B. · Answer

There are so many things to consider that books are written about it. In a forum post, I can only hope to simplify. If buying SFR's, it probably doesn't make sense. If buying a commercial property, absolutely, no question.

To answer your question with what little I know about your situation, I assume your 2 properties are SFR's and you're looking to get a few more. I'd say stay personal because as Bill pointed out, LLC's can't get "mortgages" in the sense you know them. They can only get "loans" with the property as collateral. These loans can be called In-House Loans, Commercial Loans, Business Loans, etc, but the one constant is that you typically pay 1-2% more on the interest rate, it's only amortized for ~20 years as opposed to 30, and they usually come with 5-7 year balloon payments (meaning you have to refinance). Plus, banks don't like them (In general). They aren't backed by the government and are riskier than traditional mortgages because the bank is using their own money instead of the governments. That doesn't mean they don't do them, it just means they are harder to get and more scrutiny is put into your application. AND on top of that, you are still going to have to personally guarantee it (99.9% of the time).

I do like the protection an LLC affords but in your case (what little I know from your post), I'd keep going personally as long as you can. Then go from there. I'd suggest an umbrella policy as a minimum.

Steve Vaughan · Answer

Like @Justin B. points out, it's all about asset type. Most ask this question and don't tell us what they are investing in. That (hopefully) is the first thing an attorney would ask you.

Are you just buying houses? Apt buildings? Strip malls? MHPs? Mini storage?

For my little houses with debt, I don't bother. Too many issues with borrowing and insuring a little residential house inside a commercial business entity. I just act above board and carry good insurance. When my houses are paid off I will revisit the issue.

For my commercial apt buildings, they are in LLCs. A large building may have it's own, a couple smaller ones may be together. It's about portfolio value then.

Bill Schrimpf · Answer

@lucas b

Check with your preferred lender. Many lenders don't like writing residential loans to an LLC. You then run into the situation where you purchase under your name and then quit clam to LLC, possibly triggerin the due on sale.

Take a look at trusts. Lenders understand those better and they provide many of the same benefits.

Brandon L. · Answer

as far as due on sale clause, most people are aware of the risk and there are smart people are on both sides of aisle that either say to take that risk or don't. I have not met anyone that had the bank call their loan due but my network is only with local investors and I'm new to the BP world. I would love to hear from people that have been successful with deeding property to Llc and not had due on sale clause excercised as well as from those less fortunate. Please share your experiences.

Brandon L. · Answer

the members at my local reia advise against using quitclaim for the deed transfer because they said it voids your title insurance. Once transfered have the original title company from purchase reissue title policy to Llc. The local companies around me generally offer to do the update for free.

Steve Vaughan · Answer

if you do transfer these to an LLC, don't forget to square away your title insurance and hazard insurance. The beneficiary will change. So many are running around uninsured in the name of asset protection. Woo-hoo

WA is a pain with quarterly B&O tax reporting. All 'businesses' have to do that. Do what you like, Lucas!

Lucas B. · Answer

But I would also like to protect my business in case I personally will be sued. I also have another profession that brings me quite a bit of income, and need to protect as much assets as possible (that is why I would like separate those two). For now, those are single family houses, eventually, with a little luck, lots of research, and good judgment I might purchase something bigger in the future (was thinking about it). What type of insurance would you suggest, what should I search/shop around for?

Justin B. · Answer

There are strategies like that but due to the complexity (it has to be done correctly), you really need an attorney involved for planning. With just a few houses it may be more hassle than it's worth. Depending on where you setup the LLC and what the fees are for all that, you could easily dig a deep hole into your profits just keeping your entity structure straight.

Lucas B. · Answer

Hmm, it is never that easy. Yes, this is correct, my mortgages are SFR. I am looking for LLC since with this I could separate my personal assets from the business, and vice versa. How about this scenario: Form a LLC, set up a trust, make the trust a member of LLC, and then transfer to the trust/LLC

Is forming LLC for my rental properties a good option?

Is forming LLC for my rental properties a good option?

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