Rental Property Investor · Pittsburgh, PA · Member since 2014 · 16 posts · 2 votes
Hello Everyone!
I'm currently looking for advice on what route to take as far as financing rental properties through my LLC will be. Is the LLC better than an insurance policy for personal asset protection? The problem is the amount of upfront money required when purchasing a rental through a commercial loan. I want to house my investments in the LLC, however the cost to do so seems high right out of the gate.
I'm currently closing on a property that's $61,500. The lenders want 20-25% down plus closing costs. Then add renovations on top of that and we're looking at 30-40k out of pocket on a $61,000 dollar house. Any advice would be much appreciated.
Most lenders want a personal guarantee, regardless of LLC. That means you are personally on the hook for the mortgage, even if the LLC technically owns the property. After several years of track record that may change--depends on the lender and other conditions.
What are the other numbers on the property? ARV? Expected cash-flow, etc.? If it will be worth $200k after reno, you can refinance and pull most/all of your money out.
Lastly, an LLC isn't insurance and insurance isn't a LLC. If this is your 1st property, don't get hung up on the LLC. If you don't have any other assets, what are you trying to protect?
Thanks for the info, the ARV is probably not going to be anymore than $125k. Looking for cash flow and from using the rental calculator here it's around the $375 mark. It's really the money for Reno and down payment that eat away at profits initially. So far all lenders want the 20% for investments which I knew was coming. But I better get used to this because we want to use the LLC for all properties going forward.
Insurance and LLCs do different things. Insurance pays for out-of-pocket expenses caused by damage to the property or liability on the property, up to the policy limits. An LLC is a stop-loss vehicle that limits your liability to your investment in the asset.
If you have a $1,000,000 insurance policy and someone wins a $2,000,000 judgment, they will take the property and then come after you for the remaining $1,000,000, unless the property is owned by an LLC, in which case they cannot pursue the matter further (unless you have disregarded the corporate separateness of the LLC by commingling personal assets with the LLC assets. So don't succumb to to the temptation of what many people advise, which is to run all sorts of personal expenses through the LLC to save on taxes. This is what gets people into trouble.)
Just because you currently don't have major assets other than the investment property itself doesn't mean that you should not have an LLC. In many jurisdictions, judgment creditors have up to 10 years to collect from you. So, without an LLC, they can garnish your future earnings until the judgment is satisfied or ten years have passed.
Also, don't put multiple properties under a single LLC (unless it's an umbrella LLC over several property-level LLCs) because a creditor can reach any asset under the LLC if they have a claim against any other asset under the LLC. Be sure to put each asset into it's own LLC.
If most of your wealth is tied up in properties, it is pointless to have them under one LLC, where they are not protected from each other, while your scant personal assets are protected. But, if you are accumulating lots of real estate, your personal assets are also going expand, so you need to protect them, too.
Here's info on putting rentals into an LLC (or, at least why I didn't use one for mine), but more than the article, read through the comments as there is a lot of additional info in there-
Especially because you are talking about one low-priced property, I can't imagine the LLC would make sense. Expensive, limiting, and doesn't provide full protection anyway.
The real estate investment field is split about 50/50 on the need or real benefit of a LLC. Insurance is obviously of prime importance. That is a obvious decision.
The necessity of having a LLC is questionable as no investors having a LLC have ever posted first hand experience of being protected by one. That would either be due to none having required the protection or the LLC failed to protect and they are no longer on PB.
My guess is that in the real world a LLC is more for psychological protection. Unfortunately it does encumber investing and you will still likely need to provide a personal guarantee to banks.
Insurance is more important than an LLC to get your deal done. No bank or lender will close on the loan without proof of Property & Liability insurnace. An LLC is not required to get the deal done as I'm assuming the debt you are getting is not non-recourse anyways. Please feel free to DM me with any questions. Best of luck!