should i create LLC for safety for rental properties?

5 Replies

What do most rental property owners do? Do they hold properties through LLC or just on their name?

Am seeing scary articles about getting sued and attorneys chasing your personal assets on top of insurance cover.  

@Raj Kannan first of all, if you are just starting out you probably can't do an LLC if you are getting conventional financing. Secondly, if you are in a decent area and you are running a good operation, you probably are not at risk quite as much as you may think. You can read about this question quite a bit here on BP, but what most people do when they are starting out is they get an umbrella policy.

@John Warren is correct in that financing with an LLC is more of a challenge, however, IMO you should establish an LLC and put your property into it. If you do your research, you should be able to determine how to structure that LLC so you do not run afoul of any due-on-sale clauses on the financing.

If buying little houses with a mortgage, no LLC.

Commercial property or buying with cash and don't plan to refi ever, LLC.

I've had dozens of houses over my 17 years and just carry good insurance, including an umbrella policy.  

I've had commercial assets since 2003 and always buy with an LLC.

An LLC on a house will subject you to crummy commercial loans with adjustable rates and calls, bothering you every year to submit your financials.

Don't let blind fear drive your decisions, especially from attorneys that make money setting them up for you,

Hey @Raj Kannan ,

It really depends on your situation. When meeting with clients the first order is to discuss (A) their personal assets, (B) break down their current investments portfolio and other business ventures before discussing any (C) future goals. Each of these variables will dramatically change the advice for the individual asking this question. I often break it down into the "five pillars" of protecting your assets.

1st pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur.

2nd pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

3rd pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property they can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE- check out this article to learn more.

4th pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

5th pillar is owning everything anonymously. If people don't know what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.

If you have a small investing portfolio and limited personal asserts, then you don't need to dive into a complex asset protection strategy - just operate your investments as best as you can. But if you have more at risk, then you want to start implementing more of these pillars.

This isn't legal advice, just my opinion as a real estate investor.