Should I Create a Rental Property LLC?
My wife and I currently bought our first SFH and kept our condo as a rental property. We require our tenants to have renters insurance and we have a homeowner's policy with an umbrella policy to ensure we are covered in a worst case scenario event. We want to eventually use the equity/profit from our condo to purchase future rental properties and had thought about starting an LLC to run our real estate "business" as an actual business. We understand there are benefits of running your life like a business and an LLC can help. We have also read that you can't transfer the deed of a house to the LLC without full ownership (we have a mortgage on both properties) but can still create a LLC to operate as a property managing company. I'm wondering who has experience in this field and what you've found most advantageous from a protection, tax, and functionality standpoint.
Hi Paul, if you have a mortgage on the property, transferring title to your LLC would technically trigger the due-on-sale clause of the mortgage. While most lenders don't do anything about it as long as the payment is being made, I have had clients who had the clause called and their loan called due. So tread carefully with that. If you have an LLC and don't actually own the property in your entity, it won't give you the asset protection you are seeking. It may be wise to open your LLC and use that going forward to try and purchase property in the entity name. You would have to get commercial financing of course, which may be difficult for a new LLC. I would suggest you start speaking with some lenders to get a feel for what they require. I hope that helps!
Hi Dan,
Thanks for the response it does help a bit. I guess what I'm wondering still is how can I "run my life like a business" without owning a business. For example if I wanted to buy something or do a home project on the rental property how do I clearly make that a business expense? Can I open an LLC and put a starting fund in a new bank account for the LLC and have that account be where rent checks are deposited and expenses come out of? In this case it may just be more of a property managing company and not the actual owner of the property from a legal standpoint but wouldn't that then allow me to have "business expenses" as opposed to me paying out of my personal bank account for the rental property?
Thanks again,
Paul
You can run it like a business without a LLC by opening a separate savings and checking account to segregate the funds.
Get a biz checking account and an umbrella policy.
Be sure to consider the impact of owning in an LLC vs your own name on your financing options as you move forward with more properties. Generally you can get better terms for your loan if you own in your own name. You can call some of the local banks in your area and talk with the commercial lender (not the mortgage lender) to get an idea of what their requirements would be for a loan to your LLC for a rental property.
If you do decide to continue to purchase in your own name then you are relying on the umbrella policy for additional liability coverage. It also depends on the other assets you own. The higher your net worth the more important it would be to create the separation of your rental assets from your personal assets. If you don't have much equity in your personal home and just a moderate amount of liquid assets then the amount of money someone could go after if they sued you is lower.
I agree with the other comments that it is not necessary to have an LLC to "run like a business". We started out just by having a separate rental checking account and a rental savings account to hold the security deposits. Then you need to track all of the transactions so you can do year-end (or more frequent) reporting for both tax purposes and to just see how your business is doing. I'd also recommend using MileIQ or some other mileage tracking app to keep tabs on the distances you are driving for business.
Thank you so much for the great information! We currently have it set up with it's own checking and savings account so we will keep it that way for sake of convenience. I appreciate the advice.