Rental business LLC?
FL · Member since 2012 · 10 posts · 0 votes
Rental business LLC?
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Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
13yJames, if she will not listen then what is the point? Does she have an attorney and is she competent? If you suggest she seek legal counsel you have done your job IMO. It is funny how kids think they need to control their parents. She has done pretty well on her own.
If I were you I'd be focusing on building your own portfolio. Maybe at some point she will want to sell and you can pick them up at a good price.
Don't feel bad my parents never listened to me and did just fine. After all, it is their stuff and if they choose to lose it in a lawsuit they have that right.
42 Replies
- Indianapolis, IN · Member since 2012 · 47 posts · 46 votes13y
Depends on what your states laws are. If you're in a state with fairly landlord-friendly laws, a large umbrella liability policy will probably be just fine. Each property probably has its own $500k or $1m liability policy on it already, too.
- FL · Member since 2012 · 10 posts · 0 votes13y
Thanks for your reply.Not sure what the laws are in Missouri.
- Lombard, IL · Member since 2012 · 12 posts · 2 votes13y
I am starting out and considering setting up a Series LLC to minimize risk. However, it will add some additional work for her because each LLC would need to have its own bank account/checkbook, accounting, expense tracking. I think Quicken or a similar tool would be money well spent.
- Accountant · Draper, UT · Member since 2012 · 24 posts · 5 votes13y
QUicken is not made for businesses. I would use Quickbooks Pro if you are looking at a software to use. Regardless of state law, a series LLC or just a management company that owns a bunch of single member LLCs(SMLCCs) is a good move. I am not an attorney, but i think if a tenant or some crazy wants to sue, i'm not sure the personal assets would be protected. On another note, IMO, I would rather have my primary paid off and have a mortgage on my investment properties.
- FL · Member since 2012 · 10 posts · 0 votes13y
Well thats one person saying I should setup LLC's and one person saying I don't need to.
Yes I agree I would rather she had the mortgage agianst the rentals.I tried to tell her that when she refinanced
- Orlando, FL · Member since 2009 · 2k+ posts · 282 votes13y
Originally posted by James Collins:
Well thats one person saying I should setup LLC's and one person saying I don't need to.Yes I agree I would rather she had the mortgage agianst the rentals.I tried to tell her that when she refinanced
It may be difficult to get 12 paid off properties mortgaged enough to where the creditor has little to go after (although I'm not sure about that).
I would call some insurance agents in your area. Find out what their rules about insuring LLCs: will they allow more than one member per LLC (so that she can get the charging order protection, if that's of concern to you). Will they allow more than one property per LLC? Get a quote on one or more properties to see how much higher the premiums will be vs. owning in her own name.
Once you have that info., decide how many LLC's she wants to form. Then add up the annual state filing fees, registered agent costs, and formation costs and see if it's worth it to you. Also find out what fee the title insurance company will charge to do a reissue credit, or a new title policy, if necessary. Also the cost of doing a warranty deed transfer for each property (I'm not sure if a quitclaim is an effective way of transferring in this situation).
Alternatively, maybe she could leave the houses in her name and get a general liability, commericial or blanket policy that covers more than the standard umbrella policy? That would be much simpler than forming the LLC's and transferring all the properties. I know very little about these other types of policies though so maybe some else here can chime in.
- Orlando, FL · Member since 2009 · 2k+ posts · 282 votes13y
Originally posted by Kumar R:
I am starting out and considering setting up a Series LLC to minimize risk. However, it will add some additional work for her because each LLC would need to have its own bank account/checkbook, accounting, expense tracking. I think Quicken or a similar tool would be money well spent.Good idea, but I don't think series LLCs are recogized by the courts in every state.
- Orlando, FL · Member since 2009 · 2k+ posts · 282 votes13y
James Collins
Another thing to think about: assuming she forms four LLCs with three houses per LLC, she's going to need to form four new bank accounts, possibly eight if the state mandates a separate account for security deposits. Checks and documents will need to be signed in the proper way. Screw ups could potentially render an LLC pierceable by the the creditor, and then the LLC effectively becomes useless.
Is she the one managing the properties and writing the checks for repairs, etc., or is someone else doing it? If she is resistant to the very idea of the LLC, is she going to be willing to put in the attention to detail to manage the LLCs properly?
- Lombard, IL · Member since 2012 · 12 posts · 2 votes13y
Setting up LLCs is the easy part. Maintaning the separate books is where the challenge comes in.
If a Series cannot be formed, the fees are going to be considerable. Would it be advisable to put all of the rental properties in a single LLC and then get a sizable insurance policy to cover lawsuits, etc? A related question, can a laywer suing you determine the amount of insurance policy on a property/LLC?
- Orlando, FL · Member since 2009 · 2k+ posts · 282 votes13y
Originally posted by Kumar R:
Setting up LLCs is the easy part. Maintaning the separate books is where the challenge comes in.Would it be advisable to put all of the rental properties in a single LLC and then get a sizable insurance policy to cover lawsuits, etc?
That's what I was thinking too for this situation. It's not ideal because it's still putting all the eggs in one basket, but if you think about it's what many people have to do. If you have a 20 unit apartment building you have to hold the entire complex in one LLC because it's a single structure.
- Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes13y
Yes, I think you should transfer the rentals to an LLC(s). The objective is to erect firewalls around the equity, both explicit (insurance, entity structure) and implicit (murky, difficult to trace ownership). As far as the latter protection, it will be obvious that she owns the property in the chain of title, no getting around that. For the former, of course start with a strong insurance firewall, then you have to judge how many LLCs you need based on equity exposure that can be borne, as well as the incremental costs of maintaining the LLCs.
You are trying in this case to protect the rentals from your mother's personal liability, more so than the other way around, since her net worth is more so in the rentals (at least I think, based on what you said).
- FL · Member since 2012 · 10 posts · 0 votes13y
Thanks guys.I understand seperate LLC's would require different bank accounts and paperwork.
She would keep up with it once it's setup. I do all the mantainance/repairs.
Perhaps one Setting up one LLC would be the best thing to do? - Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes13y
How many LLCs depends on how much total equity she has in her rentals, and how large a % of her total net worth this is. Many seem to gravitate around $250K of equity per LLC.
Also, properties that are higher risk may need to go into their own LLC to isolate them from other properties. Remember, each LLC, if run property, stands alone for liability protection. The cost of maintaining the LLCs is really pretty trivial in most states. If she's the sole owner, she doesn't need to file a partnership return, just flow them to the Sch. E, so no extra tax work. As far as setup, if you need several, you can hire an attorney to do one, then duplicate it for the others. So a one-time attorney fee, then modest annual state fees (modest outside of CA, that is).
- Orlando, FL · Member since 2009 · 2k+ posts · 282 votes13y
Originally posted by David Beard:
How many LLCs depends on how much total equity she has in her rentals, and how large a % of her total net worth this is. Many seem to gravitate around $250K of equity per LLC.Also, properties that are higher risk may need to go into their own LLC to isolate them from other properties. Remember, each LLC, if run property, stands alone for liability protection. The cost of maintaining the LLCs is really pretty trivial in most states. If she's the sole owner, she doesn't need to file a partnership return, just flow them to the Sch. E, so no extra tax work. As far as setup, if you need several, you can hire an attorney to do one, then duplicate it for the others. So a one-time attorney fee, then modest annual state fees (modest outside of CA, that is).
But the insurance premium is about double for an LLC as for your own name (at least in my area).
- Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes13y
This is a question for an attorney but at a minimum I would think she needs to separate her business and personal interests. A common scenario I see is the home in a trust and the rental properties in an LLC with significant liabity limits.
- 13ySteven Hamilton IIPro MemberAccountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
LLC cost in Missouri is not exhorbitant at all at $50 online. You will need Articles of Organization
Each LLC should already be keeping adequate records individually. Quickbooks can work as can Buildium. I have another client that uses the free program "Wave Accounting".
Honestly, I would rather have the loans on the rentals as well in an effort to decrease AGI and any deductions that are limited from there. I would also keep at least a 100k HELOC on the primary residence if it can be afford and invest the funds in notes or such.
Each property in an LLC will require no other paperwork than an annual report. After the cost of the annual report for 12 properties you could have already increased your Umbrella Policy significantly.
Bottom line a significant Umbrella policy and adequate landlord policies on each property should be had and then I'd look at the requirements of any LLCs.
-Steven
- Orlando, FL · Member since 2009 · 2k+ posts · 282 votes13y
Steven Hamilton II
Would she have to get a commercial umbrella policy for 12 properties? I've been told by the personal lines agents that the standard umbrella policies will only do up to 6 or 7 properties.
- Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes13y
Originally posted by Bienes Raices:
But the insurance premium is about double for an LLC as for your own name (at least in my area).
Bienes -- I was able to do add a *few* rental properties (in an LLC) with my personal lines carrier and the cost was not higher. But I was very limited in how many props, maybe 4 or so. For larger #s of rentals, they definitely required you go with a commercial policy and the cost was higher, not double, perhaps 40% higher. It's a consideration, but it seems a lot of personal lines carriers won't even do a large number of rentals, at least that's what I found when calling around awhile back. But there may be options.
I do know that there is huge pricing variability, and it can be difficult to make sure that you're comparing apples to apples on coverage. The big REI insurer that you hear about all the time (nreinsurance.com) was not at all competitive for my portfolio, as I recall. I'm using a local agent that places all 1-4 family props through USLI on a blanket. Larger props have their own policy. It's on my list to continue to research the insurance market for best combo of price and service/reliability, it's a substantial expense for sure, and a very good point that you bring up.
- Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes13y
James, if she will not listen then what is the point? Does she have an attorney and is she competent? If you suggest she seek legal counsel you have done your job IMO. It is funny how kids think they need to control their parents. She has done pretty well on her own.
If I were you I'd be focusing on building your own portfolio. Maybe at some point she will want to sell and you can pick them up at a good price.
Don't feel bad my parents never listened to me and did just fine. After all, it is their stuff and if they choose to lose it in a lawsuit they have that right.
- Orlando, FL · Member since 2009 · 2k+ posts · 282 votes13y
Originally posted by David Beard:
Originally posted by Bienes Raices:
But the insurance premium is about double for an LLC as for your own name (at least in my area).
Bienes -- I was able to do add a *few* rental properties (in an LLC) with my personal lines carrier and the cost was not higher. But I was very limited in how many props, maybe 4 or so. For larger #s of rentals, they definitely required you go with a commercial policy and the cost was higher, not double, perhaps 40% higher. It's a consideration, but it seems a lot of personal lines carriers won't even do a large number of rentals, at least that's what I found when calling around awhile back. But there may be options.
I do know that there is huge pricing variability, and it can be difficult to make sure that you're comparing apples to apples on coverage. The big REI insurer that you hear about all the time (nreinsurance.com) was not at all competitive for my portfolio, as I recall. I'm using a local agent that places all 1-4 family props through USLI on a blanket. Larger props have their own policy. It's on my list to continue to research the insurance market for best combo of price and service/reliability, it's a substantial expense for sure, and a very good point that you bring up.
David Beard Thanks for the information...
I guess I have soured lately on the LLCs because of the insurance situation in this state. My impression is that the carriers that still do business here are trying to cut out risk anywhere they can because of future hurricane possibility. I've been told that most carriers will no longer write the liability part of the LLC policy because they're afraid that the LLC may own other businesses besides the rental property.
I currently have one "high risk" property in an LLC and the rest are in my own name, under an umbrella. I'm concerned that if the carrier that does the LLC policy decides to drop liability in the future that I'm going to have to deed that property back into my own name in order to get insurance, or find some other workaround.
- FL · Member since 2012 · 10 posts · 0 votes13y
Thanks guys,Thats a lot to take in.
Basicaly I'm in this together with her.I've moved back home because she is unable to keep up with it physically and it cost her too much to pay someone else to do the work.So now all she does is the bookwork.I am running everything else.I am currently living in one of her houses so I guess she actually has eleven rentals.We are planning on expanding the business.I'm looking at some houses to buy and either flip or rent out if they don't sell.I've been a carpenter for 20 years and can pretty much handle any kind of repair/remodel.I'm not to sharpon the business side of things.So I will probaly be posting a lot more questions.
- 13yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
James Collins - There is some good advice on here from some people that speak from experience. On my side, I believe what David Beard said early in the thread. I interpreted it as insurance is your best bet against financial loss and the entity is your best bet to make the path to a lawsuit "difficult". My words not his just that's the way I read it.
I choose to have an insurance policy on each property with an umbrella overlay over the entire portfolio. The portfolio is all in one LLC. As I pay each property off they are moved to a different entity with its own umbrella policy and with a few more security tweaks. Then I have an umbrella over me personally that includes my businesses and entities. So everything is layered with insurance and can cover any unexpected events.
Ultimately I think separating, creating an entity and layering your insurance is your best bet.
Chris
- 13yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
FYI - I use Shelter Insurance. There products and ability to work with someone like me was a big reason I went with them. The rates are not the lowest, but certainly not unreasonable and the service is much better than lower priced companies, IMO. I know they do not insure in all 50 states, but there in a lot of midwest states.
- 13yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
It is still for asset protection. Same reason to keep business bank accounts separate from personal bank accounts.
When the property is no longer encumbered, it can be a more attractive target of a lawsuit. I personally do not know a single investor who has been sued and had a judgement for anything greater than what a basic insurance policy can over, so i do not subscribe to the paranoia but I do use basic structure and separation of assets for protection.
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