Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
So recently closed on my first buy and hold rental property. I have seen a bunch of conflicting information on what to do with regards to protecting myself. A couple resources suggest putting the house into a "trust". Then doing a quick claim deed to transfer the property to my LLC. This supposedly protects me from the due on sale clause in the mortgage and provides a level of anonymity. But there are costs with setting up and maintaining the trust that will be a drain on cash flow.
Others have suggested to just transfer into my LLC and skip the trust as the due on sale clause is rarely enforced and my insurance policy will protect me from most issues. Also, since I am using a property manager, I will not deal with the tenants directly, so they likely won't even know that I exist.
Curious what the thoughts are from the BP community? The property is located in Illinois in the Quad City area.
We use land trusts. We also have an LLC. Each provides a different concept of protection. I use the word concept because until you get sued and win or lose everything is just an academic exercise up to that point. Always seek competent legal advice from a qualified attorney who specializes in the area of law you need help with.
1. Land trusts provide privacy. Use a seperate Land Trust for every property, each with different names.
2. Land Trusts avoid Probate.
3. Land Trusts CAN BE pass through entities that do NOT file a tax return.
4. Land Trusts do NOT provide liability protection.
5. Your first LLC should collect all rents but OWN nothing. If you choose to set up a second LLC, It should own the beneficial interests in the Land Trusts but never manage the properties.
6. Insurance is very affordable. Get a rental dwelling policy for the rental unit(s) with a minimum of $500,000 in liability protection, a liability policy for the LLC with the same minimum and an umbrella policy over everything else of 1 million or more.
7. Your lease and sublease should be written to protect the Land Trust LLC and shift all burden onto the Management LLC.
8. Never lie under oath! Be as vague as their attorney will let you, but never lie. Never volunteer information you have not been asked. One of the worst problems people create for themselves is not knowing when to shut up. A good attorney will tell you when to shut your mouth. A good rule of thumb however is never attempt to fill in the blanks for opposing counsel. Be prepared to say "I don't Know" in a loud clear voice EVERY time they ask you a question you don't know the answer to.
9. The correct term is "Quit Claim" not quick claim.
10. Illinois is not a COPE entity state. LLCs can be attacked based upon your personal issues like auto accidents and such. Carry the highest auto liability insurance protection you can afford.
11. The Garn St Germain Act impacts the home you live in when placing a property in trust for estate planning purposes.
12. Be careful of some of the advice on moving title. It borders on mortgage fraud. Do you want to be a test case?
I am not an attorney and do not play one on television. If you need help finding a competent attorney let me know and I will point you in a few directions.
Thanks for the info! I am in PA too and have been researching land trust's. I have a rental property in my personal name with a traditional mortgage, and about to make an offer on a another one. I recently set up my first LLC as well, but I didn't realize I wouldn't be able to get a traditional mortgage through it. I have read other post's mentioning getting a traditional mortgage in personal name, and then transferring it to the land trust with the LLC as a beneficiary. Have either of you done this in PA? Any info is greatly appreciated.
@Brett Schade I recently talked to a lawyer about this opportunity in PA, and he advised that you need to be careful about the transfer tax in PA (i forget the exact %). Look into it. That was a deal breaker for me since it'll negatively impact cash flow way too much. I want to protect my assets via the same structure that might be pitched to many other investors (i.e., set up an LLC to be taxed as a partnership since I have financial partners, as a beneficiary of multiple land trusts - one land trust per investment property, with a revocable living trust per partner).