Benefits of putting my rental in an LLC?
Rental Property Investor · Phila, PA · Member since 2018 · 554 posts · 118 votes
List some please
Vs UMBRELLA POLICY
Qs to ask about putting in an LLC:
I have been investing for 18+ years.
I typically invest in nice middle-class houses/communities in good schools.
I have had and sat on a lecture where attornies came in and "scared" us that we must buy in an LLC or else . . .
For years I'm have been looking for the horrors stories told by those attorneys and found ONLY one noe that there was no LLC and the insurance company paid 25k and issue solved.
While I'm sure there are more stories out there - as one who's actively looking for those stories (I have many opportunities to ask and look for such stories) I'm still surprised that I could only find 1 story.
For me it means that LLC is placed too high on a pedestal, typically by attornies who have a product to sell ("but wait today for only $299 . . . . " lol)
after so many years my take is . . . . why do you need a LLC . . . and if the answer makes (low end/highrisk.flip/other) sense use one for sure. I have when it made sense.
Buy LLC is NOT my default for every property.
Qs to ask about putting in an LLC:
I have been investing for 18+ years.
I typically invest in nice middle-class houses/communities in good schools.
I have had and sat on a lecture where attornies came in and "scared" us that we must buy in an LLC or else . . .
For years I'm have been looking for the horrors stories told by those attorneys and found ONLY one noe that there was no LLC and the insurance company paid 25k and issue solved.
While I'm sure there are more stories out there - as one who's actively looking for those stories (I have many opportunities to ask and look for such stories) I'm still surprised that I could only find 1 story.
For me it means that LLC is placed too high on a pedestal, typically by attornies who have a product to sell ("but wait today for only $299 . . . . " lol)
after so many years my take is . . . . why do you need a LLC . . . and if the answer makes (low end/highrisk.flip/other) sense use one for sure. I have when it made sense.
Buy LLC is NOT my default for every property.
@Cameron Riley The choice of an LLC or not depends on a lot of factors. An LLC does not provide as much protection as many people think. However it is an additional layer of protection. Also there are some risks an insurance policy may not cover. Neither insurance nor an LLC is 100% liability protection.
Most importantly it is not an either or proposition. Insurance is a must even if you have an LLC.
Just out of curiosity who would you ask 1st for creating an LLC? An RE attorney or how about Legal Zoom?
Just out of curiosity who would you ask 1st for creating an LLC? An RE attorney or how about Legal Zoom?
I'm not a lawyer so take this with a grain of salt. All my properties are in an LLC. We also have insurance policies on all properties. Two times we got sued and the insurance company took care of everything b/c that is what they are there for and why we pay them. I did find out that both times, they did not go after any members or managers. So having the LLC does bring some protection. I also don't like tenants or others know who the owner is/are.
As for forming it, we are in GA so we just file directly w/ the GA Secretary of State. Super easy. I don't know how it is in CA but worth looking at
@Percy Matsunaga @Cameron Riley
There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.
Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.
This article goes into a lot of the considerations about whether to form an LLC or not, though is geared towards California specifically: https://www.mmpph.com/wp-content/uploads/2019/04/May-2019-newsletter.pdf
Creating an LLC in California would cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation.
You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.
These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.
*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
That's really info. I appreciate it. In your opinion how many properties in a C class area could be in 1 LLC? Or should each property have its own LLC?
I can't give legal advice to a non-client, and certainly not on a public forum and based on so little information. The answer will vary for each person, depending on priorities. For some, the $800 tax per LLC eats into cash flow so much that minimizing number of LLCs is a goal; for some, the $800 is a necessary evil that reduces their liability and helps them sleep better at night. Where each person falls on the spectrum will vary, along with your risk tolerance, quality of property manager, quality of tenants, condition of the property, your non-real estate assets that need to be protected, your estate planning and transfer goals, your general optimistic versus pessimistic outlook, etc. Some people feel comfortable with a certain amount of equity before creating a second LLC, some people create a second LLC after a certain amount of cash flow (the $800 increases after $250k), and still others will create an LLC for each property. No path is right or wrong. What is right for one person may be different for another, even given a similar portfolio. It's an individualized decision best talked through for your personal situation with your own advisors.
*this post does not create an attorney-client or CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
@Percy Matsunaga @Cameron Riley
There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.
Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.
This article goes into a lot of the considerations about whether to form an LLC or not, though is geared towards California specifically: https://www.mmpph.com/wp-content/uploads/2019/04/May-2019-newsletter.pdf
Creating an LLC in California would cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation.
You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.
These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.
*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
@Katie Lapore statement of "Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC."
is the key to the whole question.
Do you have the personality to Maintain (properly) an LLC? There is an Operating Agreement that must be followed, with documentation of following it, that any real estate attorney will ask for when you get sued. If you file an extension to pay taxes late, if you don't track expenses in an orderly fashion, if you think buying and selling real estate is more fun than crossing T's and dotting i's then you don't have the personality to properly maintain an LLC and it isn't worth it for you.
Generally, until you have Equity that you want to protect, you don't need an LLC anyway. Attorneys are smart enough to not bother suing people who have no money.
Just out of curiosity who would you ask 1st for creating an LLC? An RE attorney or how about Legal Zoom?
You have gotten some good advice here. The key is knowing your personal situation. Legal Zoom is absolutely NOT the place to go to consult to see if an LLC is appropriate for you. Legal Zoom is OK (but not the best choice) for creating an LLC once you know that an LLC is what you want, and that you know the appropriate formalities in running one.
Personally I don't like the concept of legal zoom. If something is important enough to need an attorney I want a good one that knows my specific situation. I don't think an attorney is a place to be cheap.
Now that I have already had many LLCs created, I just go to the state and file the forms myself for about $100.
NOLO Press has some very good legal self help books. I have at least two on LLCs. While I am not suggesting you go the self help route for legal work, I do think it is wise to understand the concepts so that you can deal more defectively with your chosen professional.
Ok thanks for the info. I appreciate it. And thanks for the heads up on the PM. I did not realize that was not acceptable.
@Cameron Riley you can name the LLC whatever you want!
@Cameron Riley if you have mortgages on the property you should check with the mortgage company. Some mortgages have a clause that the mortgage has to be paid in full if switched to an LLC I believe.
@Dani Beit-Or
So do you still have organization structure without a formal business entity?
Are you organized