Is it advisable to form an LLC with one duplex rental?

Question

I am purchasing a duplex. Should I form a LLC to protect my personal assets?

Deborah Burian · Answer

Michael Siekerka - not sure where you're coming from on this, we hold a ton of conventional financed properties in two LLCs, one of which is almost exclusively multi-family.

Dennis Nemitz - everyone is going to have a different opinion but if you intend to grow, I would do an LLC up front.  Pain in the butt to change mortgages and title insurance downstream.

Michael Seeker · Answer

If you are using conventional financing, you will have a very difficult (if not impossible) time holding the property in an LLC.  You're much better off purchasing additional liability insurance from your insurer than you would be trying to go the LLC route for a duplex.

Account Closed · Answer

Dennis,

Buying the duplex in your name and then quit claim it to your LLC will not provide any personal asset protection.  In addition to what Matt Devincenzo said about triggering the Due on Sale Clause, I'm totally in agreement with Michael Siekerka and Brian Burke.  Instead of paying my lovely CA State $800/year for the LLC, I use this money to buy a $2M umbrella insurance with Farmers.  With that said, you know where I stand.

Michael Seeker · Answer

Commercial lenders typically prefer a property be held in an LLC.  That being said, the best terms I am finding for smaller properties/owners (bigger companies and landlords can swing better terms) are 75-80% LTV and 5 year ARM with 15-20 year amortization.  Rate is typically .5-1.0% higher than a 30 year Fannie/Freddie loan.

I was referring to "conventional" as a Fannie/Freddie loan with 30 year term and 30 year amortization.  If your goal is to maximize long term cash flow, locking in for 30 years at 4-5% is the way to go.  These are also the type of loans that somebody in Dennis Nemitz shoes would usually be looking at, not a commercial loan - hence my comments on the feasibility as those loans cannot be closed with an LLC.

On the other hand, if you're paying cash or using a non-Fannie/Freddie loan then I'd look at the cost of setting up an LLC vs the cost of liability insurance.  Depending on the state, the cost could be quite significant (CA comes to mind) or it could be peanuts (KY is quite cheap to form and maintain an LLC).

Deborah Burian · Answer

Matt Devincenzo - I am referring to conventional in the 80% LTV from a bank sense.  It is a commercial lender so no fannie/freddie involved.  Also they hold their own loans under 1M which adds greatly to their flexibility... although through sheer good fortune they were audited 4 times last year...

Adam Johnson · Answer

Brian, I respectfully disagree.  Personally, I am of the opinion that when things go bad, they go REALLY bad.  I never want to be in the position where I ALMOST had enough protection, I would rather be classified as being overkill with protection.

I am not an attorney nor do I play one on TV.  Dennis Nemitz, you may want to consult an attorney as well to get their feedback.  In the event of a loss/lawsuit (say, for example your tenant's broke friend "trips" on the sidewalk and suffers emotional trauma that renders them unable to work for life), ALL money sources will be listed - your insurance company, the entity that owns the property, you personally, all other assets (LLC's, businesses, etc.) owned by you personally.  Having the property owned by an LLC adds an extra firewall the opposing attorney has to get through.

Overkill helps me sleep better at night.  As far as financing, it doesn't make it impossible, it only makes it different.  You may find yourself shopping for new lenders, but you can still get deals done.  You may also find that having "too many mortgages" isn't such as challenge with the new lenders as well, as they generally will be smaller local/regional banks that do portfolio loans, not subject to Fannie/Freddie guidelines.

I am not a big fan of Quit Claiming after closing to transfer to an LLC.  Just my opinion, it adds additional risk with both the lender calling it due as well as if there were ever a lawsuit and the attorneys caught it (which would be pretty easy to find) and were able to pierce the veil.  This option is better than nothing, but I have continued to buy properties in an LLC from day one and plan to continue to do so.

Theresa K. · Answer

Brian Burke:  Thanks.  I have an email in to the commercial broker that handles my other business insurance so I'll see what they recommend too.

Brian Burke · Answer

I'm not an insurance analyst, so that is better answered by the pros.  That said, I advocate for a landlord policy that meets the policy limit requirements set forth in an umbrella policy, and that umbrella should have at least $1MM of liability coverage, $2MM is even better.

Matt Devincenzo · Answer

Deborah B. are you talking conventional govt backed loans?

What Michael Siekerka is referring to is that conventional loans can't be lent to entities just individuals so QC them into an LLC post closing could technically trigger the DOS. If they are portfolio loans from local banks then this may not be an issue.

Theresa K. · Answer

Brian Burke:  Do you think the standard State Farm/Farmers/Allstate etc type of policy provides sufficient liability coverage for rental properties?

Is it advisable to form an LLC with one duplex rental?

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