Best way to set-up an LLC?

Question

First time doing an STR and I want to put it in an LLC to shield my other assets as best as possible. I've read the pros/cons of LLC vs only doing umbrella insurance and I'd prefer to do the LLC route to minimize risk.

I've gotten conflicting views from CPAs and attorneys on what the best way or order of operations would be to set-up an LLC. My lender and CPA said I should purchase an STR with a conventional loan and then transfer the title to the LLC, but keep mortgage in my name. I understand there is risk of invoking the due on sale clause, but it sounds like that is a very unlikely scenario (my lender confirmed this as well). On the flip side, I spoke with an attorney this morning who said you definitely want the mortgage through the LLC and NOT in my name. And that I would need to personally guarantee the loan since the LLC does not have a track record of income. Now I've also heard you never want to personally guarantee the loan as that opens the door up to all sorts of issues.

Needless to say my head is spinning and I'm coming here for some opinions :)

Megan Templeton · Answer

Hi there! I do recommend holding the STR in an LLC - an LLC with anonymity if possible. I agree the umbrella policy is not the first line of defense but I do recommend one in conjuction with your LLC. For the loan, I would recommend getting the loan in your name and transferring the propety to an LLC post closing. There are exceptions to the due on sale clause an depending on the type of property, an attorney can help you meet the requirements so that a trasnfer post closing wont trigger the DOS (the process involves use of a trust). Gettting the loan in your name will provide much better rates and if done correctly is low risk so I would go that route. Happy to answer any other questions on this you may have.

John Underwood · Answer

You might want to search through previous posts. This question is asked multiple times every week and is getting more frequent.

Tom O. · Answer

Umbrella or LLC? No, umbrella AND LLC. Although if you have enough millions in insurance that is a pretty darn good way to shield your other assets. To answer your question, either way, the property has to end up in the LLC. The property secures the loan. But, nobody's going to lend you the money without you personally guaranteeing the loan as well. But you should try to prove me wrong. Because, yeah, the LLC has no track record of income and you do.

What I do know of asset protection is this: plaintiff's lawyers are somewhat lazy. They like big fat insurance policies. They don't want to go after land and property. They don't want to own or manage rental properties. They want cash. From an insurance policy. Get more insurance. Also, nobody says this but it's true: personal injury lawsuits are fairly rare. Get more insurance.

Donald Maxwell · Answer

Costin, Good Stuff Sir. I was just wondering if you or others within BiggerPockets might have book read recommendations for the DIY LLCs. Looking ground up or covers all reads.

Thanks again all!

Don

Costin I. · Answer

@Brian M. - If you are new to REI you should be primarily concerned with finding good deals and growing your business first. I would not suggest to look into establishing LLCs and asset protection strategies till you have at least $100-300K in equity(!) and only after you covered properly the "other" aspects of risk management (insurance, umbrella insurance, proper property management, etc.).

Unless you are doing flipping (or AirBnb), in which case I suggest you look into Series-LLC and you operate each flip in its own child-series (if not clear why, ask for more details).

Here are some diagrams to help you in this quest:

Asset Protection Decision Diagram - to help assess the need for asset protection, and what to implement : https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-decision-diagram

Asset Protection Onion Diagram - what, when and at what cost one should implement in terms of asset protection - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-onion-diagram-v2

What is needed for a complete asset protection OR the domains that need to be intersected to find asset protection nirvana - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-spectrum-diagram

How a fully implemented asset protection layout might look. - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-structures

Let me know if have questions or want to chat further - I can give you my investor perspective.

PS. Read this book first - https://www.amazon.com/Every-Landlords-Property-Protection-Guide/dp/1413307000 - before getting into more complicated and expensive measures of protection.

Brian M. · Answer

Thank you, Megan! Super helpful.

Best way to set-up an LLC?

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