LLC for my Vacation Rental

11 Replies

So I think it's best I start an LLC for my vacation rental. It's doing much better than expected and I want to protect myself.

I have no idea how this works. In fact I heard on a podcast where a guy started an LLC after he signed the paperwork and the deed was transferred in his personal name and he formed an LLC later and he got screwed. Maybe I didn't hear that correctly?

My mortgage is currently being sold to who knows what bank. 

Please advice me on how this works. 

Thanks! 

Yes, the Podcast heard is likely accurate. It is difficult to acquire personal property as a business, but you can quit-claim deed it to an LLC shortly thereafter. I would wait until the note is sold, then create your LLC (check your local statutes to create this) and quit-claim deed it to your LLC. Check your local requirements, but it's likely a pretty simple process, at least in AZ where I have my VR's.

Best of luck,

Mike 

Originally posted by @Michael Greenberg :

Yes, the Podcast heard is likely accurate. It is difficult to acquire personal property as a business, but you can quit-claim deed it to an LLC shortly thereafter. I would wait until the note is sold, then create your LLC (check your local statutes to create this) and quit-claim deed it to your LLC. Check your local requirements, but it's likely a pretty simple process, at least in AZ where I have my VR's.

Best of luck,

Mike 

What's a good google search to start with? I don't even know where to go? - lawyer? 

I have my Sedona, AZ vacation rental now in an LLC. Quit claiming to your new LLC is easy. It just takes a simple recording with the county. You can get forms from the county to use to convey the property. You just need to get the conveyance notarized and then file with the county.

The thing you need to be careful about is the due on sale clause likely to be found in your deed of trust/mortgage documents. Technically the note holder can call the note due immediately when ownership is changed. There are several threads on BP about setting up a Land Trust that holds the property and then making your LLC be the beneficiary of the trust. Supposedly this type of set up still provides for liability protection through your LLC but does not trigger the due on sale clause on your mortgage because of laws that prevent this from happening when you move assets into a trust for estate planning.

So far I have regretted moving my property into the LLC. I have long term plans for this niche and the LLC should be beneficial in the long run so I plan to keep it. But it is has been more costly, time consuming, and I have made it dramatically more challenging to refinance the property. Mine is free and clear and I want to do a cash out refi to go after another investment but it is impossible to find conventional financing for an LLC property. I am beginning to explore the land trust with LLC as beneficiary possibility, otherwise a commercial/portfolio loan will be necessary with less favorable terms and rates compared to conventional residential financing.

If I could do it over again and planned to only have one or two properties I would simply invest in a good umbrella insurance policy and call it a day. It would save me a lot of money and time wasted long story short. By the way my insurance premiums are the same with the LLC....

@Brian G. I also have LLCs and I agree there is a lot of extra hassle so @Lucas Carl really do your research and make sure it's what you want to do.  Umbrella Policies are an option for some people but they run into their own troubles...so basically nothing is perfect. The lending thing is a major hurdle though.

It may differ by state so I'd certainly recommend contacting an attorney that specializes in investment property in your state. I formed an LLC and purchased 2 properties under the LLC...be sure to include your business title when you sign all legal forms.

From a financing perspective I was able to get a loan using the LLC name but had to be a personal guarantor. It's very unlikely any financial institution will issue financing to the LLC alone so you'll have to personally guarantee the loan, but including the LLC allows your company to build credit and hopefully will allow you to separate business and personal credit at some point. I found rates and terms were much better when I used a local bank (specifically a bank that operates on the island).

I certainly agree with establishing an LLC to conduct business but you'll want to be careful how you operate so your day-to-day activities don't cross between multiple companies and deteriorate the value of the LLC. Example: we also manage other peoples properties so I have a different LLC for the management aspect. This requires separate bank accounts, etc.

You'll also want to consider how many properties you want to include within each LLC. Our current properties are both in Galveston, TX but we're considering purchasing a property on the lake near Austin. I'll probably create another LLC for properties I purchase in that area so I limit my exposure.

It's worth $1-$2k to protect $500k of assets and cash-flow, especially as you grow and people start to recognize your wealth building.  One example I was given was of a taxi cab business: a truck driven hit a taxi-cab, fortunately there were no fatalities but both cars were totaled.  The accident was the fault of the truck driver but a passenger in the cab sued the taxi company (the person that appeared to have the most money).  The taxi company incorporated each car separately so with the car being totaled there were no assets to go after.

Originally posted by @Bill Higgins :

It may differ by state so I'd certainly recommend contacting an attorney that specializes in investment property in your state. I formed an LLC and purchased 2 properties under the LLC...be sure to include your business title when you sign all legal forms.

From a financing perspective I was able to get a loan using the LLC name but had to be a personal guarantor. It's very unlikely any financial institution will issue financing to the LLC alone so you'll have to personally guarantee the loan, but including the LLC allows your company to build credit and hopefully will allow you to separate business and personal credit at some point. I found rates and terms were much better when I used a local bank (specifically a bank that operates on the island).

I certainly agree with establishing an LLC to conduct business but you'll want to be careful how you operate so your day-to-day activities don't cross between multiple companies and deteriorate the value of the LLC. Example: we also manage other peoples properties so I have a different LLC for the management aspect. This requires separate bank accounts, etc.

You'll also want to consider how many properties you want to include within each LLC. Our current properties are both in Galveston, TX but we're considering purchasing a property on the lake near Austin. I'll probably create another LLC for properties I purchase in that area so I limit my exposure.

It's worth $1-$2k to protect $500k of assets and cash-flow, especially as you grow and people start to recognize your wealth building.  One example I was given was of a taxi cab business: a truck driven hit a taxi-cab, fortunately there were no fatalities but both cars were totaled.  The accident was the fault of the truck driver but a passenger in the cab sued the taxi company (the person that appeared to have the most money).  The taxi company incorporated each car separately so with the car being totaled there were no assets to go after.

I am definitely sticking with my LLC but it did cause plenty of initial headaches and additional expenses. Your point is well taken though and for the long run it is the only way to go for me.

Now I am looking at financing options. Conventional financing terms and rates are so attractive so naturally I focused on this first. I realize conventional financing will not be the most appropriate now that I use my LLC to hold the property and operate the property. However since I will likely have to use a commercial or portfolio loan (I want a cash out refi or credit line secured by the property/business, I am of course willing to personally guarantee) I think it is reasonable for the underwriter to appraise the property taking into consideration cap rates/business income to derive the value. When you got your loan how did the lender value your property?

I also hold my real estate license in AZ and have strongly considered setting up a property management company to specialize in STRs with my brokerage. I am still in my first year of holding my RE license. Do you run your property management service through a Texas brokerage? I do not have past experience in formal property management (managing trusts accounts and trust accounting among other issues) and this is doing my head in. How did you set up your property management entity?

Figuring out how to run my own entity's properties is mostly simple enough, but managing others' properties under my brand seems to bring about another set of complications, arrangements, and partnerships with a brokerage.

@Brian G. - I don't have experience with a bank basing my property value and providing financing on cap rates.  My assumption and from what I've been told, you'll probably need 2-3 years of tax returns showing your revenue and expenses.  Beyond that, you'll probably have to argue your calculated cap rate vs the cap rate established for commercial investments in your area.

I personally have found success in condos.  One benefit there is the lower cost of entry and high CapRate yields.

Concerning Property Management, my wife has held a real estate license in Texas for ~4 years. Texas recently changed requirements for STR's and no longer requires a realtor license if you don't allow rentals beyond 30 days (tenant law).

I'll personal message you if you want to discuss more.

Bill

Originally posted by @Bill Higgins :

@Brian G. - I don't have experience with a bank basing my property value and providing financing on cap rates.  My assumption and from what I've been told, you'll probably need 2-3 years of tax returns showing your revenue and expenses.  Beyond that, you'll probably have to argue your calculated cap rate vs the cap rate established for commercial investments in your area.

I personally have found success in condos.  One benefit there is the lower cost of entry and high CapRate yields.

Concerning Property Management, my wife has held a real estate license in Texas for ~4 years. Texas recently changed requirements for STR's and no longer requires a realtor license if you don't allow rentals beyond 30 days (tenant law).

I'll personal message you if you want to discuss more.

Bill

Thanks again Bill, this all makes sense. Ill look forward to staying in touch!

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here