Should I Form A LLC For My Rentals?

Question

If someone is just getting started with investing in single family & duplex rental properties, what do you all recommend when it comes to forming a LLC for the properties you are renting out? Meaning, is it better/safer to create a company name with a LLC and add your properties under that company name? Or is the risk of getting sued not that significant and just complicates the process for a newbie?

Kyle J. · Answer

You'll get a lot of different opinions on this topic but there's no right or wrong answer.  I can tell you that you'll get much better financing terms if the property is in your personal name.  That's something most people don't think about until it's time to go get a loan.  For someone just getting started, it might be better to buy it in your personal name so you can get the best financing, and then buy a good umbrella insurance policy (which is very inexpensive) for peace of mind.

Brandon Hiett · Answer

In short - the answer is yes.

Depending on the size of the property or portfolio more than one LLC may be needed.

If you're buying  single family homes it can become a pain - both timely and costly - to create an LLC for each home. I've seen investors create an LLC and put up to 5 or so homes under it. However, for multi-family properties 5 units and above I'd highly encourage you to have an LLC for each property. It limits your liability if something were to happen and doesn't necessarily put any of your other properties / assets at risk.

Creating an LLC is relatively easy. Something I've done in the past is have someone at my title company, specifically the escrow officer I was closing with, create LLC for my particular purchase then transfer ownership to it once it was closed. Leveraging someone who has done it before makes it a whole lot easier and gives you the opportunity to ask as many questions as possible regarding the process.

Hope this helps!

Mike H. · Answer

Here are some reasons why I wouldn't create an LLC and stick something in it if you're just starting out. I would look at an S Corp as an entity.

1) Fannie mae/freddie mac count a mortgage owned under an LLC towards one of your conventional spots. Yet they won't lend to an llc. If you get a commercial loan under the llc, it will count against your conventional loan limit. If you do the same with an S Corp, it won't. Both work pretty much the same.

2) Chances are your first few properties are going to be in conventional loans anyway under your name. So why not just leave them under your name? Most of us typically don't have a ton of assets in our name to begin with.

So not sure what the difference is if you stick it in all under an LLC or your personal name. Either way, they can come after all your real estate (i.e. If under an llc and someone sues, all the real estate in it is at risk).

Once you get over your conventional limit and have to get commercial loans, then maybe it makes sense to put it under an entity. I'd still do an S Corp just in case I were to ever sell a couple of the houses with conventional mortgages so I could use those spots again (whereas if you had 8 conv in your name and 5 under an llc, you would not have any spots any more).

If liability is really concerning, why not get an umbrella insurance policy. You'll make your accounting way simpler and what you'll save on cpa fees will make up for some of the costs of the umbrella policy.

Jay Helms · Answer

When it comes to asset protection, many ways to skin it. Putting your properties in a LLC is one way, holding a multi-million dollar umbrella policy (naming those properties) is another. We do both. A few items to consider with either:

When using a LLC:

• in the state of FL, the title of the property has to match the name insured. 
• in the state of FL, the title of the property also has to match the name on the note/loan. i.e. You cannot have a loan in your personal name on the property, but title/insure the property in a LLC. 
• a good rule of thumb is 8-10 properties in a LLC, to spread out your asset protection. Meaning you don't want all 50 properties in one LLC, get sued on one property, and then lose your entire portfolio.

When using an umbrella policy:

• there is a limit to the # of properties you can add to the umbrella policy
• going from a $1MM to a $2MM is not much more
• you have to remember to add/remove properties to your policy as you acquire /sell them

For entertainment purposes only, please consult an attorney regarding asset protection :)

Scott Smith · Answer

@Anthony Bertolino @Jay Helms

Two quick points:

(1) the number of properties in an LLC is not the defining point, it is the amount of equity exposed that really care about. I recommend never holding more than $1MM in any LLC or Series LLC because at that point the amount of equity justifies the "legal insurance" of an LLC.

(2) You can form a Series LLC in Texas/Nevada/Delaware and use it in any other state (just like tons of companies do with the Delaware LLC)

(3) You want to avoid the due on sale clause by transferring the property into a land trust (transfers to a trust won't trigger the clause) and then have that trust owned either by an individual series of a Series LLC OR by a traditional LLC. This method also creates anonymity of ownership and offers the liability protection

Jay Helms · Answer

@Anthony Bertolino - typically no, cannot transfer the title. In most cases, transferring the title usually causes the note to become due - check the fine print in your loan documentation and the properties state law/regulations. Now, once you pay off the loan, you can easily & inexpensively perform a quit claim deed from/to.

Anthony Bertolino · Answer

Thanks for the insight.

Follow up, if an individual still has an open loan, are they (usually) able to transfer the title to an LLC? I assume that would depend on the issuer but I am hoping that there is a norm.

Jay Helms · Answer

Great question for your legal counsel, but my response is it depends. Are you buying large multi in each state, my answer is yes. If you’re buying SFRs then my answer is one LLC per 8-10 units.

Should I Form A LLC For My Rentals?

Most Popular Reply