Investor · Saint Louis · Member since 2020 · 55 posts · 20 votes
I just purchased my 4th rental property, and currently own all properties under my own name...no LLC. I know there are different schools of thought on how to structure the business. Does anyone know a fair, reasonably priced real estate lawyer in the St. Louis area that I can talk to? I am buying for rehab, hold and rent.
I've heard different options:
One LLC for each property
Once LLC for properties in rehab and one LLC for all the rest of the properties
@Todd Kozak another thing you may not have thought of was getting an umbrella insurance policy to protect your assets as well. Most people don't realize that driving a car is way more risky than owning a rental property. It is more likely that you will get in a car accident than someone slipping and falling at a rental property and it is deemed the property owners fault. If you cause a car accident and hurt someone they can sue you and they can go after your LLC shares. The LLC doesn't protect you against yourself hence why an umbrella policy is probably more important than the LLC itself. Let me know if you need a referral to a good insurance broker.
I don’t know any attorneys in your area, but I’ll weigh in on the options you mentioned, if you don’t mind a layman’s opinion...
Either way, you’ll need insurance. Furthermore, unless you are investing with a non-spousal partner the entity isn’t necessary for tax purposes. The deductions you are allowed are the same. If you have a non-spousal business partner, you pretty need the entity more so for legal reasons and to divy up the profits/losses.
The main reason for skipping the LLC is financing. LLC's are eligible for conforming residential loans. You'll have to use commercial financing. This is the main sticking point for most people. They don't want to "pay" for the asset protection afforded by the entity.
For many of those who just use insurance (you'll need insurance inside the LLC anyway), it's generally the financing cost and the other additional cost/overhead of having the LLC. You need to protect/maintain your corporate veil so for one not to co-mingle funds, the separate bank accounts, gettin receipts made out to the correct LLC, etc. just isn't worth since the insurance (with up to a $5M umbrella policy) is enough. Now, if you are doing commercial properties it's a different story.
For liability and I think business reasons, you want to separate the different types of investing. You generally one only one business operation or trade being handled by an entity. So long term rentals separate from short term flips. Also, it’s a liability thing. If you put the two together, now you have your long term rentals “exposed” to the liability of your flips, and vice versa.
Kinda leads into next point. Some people make a new LLC for each flip deal. Others will make a new LLC after a few years. Even though you may have sold the flip property, somebody could come back to sue you years later down the road. So, if you close down the LLC periodically, you get rid of all that liability.
You see, it’s all about what/how much are your trying to protect and how much risk are you willing to take on. That’s something you need to decide yourself (with some good advice from a qualified or professional or two or more).
Don't forget, to maintain the corporate veil of each LLC, there is a bunch of bookkeeping / accounting that needs to be done. You also need to make sure you are using the correct bank account, getting payments made to the correct LLC, receipts/invoices, etc. I do my own bookkeeping so it's a double edged sword. I can keep track of everything going in/out, but how many accounts do I really want to keep track of, checkbooks, etc. I think some people pay their cpa/accountant to do the bookkeeping so they don't care as much. You can use software tools like QuickBooks or Stessa, but you still need to enter the data. Same goes for all the paperwork (receipts, invoices, etc).
Good info, thank you. I don't own 10 properties yet so I can still get conventional loans. You said if the LLC purchased then it must be a commercial loan? Perhaps it would make more sense not to refinance my next few homes (using BRRR ) with an LLC, but rather keep under my name after purchase and during re-if. Then later, if I chose to do so, I could quick claim deed the property into the LLC, as long as my bank allows it. I think?
Quit claiming the deed after the refi basically goes back to what I said about people not wanting to "pay for it" (i.e. the limited liability protection of the lLC). Maybe take a look at this ongoing thread where the OP thinks he is asking a new LLC question but isn't:
The point is to get the protection of the LLC, you need to have everything in the LLC. By having the mortgage in your name and Title in the LLC, you've already co-mingled. So, which bank account is going to pay the mortgage? I will admit for those who are just starting their LLC I think that is the only way to capitalize the LLC. However, its still screwy.
Meanwhile, when you quit claim the deed, you need to make sure your home insurance and Title insurance are good. The former might need a new mortgage clause attached (which automatically notifies the loan servicer of a TItle change since they have to update the paperwork) and the latter may be voided since Title changed hands.
Hi @Todd Kozak after working with an attorney we decided that a series LLC would be best for our properties in Missouri. He is really reasonably priced and would be happy to help you out. If anyone needs his contact I would be happy to share it.
I strongly recommend to all of the investors I work with to have an LLC. You can house about 10 properties there. That's the number that most investors like to stick with. I would create at least 1 LLC. Not sure which state you're in but you can create an LLC with an EIN for free online then file it with your local records office for around $100.
@Todd Kozak another thing you may not have thought of was getting an umbrella insurance policy to protect your assets as well. Most people don't realize that driving a car is way more risky than owning a rental property. It is more likely that you will get in a car accident than someone slipping and falling at a rental property and it is deemed the property owners fault. If you cause a car accident and hurt someone they can sue you and they can go after your LLC shares. The LLC doesn't protect you against yourself hence why an umbrella policy is probably more important than the LLC itself. Let me know if you need a referral to a good insurance broker.
David, that’s really interesting. Can you say more about how the umbrella policy works? Does that mean you don’t need individual policies or is it additional?
No, the umbrella policy kicks in OVER and ABOVE an existing "base" policy. So, lets say you own some rentals in your personal name and you have an umbrella policy(which is genreally available $1M to $5M in $1M increments for a few hundred bucks per increment or so). If something happens and the lawsuit going over the liabiilty limits of your existing policy (e.g. landlord policy, auto policy, personal liability, your personal residence, a boat if you have one..., etc.), then the umbrella policy kicks in and provides that additional amount of coverage. But, you need to have the "regular" policy.
Now, if you hold Title to the rentals in a LLC or other entity, then that entity's umbrella policy will only cover over and above the policies of the rentals in the LLC.
You really need to consult with at least one qualified professional about this. What is the LLC worth to you? How strong are the laws in your State (remember, these are all State formed and governed entities) with regards to inside and outside protections. When setup and operated properly, the LLC should limit the liability both ways. That is, a lawsuit in the LLC should prevent the suitors from going after your personal assets and vice versa. But again, you need to protect and maintain that corporate veil properly.
Lastly, here is a recent post where we were just chatting again about LLC's and umbrella policies:
Hey @Chris Fillingham yes what David M said above is correct. For example my auto policy liability limit is only $250k. If I cause an accident and someone gets hurt they can obviously sue me for more than that. Let's say someone sues and is awarded $1M. My insurance would only pay up to $250k of that. For the rest they could go after my shares of ownership in businesses/LLCs or whatever personal assets I own. Now if I had a $1M or larger umbrella policy it would go above and beyond the $250k and protect my assets and business even further.
Both Davids have given excellent advice here in this thread. I also agree with Dee Dee regarding the Series LLC, but it's a bit more complicated than just having an LLC. Here's a quick rundown of the differences between a Traditional LLC and a Series LLC. This is a complex topic and it's no wonder you're looking for a good attorney. Before you decide on which attorney to go with, make sure you ask them proper vetting questions. Asset protection requires more than just insurance or an LLC, though. Here's a good article regarding the different methods real estate attorneys use to protect real estate investments.
