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Carlos Lopes
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Setting up an LLC for one Rental Property

Carlos Lopes
Posted Apr 15 2023, 10:34

I’m new to real estate investing, so I have many questions. 

I currently only own one rental property in Florida. Only became my rental because I moved to California for work reasons so I decided to keep it. 

I'm now looking into buying more real estate, but I first want to make sure I have things setup correctly. Currently the one property, I manage it myself and don't have an LLC setup. Really all I have setup for the property is a separate checking account and have a landlord specific home insurance policy.

The questions are as follows: 

1) Should I set up an LLC for just one property? Pros and cons? If so, do I set up that LLC in California (since that's where I live now) or do I have to set it up in Florida since that's where the property is?

2) If I do setup an LLC, is transferring a property from your name to the LLC pretty straight forward? (I’m also still paying a mortgage). Will this trigger any clause on the mortgage lender side for a conventional loan? Ideally I would just transfer the property over and keep paying the mortgage as an individual. 

3) Lastly, what are people’s thoughts on umbrella insurance? I see a lot of people mentioning those. I have my regular insurance on the rental property, but should I be concerned with looking into umbrella policies for extra liability protection?

I know this is a rabbit hole, but just looking for some guidance on how to make sure I’m properly setup before I start looking into buying more properties. Thanks in advance! 

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Chris Seveney
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Chris Seveney
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Replied Apr 15 2023, 10:52

@Carlos Lopes

If you manage it yourself putting it in a LLC does nothing for asset protection as you as the manager would get sued too.

Keep it in your name and get an umbrella policy

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Carlos Lopes
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Carlos Lopes
Replied Apr 15 2023, 11:00
Quote from @Chris Seveney:

@Carlos Lopes

If you manage it yourself putting it in a LLC does nothing for asset protection as you as the manager would get sued too.

Keep it in your name and get an umbrella policy

Good point. Didn’t think of it that way. Sounds pretty straight forward then. My plan is to own a couple more properties by the end of the year, all of which I’m gonna manage myself. So would just sticking with a good umbrella policy and skip the LLC still be a wise choice? 
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Chris Seveney
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Chris Seveney
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Replied Apr 15 2023, 11:03

@Carlos Lopes

Without providing legal advice that is what we do. If you have good tenants and are a good landlord the odds of getting sued are super low. You have to do something pretty egregious to get sued and not have it be insurable

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Katie Balatbat
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Katie Balatbat
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Replied Apr 15 2023, 12:00

@Carlos Lopes

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc. Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.

California is generally more cumbersome than other states when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don't buy CA property as a CA resident.

Any lawsuits should be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. Or, a charging order may be granted.

If you're going the umbrella insurance route, perhaps see if it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

Creating an LLC in California could cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation. California does not recognize series LLCs.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a fairly new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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Nathan Gesner
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Nathan Gesner
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ModeratorReplied Apr 16 2023, 06:14

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.

If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.

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Carlos Lopes
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Carlos Lopes
Replied Apr 16 2023, 09:30

You guys did a great job breaking this down. I've always felt like the whole LLC thing was a bit blown out of proportion and always wondering just how often people get sued. I personally run a very tight ship when it comes to managing my property and follow the law to the T. Also, to me seems like getting an umbrella insurance is still much less of a hassle then getting an LLC. Thanks for the perspective guys!

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Matt Broccoli
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Matt Broccoli
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Replied Apr 18 2023, 08:40

check out strlawguys.com

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Darin Mellinger
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Darin Mellinger
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Replied Apr 18 2023, 12:43

There are certainly many considerations that should be founded on your own preference and situation. However, in general, I believe holding title to an investment property in an LLC is a wise choice for many reason, including asset protection. (Also, if you will be the only member and don't file a s corporation tax election, you will be considered a disregarded entity for tax purposes and can simply file the income on your personal tax return). As mentioned in a previous post, your personal assets will be insulated (unless the "corporate veil" is "pierced" by your commingling of personal and business assets, fraud, intentional torts, etc.). It may be easier to use a FL LLC due to the considerable hassle with a CA LLC and you would still need to register any foreign LLC (any non FL LLC) with FL in order to avail yourself to FL laws such as evictions, etc. I am happy to discuss the FL LLC option in more detail if you wish to contact me directly.

Nothing herein is intended as a legal opinion or advice and is solely for informative purposes.

The hiring of an attorney is an important decision. You should request and carefully consider the education, qualifications and/or experience of an attorney prior to engaging his/her services.