LLC for rental unit

[Sweta Jain]

Hi,

I just started reading some books on real estate investing and wondering about the pros and cons of having a LLC for rental/investment property. Is it recommended to have a LLC and who can help creating a LLC (tax consultant or lawyer)?

Please share your opinion on this topic.

Thanks

[Basit Siddiqi]

An Attorney will help with creating an LLC.

LLC is not required, may make getting financing more difficult.
It may provide some asset protection.

Most of the asset protection that you need will come from the insurance policy.

Discuss with the insurance agent on situations that you are not protected.
Have a discussion with an attorney if your extra concerns can be protected through an LLC.

[Mark Fries]

LLC is recommended. It's very easy to do yourself online, but there is services that do it for about $150. As you grow and buy more properties would suggest a trust or similar entity.

[John Mason]

https://www.legalzoom.com/articles/what-is-a-limited-liabili...

[John Mason]

Good umbrella policy is a  good asset protection strategy

[John Mason]

Here is a good explanation

https://www.biggerpockets.com/forums/926/topics/1196640-how-...

[Nathan Gesner]

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's 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 appear 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 primary 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 14 years of 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 expected to be higher, 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 extra, on-going effort to maintain.

[Sweta Jain]

Thankyou everyone for your inputs. 
does having a family trust and putting properties in trust's name rather than individual name also helps on liability reduction similar to LLC?
I do have umbrella insurance coverage. 

[Crystal Smith]

Quote from @Sweta Jain:

Hi,

I just started reading some books on real estate investing and wondering about the pros and cons of having a LLC for rental/investment property. Is it recommended to have a LLC and who can help creating a LLC (tax consultant or lawyer)?

Please share your opinion on this topic.

Thanks

Pro- An LLC can provide some anonymity protection, but in my opinion, it's not enough. Depending on where you incorporate your name will still be recorded on the public record with the Secretary of State. If your goal is anonymity then you have to choose a state where your name is not recorded. You can also purchase inside of a LandTrust for additional anonymity

Pro- Legal protection; combined with the right type of insurance

Con- Traditional bank will not lend to an LLC with no track record. You can start it, get a track record of at least 2 years and then maybe....

Pro- Hard Money lenders who can only lend to a business will lend to a new LLC, but you will still be personally guaranteeing the loan.