Rental Property Strategy

[Darryl E Johnson]

Does anyone have any advice on how to use your primary residence as an investment property? 

Is it smart to transfer the house into your LLC? What are the pros and cons?

[Jaron Walling]

@Darryl E Johnson 
Unless you're an established investor with numerous doors starting an LLC is pointless. This has been discussed a lot in the forums. Good insurance coverages and reserves should be your two big goals. There's no laws pertaining to a primary residence, but... in some cases buyers never considered holding it as a rental property. Sometimes they cash-flow and sometimes they loose tons of $$$ per month making it a bad investment. Depends on your numbers. 

[Elias Osborne]

Hey Darryl,

House hacking would be your best bet to use your primary residence as an investment property. You can get a 1-4 unit residential home using a FHA loan and pay 3.5% down which can help financially. So you can potentially rent out up to 3 units and take profit from those, apply that to your mortgage and potentially live rent free. You just have to make sure you keep up to standard as a landlord.

You do not have to use a LLC in this case. It does help conceal identity to the tenants if they are not paying direct to you and you utilize a property management company. Initially it may prevent financing if trying to secure with an LLC.

[Drew Sygit]

@Darryl E Johnson 

How does an LLC Logically Protect a Landlord?

A lot of landlords are advised to put their properties in the name of an LLC for asset protection.

While this is basically true, the reality isn’t what most landlords think.

If a legal issue occurs with your property resulting in a lawsuit, there's a decent chance the plaintiff's attorney will be successful in "piercing the corporate veil" of your LLC if you were sloppy and being able to sue you directly.

Why? Because most landlords don't follow all the legal requirements to maintain their LLC as a separate entity.

So, what else can a landlord do to protect their personal assets from a business lawsuit?

Well, what types of lawsuits is a landlord most likely to face?

Lawsuit from tenants for personal injury!

How many tenants have the funds to pay a retainer fee to an attorney to handle the lawsuit?

Not many! Most will find a personal injury attorney that will take their case on contingency – meaning the attorney will charge very little, if anything, upfront, but take a third or more of whatever they collect.

And here is the secret of using an LLC to protect your personal assets – by "hiding" them!

You see, there’s nothing worse for an attorney taking on a contingency case, fronting all the legal expenses and investing their time to win a case and obtain a court judgment – then NOT be able to collect on the judgment.

So, astute attorneys will research the available assets and insurance before accepting a case on contingency. If they can’t find either, why would they waste any resources on the case?

If all they can find is the property in the LLC, it may not be worth the additional hassle of trying to force a sale of the property to collect on their judgment.

So, they'll research who owns the LLC and what assets that individual has.

If you act as the agent for your LLC and use your personal address – guess what? You've just made it super easy for them to find you and now they can research your other assets and probably sue you!

So, if you're going to go through the effort of setting up an LLC, be sure to take the extra steps to find an attorney, CPA or other professional willing to act as the agent for your LLC and allow you to use their address. Most will charge a reasonable annual fee, but think of it as insurance.

Lastly, consider just getting more insurance, typically an umbrella policy to cover your entire portfolio, instead of OR in addition to an LLC.

Of course, discuss all this with an attorney!

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[Alfath Ahmed]

Hi Darryl, 

I would buy a duplex as an owner-occupant property and rent one side and live in another. After 1 year, you could use a quit claim deed to transfer the property to an LLC (this way you would be free of any liabilities).

I would not transfer the property to an LLC before a year because the lender could call the loan using the acceleration clause.

Let me know if you want any advice on house-hacking, fix & flip, BRRRR, or raising private capital. My family and I own over 400+ doors. I could definitely offer some positive insight.

[Jimmy Lieu]

Quote from @Darryl E Johnson:

Does anyone have any advice on how to use your primary residence as an investment property? 

Is it smart to transfer the house into your LLC? What are the pros and cons?

Tons of different ways to house hack! I'd recommend the book House Hacking by Craig Curelop. So I got started in real estate investing by house hacking myself. I purchased my first single family house here in Columbus and started renting out bedrooms for $600 each and was able to live completely free because of it! Great financial move. Some popular ways of house hacking including renting out bedrooms in a single family house, renting out other units in your multifamily, renting out your guest house, etc. I'm an investor and agent here so I've worked with tons of investors looking to house hack so if you have any questions or need any help, feel free to reach out!

[Miller McSwain]

I've also been advised to not worry about putting my House hack into an LLC. If you ever decide to refinance, then you will likely get a loan with less favorable terms.

Also, I've been told that a lawsuit can easily "pierce the corporate veil" because you lived in the property. So this defeats the purpose of the LLC.

Instead, we purchased Umbrella Insurance that will help pay for a lawsuit if we ever get sued. It costs only $200/year for a $1 million policy (we currently have 2 properties and believe that $1 million is sufficient).