LLC for rental properties
Member since 2021 · 15 posts · 3 votes
LLC for rental properties
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Jeff CopelandBusiness Member
Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votesThe mortgage isn't really much of a factor when it comes to liability protection. (But this is really a question to discuss with your attorney. Don't take my word for it.)
An LLC owning the property theoretically creates a "corporate veil" that simply means if you have a claim against one of your properties (a personal injury or wrongful death claim being the worst case scenario that most landlords are looking to protect themselves from), the claimant can not go after your personal assets, only the assets owned by the LLC.
But there's more to it that just placing the deed in the name of an LLC. You also need to keep separate accounts and bookkeeping for each LLC, and avoid any commingling of funds. Using the money in your LLC's bank account to buy yourself a pair of sneakers or pay your personal electric bill can make your corporate veil easier for a plaintiff's attorney to "pierce". (An attorney could argue that your LLC is total BS, as evidenced by the fact you used it to buy yourself Taylor Swift tickets, and a judge or jury might agree).
Another crucial component of liability protection is your insurance coverage. Many investors make the mistake of changing the deed over to an LLC, but leaving the insurance policies in their personal name. This can create the risk of claims being denied on the basis of you (personally) not having an insurable interest in the property, since it is not owned by you; It is owned by a corporate entity. Much like you cannot take out an insurance policy on my house (and expect to be paid when there is a claim), because you don't own my house.
Also note that if you ask an attorney, a CPA, and a mortgage broker how to structure your LLCs, you're likely to get three different answers. There are liability issues to consider (so the attorney will tell you one thing), tax implications (so the CPA might tell you another), and financing limitations (you can't get a conventional mortgage in the name of an LLC, and the due on sale clause noted by another poster) to consider. So it's important to understand the nuances and figure out what works for you, because there is no one size fits all solution.
Copeland Morgan LLC4.770 Reviews
9 Replies
- 3yGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
I"m not a layer or CPA.
Depends what you mean by "benefits and protections".
If you are not managing your LLCs correctly, a lawyer can easily have them thrown out so they offer you no protection. I've heard Garrett Sutton say that 50% of LLCs aren't managed properly and get thrown out in court. There are lots of ways for an LLC to be thrown out. It's not clear to me, but I would suspect that if the mortgage is in your name but the property is in an LLC, a good lawyer could use that to say you haven't been managing the LLC like a business.
By moving the deed into your LLC you have exposed yourself to the risk of the bank calling the loan (due on sale clause) although that is unlikely. If you want to refinance with an agency loan you can't get an agency loan while it is in your LLC.
- 3yJeff CopelandBusiness MemberReal Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
The mortgage isn't really much of a factor when it comes to liability protection. (But this is really a question to discuss with your attorney. Don't take my word for it.)
An LLC owning the property theoretically creates a "corporate veil" that simply means if you have a claim against one of your properties (a personal injury or wrongful death claim being the worst case scenario that most landlords are looking to protect themselves from), the claimant can not go after your personal assets, only the assets owned by the LLC.
But there's more to it that just placing the deed in the name of an LLC. You also need to keep separate accounts and bookkeeping for each LLC, and avoid any commingling of funds. Using the money in your LLC's bank account to buy yourself a pair of sneakers or pay your personal electric bill can make your corporate veil easier for a plaintiff's attorney to "pierce". (An attorney could argue that your LLC is total BS, as evidenced by the fact you used it to buy yourself Taylor Swift tickets, and a judge or jury might agree).
Another crucial component of liability protection is your insurance coverage. Many investors make the mistake of changing the deed over to an LLC, but leaving the insurance policies in their personal name. This can create the risk of claims being denied on the basis of you (personally) not having an insurable interest in the property, since it is not owned by you; It is owned by a corporate entity. Much like you cannot take out an insurance policy on my house (and expect to be paid when there is a claim), because you don't own my house.
Also note that if you ask an attorney, a CPA, and a mortgage broker how to structure your LLCs, you're likely to get three different answers. There are liability issues to consider (so the attorney will tell you one thing), tax implications (so the CPA might tell you another), and financing limitations (you can't get a conventional mortgage in the name of an LLC, and the due on sale clause noted by another poster) to consider. So it's important to understand the nuances and figure out what works for you, because there is no one size fits all solution.
Copeland Morgan LLC4.770 Reviews - Member since 2021 · 15 posts · 3 votes3y
Quote from @Jeff Copeland:
The mortgage isn't really much of a factor when it comes to liability protection. (But this is also a question to discuss with your attorney. Don't take my word for it.)
An LLC owning the property theoretically creates a "corporate veil" that simply means if you have a claim against one of your properties (a personal injury or wrongful death claim being the worst case scenario that most landlords are looking to protect themselves from), the claimant can not go after your personal assets, only the assets owned by the LLC.
But there's more to it that just placing the deed in the name of an LLC. You also need to keep separate accounts and bookkeeping for each LLC, and avoid any commingling of funds. Using the money in your LLC's bank account to buy yourself a pair of sneakers or pay your personal electric bill can make your corporate veil easier for a plaintiff's attorney to "pierce". (An attorney could argue that your LLC is total BS, as evidenced by the fact you used it to buy yourself Taylor Swift tickets, and a judge or jury might agree).
Another crucial component of liability protection is your insurance coverage. Many investors make the mistake of changing the deed over to an LLC, but leaving the insurance policies in their personal name. This can create the risk of claims being denied on the basis of you (personally) not having an insurable interest in the property, since it is not owned by you. it is owned by a corporate entity. Much like you cannot take out an insurance policy on my house (and expect to be paid when there is a claim), because you don't own my house.
Also note that if you ask an attorney, a CPA, and a mortgage broker how to structure your LLCs, you're likely to get three different answers. There are liability issues to consider (so the attorney will tell you one thing), tax implications (so the CPA might tell you another), and financing limitations (you can't get a conventional mortgage in the name of an LLC) to consider. So it's important to understand the nuances and figure out what works for you, because there is no one size fits all solution.
Awesome thank you for the detailed response!
- Accountant · Franklin, TN · Member since 2023 · 204 posts · 91 votes3y
Remember that an LLC is an asset protection and risk mitigation tool not tax strategy. Also make sure you speak with your lender before moving the property into an LLC. Congrats on the growing portfolio!
- 3yJeff CopelandBusiness MemberReal Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votesYou're welcome! I also sent you a PM with some additional resources to check out.
Quote from @Alexis Herrera:
Awesome thank you for the detailed response!
Copeland Morgan LLC4.770 Reviews - Member since 2021 · 15 posts · 3 votes3y
Quote from @Greg Scott:
I"m not a layer or CPA.
Depends what you mean by "benefits and protections".
If you are not managing your LLCs correctly, a lawyer can easily have them thrown out so they offer you no protection. I've heard Garrett Sutton say that 50% of LLCs aren't managed properly and get thrown out in court. There are lots of ways for an LLC to be thrown out. It's not clear to me, but I would suspect that if the mortgage is in your name but the property is in an LLC, a good lawyer could use that to say you haven't been managing the LLC like a business.
By moving the deed into your LLC you have exposed yourself to the risk of the bank calling the loan (due on sale clause) although that is unlikely. If you want to refinance with an agency loan you can't get an agency loan while it is in your LLC.
Good to know! Thank you I appreciate it.
- Spring, TX · Member since 2017 · 138 posts · 44 votes3y
Quote from @Jeff Copeland:
You're welcome! I also sent you a PM with some additional resources to check out.Quote from @Alexis Herrera:
Awesome thank you for the detailed response!
Hi Jeff,
Can you PM me with those additional resources too. Thanks!
- 3yJeff CopelandBusiness MemberReal Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votesDone!Copeland Morgan LLC4.770 Reviews
- Realtor · Miami Fl · Member since 2021 · 71 posts · 64 votes3yJust to piggy back from the above posts.
Quote from @Alexis Herrera:
Hello all,
I have yet to speak to an accountant (looking a new one) or a lawyer (had one and was not reliable) about this but I wanted to ask. I have a few rental properties that I own. I have LLC's for each one, but only for the deeds. The mortgages are not under an LLC, just my personal name. Do I still get the same benefits and protections by just having the properties on an LLC through just the deed?
-You avoid piercing the vail by not commingling funds, having quarterly meetings, and property filling the taxes.
-First line defense should be your insurance policy then the LLC protection. Ideally you want to have the least amount of equity in the property to avoid lawsuits. If a lawyers sees that there is a 1st lien mortgage with very little equity in the property then it is likely that they will not further pursue you after getting the insurance settlement if anything would be to happen.
To answer you above question: My understanding is that you only deed the property to the LLC. You do not change the mortgagor. What the bank cares about is that the debt is being serviced and they are getting their money.
Hope this helps,
Best Regards.
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