House Hacking - Legal Structure for Rental Unit?

Question

My son is buying a 2-unit building in Milwaukee. He is buying the property in his own name. He intends to renovate the building while he lives in one unit and rents out the second. Without going into the technical legalities of how to do this, what's the best structure to manage the rental?  For example, does he set up a separate corporate entity to manage costs and expenses? How can he shield his personal assets from liabilities if the entire building is in his name? etc.  Thank you for any geuidance here.

Marcus Auerbach · Answer

Here are the 5 layers of defense your son should set up:

1.) Make sure your property is safe and compliant; don't be negligent.
2.) Screen your tenants well
3.) Use a bulletproof lease, rules®ulations, lead notice, smoke/CO detector notice, non-standard rental provisions to clearly regulate the rest
4.) Carry proper insurance on the building, which includes landlord liability
5.) Get an umbrella policy for $1 million that covers liability in excess

I've been a landlord in Milwaukee for 15+ years, I am on the board of the RPAWI and see a lot of legal stuff (like the Koble case at the moment) and as an agent, I've been working with house hacking clients for a decade. We pretty much have house hacking ready in a can for clients, including how to do background checks, all the paperwork etc. - DM me for details. You could set up an LLC, but that has also downsides and if you can't proof in court its an actual company it may not hold up - lawyers call that "piercing the veil". But it depends, setting up a corporate structure makes sense once your building's equity or your net worth exceeds your umbreall insurance coverage. Otherwise your juice is not worth the squeeze for a attorney trying to take you to court.

Stuart Udis · Answer

If the property is in your son's name creating an LLC or any other entity does nothing but add additional operational costs. Without getting into the weeds on litigation procedures, there's nothing that stops your son from being named as a defendant in a claim regardless of the entity structure. In this particular case, adding entities as a owner occupant where the property is titled in your son's name only makes litigation more complexed and expensive.

@Marcus Auerbach provided great practical advice and his 5 layers really boil down to one thing.... be a good operator. As a property owner, the focus should be on proactively preventing liability from arising rather than solely preparing for when that liability event occurs. Being proactive is simply doing things the right way. Normally those who are proactive are not only more likely to avoid the liability events but by operating their business the correct way if that liability event does occur (and it inevitably will) the proactive property owner are always better prepared to repel exposure.

Marcus Auerbach · Answer

Just to clear, if you are deeding a collateralized property from your personal name into an LLC after you have taken out a residential 30y fixed rate loan you are in violation of your mortgage contract. The fact that most (almost all) people have gotten away with it in the past does not make it legal. That's what commercial financing is for, usually 5 year balloon loans.

Ryan Randall · Answer

Why isn't your son doing this research?

Wale Lawal · Answer

@John Franczyk

Great question! Since the property is in his personal name, the best first step is to get a solid landlord insurance policy and consider an umbrella insurance policy for extra liability protection. If he wants to shield personal assets further, he could form an LLC and explore transferring the property into it later—though that has tax and lending implications. For now, he can also keep finances separate by using a dedicated bank account for all rental income and expenses. Once the renovation is complete, he may revisit the LLC structure with a real estate attorney for long-term asset protection.

Good luck!

Charles Clark · Answer

@John FranczykGreat strategy by your son — living in one unit while renting the other is a smart move!

Even if he’s buying in his own name, it’s worth thinking ahead:

LLC: Consider transferring to an LLC later for liability protection (with some tax/loan implications).Separate Finances: Keep rental income/expenses in a separate account.Insurance: Strong landlord or umbrella insurance is a must.Tools: Apps like Avail or RentRedi can simplify management.

Want help figuring out the best setup for him? Let’s chat!

John Franczyk · Answer

I appreciate the info!

House Hacking - Legal Structure for Rental Unit?

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