How to structure STR business

Question

Hello! I've been reading BP for awhile now, but have not posted yet. My spouse and I are under contract on what will be our first investment property, a small single family home in small town in south central Missouri. We intend to renovate the house, and then open it as a STR this fall. I am confused as to how best to create our business structure - we do have other non-real estate assets, which I am reasonably concerned about protecting. It seems a STR is slightly higher risk than a regular LTR.

Should we -

option 1: Do nothing - buy umbrella insurance and not open LLC/LLP. It would be easier to get a home equity loan/HELOC, which I think we will want to do in 6-12 months to scale up. Taxes would be simple as we could file as a qualified joint venture.

option 2: Open single-member LLC with myself as member and have LLC own the property. In that case, is all the income "mine"? This would make it harder to withdraw equity/acquire a HEL. I also already own a SMLLC as I am self-employed doing consulting work.

option 3: Open a multi-member LLC with us both as members and have the LLC own the property. My tax person says we would then be taxed as a partnership which is less favorable. (Missouri is not a community property state so cannot file as QJV under an LLC in Missouri)

option 4: Open a LLP or S-Corp... seems a bit much for one investment property, but what do I know.

What am I missing here? I'm feeling lost on how to protect our assets while still getting the tax benefits of a rental! Please send your thoughts and opinions and if you have a real estate lawyer in Missouri that you like, I'm all ears!

Thank you!

Sarah Watson · Answer

@Steve Redd Glad to hear your STR in Branson is going well so far - it seems like a slam dunk! Yes, We live about 3 hours from Branson. Here in Salem, we have only a dozen or less STRs on the market, so it has been quite difficult to have any info about rates, occupancy, etc. However, none are dog friendly and most are very small or very large, so we are hoping to hit in the middle with a 3bed/2ba that is dog friendly. *fingers crossed* We are also prepared to convert to medium-term rentals as there are several employers in the area that have contract workers in and out regularly.

Thank you for your well wishes!

Steve Redd · Answer

@Sarah Watson these are great questions. Thanks for asking them! I can't advise on anything, but these are probably the questions I should have asked before I did my Branson MO STR! You have definitely got me thinking…

I’m anxious to see how you handle this, and scale your business in the future! Best of luck to you!

Sarah Watson · Answer

@Ryan Meuer Hello neighbor! Thank you for replying. I can see the advantage of keeping it simple with an umbrella policy at the beginning, and worrying about LLCs later. I have a few phone calls scheduled this week to try to get more info/opinions. Setting up trust/holding co/llcs is definitely something I'd want to offload to an attorney - yuck. But we aren't looking to pay the big bucks for that right now either.

If you don't mind my asking, have you ever had a claim (umbrella insurance) related to your STRs? I imagine it's probably a low chance that something catastrophic happens.

Ryan Meuer · Answer

Hey there @Sarah Watson.  I'm only a short distance from you here in Union, MO and we invest primarily in Branson.  We too had other assets we were concerned about protecting when we started but opted to get a hefty insurance policy in order to get things going quickly.  We now have a LLC (just my wife and I) for our real estate, but we are scaling and will be looking to really protect assets by using an estate planning attorney later this year.  The structure I think we will be going towards is something like this; Trust>Holding Company>Multiple LLC's.  To my understanding, there isn't really a huge difference in taxation between the LLC choices you presented, at least not when you are just getting started, so don't stress too much about it.

Steve Redd · Answer

@Sarah Watson the STar in Branson is doing well. It is still early (it has only been active for about 6-7 weeks), so I’m hesitant to say it is or is not successful yet. We have friends that invest in Branson, and they are doing very well with STRs. We love visiting Branson too. You guys are only a couple hours from there right? I’m not familiar with your area in MO. Are there many STRs to give you a good sense are marketability there? I wish you the best of luck. I am super excited to see others advancing toward their Investing goals. It motivates me to keep grinding. I’m cheering for you!!

Sarah Watson · Answer

I will do my best to update when we decide how to move forward! How is your Branson STR going? My mom goes to Branson several times a year. It seems like it would be a great place for a STR!

Sarah Watson · Answer

Thank you for your response! Do you have a lawyer you would recommend who is familiar with the STR business side? I would be happy to pay for legal advice (and will likely need legal in the future), I just have not found someone yet who seems like they're giving personalized advice.

Jacob Trogan · Answer

Do whatever allows you to focus on buying a property and not worrying about all of these details. When it matters later on you will figure it out. As for an actual answer my personal opinion and that is the best anyone can give you on an online forum for free (an opinion that really doesn't matter... honestly just pay a lawyer for stuff like this) anyways my advice is open an LLC if you want to start a STR business. If it is not a business and rather investments you can buy under your name for now but will probably switch to making it a business anyways later on

How to structure STR business

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