First Duplex- s/c corp vs Llc? Any other advice?

Question

I am about to purchase my first home/investment property. It’s a duplex and I will live in one side and rent out the other. I’m using a bank loan (10/6 arm).

I’m wondering if I should use a s or c corp or an Llc for it? Am I allowed to do this if I live in one side?  Will the bank even allow this? Does one have additional tax benefits over the other?

I’m planning to fix some plumbing, ac and roof before moving in? Do I need to for the corporation before I hire people to work on the property?

What’s the best way to get tenants? Do you need to hire a lawyer to draft a lease agreement?

Any advice in general? I am excited but also feeling incredibly overwhelmed

Katherine Serrell · Answer

Hi Cindy! Congrats on your first deal! Here are my thoughts on your questions.

- You cant use an S corp, C corp, or LLC for a primary residence secured by an owner-occupant mortgage because they bank can call the loan. There is something called a 'due-on-sale' clause that basically says that if the property is 'sold' to a new owner (i.e. your S corp, C corp, or LLC) they can call the loan due and you would either have to refinance or sell. Granted - this is rare, but they most certainly can. You just need to inform you insurance agency that you are renting the other side and ask them to update your policy to cover this. I would also get good commercial liability umbrella insurance policy. You can require your tenant to get renters insurance if you want to go a step further.

- The tax benefits are the same in this situation. Just because it isn't a formal LLC doesn't mean its not a 'business' since you still have business income, business expenses, etc. The tax treatment of sole proprietorship income (what you will have) and a single-member LLC income is the same because single-member LLCs are "pass through entities" so the income essentially flows through to your personal return.

- You don't need to have a corporation to have people work on the property.

- Best way to get tenants? Depends on your market. Zillow, Apartments.com, local college facebook groups, etc is a good place to start. Biggest thing is to screen them well. Background checks are absolutely necessary. You don't need to hire a lawyer to draft a lease agreement. You can find lease templates online. Make sure they cover what your state requires. You do need to understand tenant-landlord laws in your state such as how you have to hold a security deposit, how much you can charge for a security deposit, how many days notice you have to give for certain things, etc. Many websites have quick guides to each state's laws.

- Advice in general: There are no dumb questions (cliche, I know). Everyone feels overwhelmed when they first start off. Keep asking questions and try to be "comfortable being uncomfortable" until you get through the learning curve. The first one is the hardest. Never cheap out on insurance. Keep records of literally any money you spend on or related to the property for when tax seasons rolls around.

Hope this helps!

Ian Murray · Answer

@Cindy Joseph You can still PM and use software like Innago and Rent Redi to help you.  Both platforms, as well as Avail and others, offer screening services charged to the potential renter.  Some of them also allow you to post directly to a number of sites to advertise your property for rent.  You can have the potential tenants pre-screen based on your criteria and then conduct their background checks all on the platform before signing the lease, also something that can be done on the platforms.  Personally, I also like having the payments done through the software platform.  That way, the money goes straight to my account, and there is no discussion about whether it was paid on time or not due to my accessibility.

Drew C Grossman · Answer

Hi @Cindy Joseph,

Congrats on the goal to purchase your first home! When do you close? Is it still your plan to live in one side?

Regarding LLC...its a super grey area because technically quit claiming ownership into an LLC can trigger a Due On sales clause ....though extremely unlikely is still a risk. The best way to figure this out is just to ask your bank! Most banks, especially if you are getting traditional financing (Conventional, FHA, VA ect) will make you close in your own name if thats how you are buying it. It is up to their discretion what happens after.

Assuming you do move ownership to an LLC....S vs C corp really depends on how you will operate this "Business" and I would defer to your Tax professional on specifics however there likely wont be a major difference especially with this being your first property. Although the differences will not be huge for your situation is still good idea to understand the Tax landscape.

On the rehab question, it shouldn't make a difference if you own under your name or LLC. When the roof company comes to replace roof for example, they will make sure you are owner and then go pull permits with county and handle.

Being that its your first property, I would really recommend using Zillow to do the basic back ground/credit screening and applications submissions. This service is currently a free service and super valuable! You will make your listing, add pictures directly though the zillow rental manager portal which is super easy. I have a draft of a FL lease I have used over the years I can send you, feel free to PM me. This is something you as the landlord can sign directly with the tenant however if you want a PM company or attorney to do so, you can hire out.

If you are not looking to be hands on/ vet potential tenants ect you can always hire a Property Management companies such as my self who will typically charge 8-10% for full service, placing tenants, signing leases, income verification, collecting rent, dealing with maintenance ect..

Best of luck!

Drew C Grossman · Answer

Good advise.

A lot of the policies I have in Florida (or have worked on for a client) on residential or small multi family offer a property insurance section and a separate general liability portion built in that protects from a variety of things. Having a reliable insurance contact to run things by to be certain is SOO critical.

Drew Sygit · Answer

FNMA allows transfer of deed to LLC if mortgage originated after June 1, 2016 and original borrower owns a majority interest in the LLC and any 12 months of owner-occupancy is first met.

https://servicing-guide.fanniemae.com/THE-SERVICING-GUIDE/Part-D-Providing-Solutions-to-a-Borrower/Subpart-D1-Assisting-the-Borrower-with-Property-Related/Chapter-D1-4-Transfers-of-Ownership/Section-D1-4-1-Information-Relating-to-Transfers-of-Owner/D1-4-1-02-Allowable-Exemptions-Due-to-the-Type-of-Transfer/1041300841/D1-4-1-02-Allowable-Exemptions-Due-to-the-Type-of-Transfer-09-09-2020.htm

Cindy Joseph · Answer

Thank you! Closing is scheduled for 12/12. Yes planning to live in one half. I will be PM  you, would love a copy of the FL lease. Thanks again!

Basit Siddiqi · Answer

an LLC is normally used to hold business property.A house-hack is a property that is partially business and partially personal.You want to see if having the property held within an LLC will provide you the protection you are looking for as you normally can not commingle personal/business transactions within an LLC.

Cindy Joseph · Answer

Do you recommend both landlords insurance and umbrella insurance (on top of home owners insurance)?

First Duplex- s/c corp vs Llc? Any other advice?

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