Should I move my rental to an LLC?

Question

I am a first time investor and I am wondering about moving my soon-to-be rental property into an LLC. Is this a good idea, why or why not? I filed for an LLC along with my application for a business line of credit. I guess I just feel weird about having my new investment property under my business name instead of my own name. I plan on closing with the title company under the LLC name, instead of my own and then moving it later.

Thanks for your help; I apologize if this is a silly question!

Nathan Gesner · Answer

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.

Jon Puente · Answer

Hey Iris,

The only reason to start an LLC and purchase properties under that LLC is for limiting liability, meaning its harder to come after your personal assets should someone sue you. The only reason someone would sue you is because you have substantial assets, enough for them to want money. If this is your first rental, then it would not be worth it.

Right around 3+ rentals is when you should start thinking about an LLC. Transferring properties to an LLC is very easy to do with a QCD or Quit Claim Deed. If you are pursuing traditional loans, lenders want financing done in your personal name anyway. However, if you are purchasing loans with NonQM loans, then you can purchase under LLC.

Just buy your first rental with your personal name and start building that way! Keep it simple!

Matthew Kwan · Answer

Yes using LLC towards your investment properties would be a shield protection towards your personal name. However, I dont believe you can use LLC towards primary as your lender would view the LLC as a business entity and could call off your loan "acceleration clause"

@Albert Bui @Carlos Valencia

Tom O. · Answer

Here's what nobody says when they are shilling that you should own everything in an LLC:

1. The "personal asset protection" may not be there depending on your jurisdiction and your activities. In my area, which is pro-plaintiff, I have personally seen judges go through LLCs (and even land trusts) as if they don't exist to find personal liability for the owners. I even had a judge say "this looks like a shell game" which is true of any corporate structure. Also, if you self manage you may be personally liable for your activities.

2. A downside to putting property in an LLC is you may be barred from representing the LLC in court in say an eviction matter. Attorney ethics rules prohibit non-attorneys from representing LLCs in court in many/most (?) states. So if you use an LLC you may be required to hire an attorney.

3. I have never personally seen a personal injury attorney go after personal assets when sufficient insurance was in place. And a $1 million umbrella costs only $3-400. If you want to sleep better at night buy more insurance. My suggestion is assume your building is going to kill someone and buy a policy that provides at least $1 million and a $1 million umbrella unless you have more than 10 units. Also, you can buy one umbrella that covers multiple buildings.

4. Keep your building bank accounts in a separate bank from your personal accounts.

Patricia Steiner · Answer

This is a very common concern with investors; an LLC may not be the best vehicle based on property utilization. An Umbrella Policy - which is a cheap date - may be a better way to go.  I've shared this article many times before and it's an absolute must-know for investors (the scenarios/case studies at the end are very telling):

https://www.apartments.com/ren...

Hope this helps.

Steve Vaughan · Answer

An LLC or not to me depends on if you will have unrelated partners or not and if the 'rental property' is residential or commercial.

House/townhome/condo or small plex without partners?   No LLC

Commercial 5+ units/ industrial property?  Yes LLC

Hard to believe you are being advised at all without basic property type or partner or not info.

Jason Marino · Answer

Hi Robert,

To make a transfer from yourself to an LLC, you can use a real estate attorney or a title company. You could try to create and record a Deed yourself, but you would need to research the State and County requirements for a Deed. The rules vary, so it is important that you get the right template.

Iris Olivas · Answer

Thank you everyone for your responses!  I appreciate your thoughts and help!

:) Iris

Chris LumLee · Answer

I've had properties held under my name personally and I just paid for better insurance. An LLC is a commonly recommended practice but another option- albeit one up for debate- is just to pay a little more for more insurance coverage.

Jenny Milu · Answer

I had the same question and decided an LLC is likely the best route for me to go next.

In addition to this, is there any particular state to form the LLC in that is better than the state that I intend to do business in being Montana?