When is the right time to put rentals under an LLC

Question

Am I better off purchasing properties under my own name? Or go ahead and do them under an LLC? At what point is it worth the investment both for security purposes and tax purposes

Weston Couch · Answer

@Ben Satterfield @Grant Rothenburger Full disclosure, I work with an asset protection organization, but I hear that "probably only worth it for big investors" rhetoric a lot, and I think LLC's are surprisingly affordable if you get the right services(comparable to insurance). I also think using LLC's are worth it even if you even if you're not a bigger investor for a couple other reasons.

First, they do provide effective protection that insurance doesn't as long as you avoid mixing money, etc. They can prevent a court from stripping you of your investment properties if there's a large judgement from a car accident you were involved with for example. They also compartmentalize what's at risk in any given lawsuit meaning that if a lawsuit comes from an accident at a property, you can't lose more than that specific property.

Second, they're more about being proactive in protecting yourself. When used appropriately, they prevent you from ever being low hanging fruit for a lawsuit. If you only have insurance and own everything in your own name, when or if there's an accident on your property, you'll be a clear target for a lawyer looking to collect.

Feel free to connect with me if you would like more information. I can provide a lot of resources on the subject.

Weston Couch · Answer

@Todd Rasmussen Hi Todd, it's not so much an issue of "piercing the veil" as it is potentially violating a due on sale clause. Though it won't effect the ability of an LLC to shield from liability, a transfer to an LLC will trigger the clause and should therefore be avoided, even though banks are hesitant to ever foreclose as long as the note is being paid. Even with the note being paid, the banks will still send threatening letters. This issue can be avoided completely by transferring the property into a land trust.

While a transfer to an LLC will cause alarms at the bank and prompt them to send you a letter, a transfer to a trust will not. A transfer to a trust is exempt from due on sale violations since banks will view transfers to a trust as an estate planning tool. You should not even receive a letter from the bank.

This article can explain the general process of taking a property into your own name and transferring it into the Land Trust before assigning it to the LLC. The added benefit of this process is that you can also have your attorney sign the public records as "Nominee Trustee" before assigning yourself as the "Trustee" once the Trust has been established. It means your name does not appear on public record for that property, your attorney and their address is the only thing that appears. All the while, you always have control and nobody else, not even your attorney, can manage or sell your property except for you.

If you need to prove ownership for financing or any other reason, you simple produce your company documents as well as your banking and accounting records. Since these disclosures are private, and not part of the public record, it does not violate the anonymity you’re seeking.

Please feel free to connect with me or DM if you’d like to know more.

Grant Rothenburger · Answer

I don't disagree with your points about asset protection.

I say what I said to new investors that are caught up on this because we've seen time and time again people want to invest but get caught up in the LLC debate. "Should I make one, should I not, when should I, how do I do it, how much is it...." blah blah blah.

IMO the better move is to forget all about the LLC (unless you need it for hard money) and just go get a freakin deal. Once that's done and you know your way around the real estate industry a little better, worry about the LLC at that time. (again not referring to partnerships or larger/commercial deals, just one person trying to start with one smaller property)

I didn't even mention the people that finally get the LLC started, think they've done something, and never do a deal.

But, if I were working for an asset protection agency I would absolutely disagree with myself lol.

Heath M. · Answer

I need to move mine into a LLC.  My lender is okay with it, I use a smaller bank that markets to investors so they were okay with it.  I just haven't moved mine over yet.  I've been researching the best way to do it, seems a warranty deed seems to be the best way to deed it over to the LLC name.

Weston Couch · Answer

@Grant Rothenburger  All valid points, getting property is definitely the most fundamental part of investing in real estate, haha.  I'll just say that you don't need to get a lot of experience(own multiple properties for example) before looking into LLC's, especially given they can cost next to nothing.

Heidi Kenefick · Answer

@Ben Satterfield

I guess it depends. If you are in a profession where you are likely to get sued (which includes being a landlord) and LLC isn’t a bad way to go. An umbrella policy is also worth having and very cheap (mine is $100/yr).

I just met with a lawyer yesterday who highly recommended I put my rental (I only have one right now) into an LLC, thus if I’m sued it is limited to the value of that property and they cannot go after my other assets. Apparently it is a lot easier than I thought. I will definitely do this going forward, and each house will have its own LLC, and then I can create a parent holding company for all the LLC’s. However, my situation may be different from yours because I’m in a profession that is very likely to be sued.

Steve Vaughan · Answer

Commercial property = LLC.

Residential = no LLC.

Don't subject yourself to commercial loans on residential property.   Commercial loans suck and are 10x the risk.

Zachary Bohn · Answer

@Todd Rasmussen an LLC owned by a husband and wife is only disregarded if you live in a community property state otherwise you should be filing as a partnership

Todd Rasmussen · Answer

We have an LLC we handle all the operating expenses in, but it's a single member llc so all the financials flow through to our personal tax return. Properties are in our name so we can finance them conventionally (for now). My vote is for a substantial liability policy. For most people starting out tax differences are negligible or worse filing corporate tax returns on top of your personal. Husband/Wife owned LLC's are considered single member and as such is disregarded by IRS so you could get one if you wanted without upsetting your tax experience, but don't think it's necessary to start.

Weston Couch · Answer

@Chris Purcell Connect with me and I can share our blogs and articles with you, both of which have case-law.

When is the right time to put rentals under an LLC

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