Want to setup an LLC in Colorado (partnership with my mother) for investing in rental properties

[Sabrina H.]

Hi! I'm fairly new to the site (been browsing for a week or so) and haven't landed on exactly the information I'm seeking, so I thought I'd post my questions instead.
My mother sold her house in the southeast recently and moved in with me here in Colorado. Obviously banks aren't paying squat in interest right now, so we are looking at using some of her proceeds to buy 2-3 properties to rent out and split the rental income (she puts up the cash, I do all the marketing and property mgmt).
I've been told that an LLC is the way to go, so that we can protect ourselves as individuals if something happens in the rental(s), and also to get the best tax benefits. I'm just not sure exactly where to get the information for all of the forms needed by the state (I found the LLC submission area on Colorado.gov, but have questions about some of the fields needed to be filled out).
Also, since these properties will most likely be condos (making sure that the HOA covers the roof and exterior maintenance), do we need to get some sort of insurance outside of regular 'condominium insurance'? Does the policy get taken out to the LLC or us as individuals?
Should we setup the LLC and it's relative bank accounts before purchasing anything and writing up lease agreements? I've heard that even if you have an LLC, if the tenant knows your personal name, they can go after you personally regardless of the LLC being the actual "landlord".
I'm excited about moving forward (we recently stumbled upon a great property and would love to pick it up right away), but I'm a little intimidated at some of the potential insurance/tax/etc... issues that may arise.
Thanks in advance for any and all advice!

[Mitch Kronowit]

Hi Sabrina,

I don't know much about Colorado law and I'm not an attorney, but I can tell you what we have done out here in California that may steer you in the proper direction and help you ask the right questions.

Originally posted by Sabrina H:

Also, since these properties will most likely be condos (making sure that the HOA covers the roof and exterior maintenance), do we need to get some sort of insurance outside of regular 'condominium insurance'?

I'm not sure what you mean by "condominium" insurance. Typically, there is a Master Condominium Policy on the entire development that the HOA pays for (with your dues money). This covers the basic structure of the building and grounds. However, you're going to need to insure the interior of the condo and it's fixtures, such as carpet, hard wood floors, kitchen cabinets, chandeliers, etc. You're also going to need liability insurance in case a tenant or visitor gets hurt on the premises.

The policy you will get won't quite be a homeowner's policy since you won't be living there. My carrier calls it a "Fire" policy (I guess it covers everything a fire might do to the place, including the flood caused from putting the fire out), but I've also heard them called "Landlord's" policies and maybe even "Rental" policies.

What you don't want, but your tenants should have, is a "Renter's" policy. This covers their personal belongings and nothing more. So, if lightning strikes and burns the entire complex down, the Master Condo policy should rebuild the building, your "Fire" policy should finish the interior of your unit (new paint, flooring, cabinets, appliances, etc.) and possibly even cover your lost rent while the premises are uninhabitable, and your tenant's "Renter's" policy should replace their flat-panel TV, sofa, bed, clothing, laptop, etc.

Our insurance carrier simply added our LLC as an additional name insured on our policies. So we're covered as both individuals and an entity.

That's not entirely necessary, but not a bad idea if you're very close to conducting business. That way everything is in place from day 1 of your first rental.

This has been a huge topic of discussion here on BiggerPockets. If the tenants know your name (I hide mine from most of our tenants), then some attorney is sure to sue everyone and anyone that he can think of. However, just because you're named in the suit doesn't automatically mean you're personally liable. The way my attorneys explained it to me, if you conduct your business in a responsible manner and maintain your entity properly so there isn't any fraud or misrepresentation, then your attorney should be able to have the court dismiss the personal suit against you and force the plaintiff to sue your LLC by itself.