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Updated almost 12 years ago on . Most recent reply
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Is it worth setting up an LLC?
Hi, a family member and I are considering investing in our first investment property. I've read that forming an LLC to purchase the property is a good way to protect ourselves from liability. However, I also understand that obtaining financing for an LLC is often difficult (especially if there are no pre-existing assets or income streams). I'm told that we'd have to obtain a commercial mortgage which often requires higher down payments (up to 35%) and higher interest rates. We'd also have to personally guarantee the loan, which I could understand. I was also told that the most important protection from personal liability will be the insurance I purchase. The LLC will add another layer of protection, but the insurance will be the most important.
My question is this: Is it worth setting up an LLC and having to deal with higher financing costs, or do most investors purchase investment properties using residential mortgages and rely on insurance to protect themselves from liability? Any input would be much appreciated.
Most Popular Reply
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The real question is how much personal wealth/assets do you have? If it is little to none, then you don't have much to sue for. Next question is how much equity exposure will the investment have? Again, if small, then just insurance is appropriate.
If you do have equity or assets at risk, I highly recommend the LLC or some kind of asset and liability protection in addition to insurance. As far as the LAN goes, you take it out in your name and then after closing, transfer the property ownership from your personal name to the new entity. When you do this, you need to make sure you also transfer the named insured on your policy over to the LLC.
Now some will argue or warn about the DOS clause (due on sales clause), but to be frank, I have yet to hear of one person where this was actually enforced to the point of a balloon. Banks just want timely payments and insurance coverage. Therefore, there is really no DOS risk.