Legally Protecting Myself as an Owner-Occupant in MF Home with FHA Loan

[Lindsay Wilcox]

I'm under contract to buy my first home AND my first investment property! I'm going to be living in one unit of a triplex in Indianapolis' Fountain Square neighborhood, and I'm using an FHA loan to do it, pretty much exactly as described here http://www.biggerpockets.com/renewsblog/2012/11/08/fha-loan-multi-family-investment-strategy/ only my purchase price is only $50k and rent is $500 per side. Midwest for the win!

My question is how I can legally protect myself in this situation. I'm pretty sure an LLC can't take out an FHA loan, right? Because how can a corporation live in a house? But I don't want to just run blind either.

So what do I do? Thanks so much!!

[Jerry W.]

Way to go Lindsay Wilcox. First I am not licensed in your area, and I do not know your state laws so not all of this information may be exact as to your location. (my disclamer) Corporations were originally formed to allow people to pool their money into a common enterprise through creating a new ficticious person and limit their liability to just their investment. Forming an LLC or a C Corporation, does protect you from liability in most cases because there is another legal entity created. With an LLC or a subchapter S corp you still get pass through taxing so you only pay taxes once. The problem with your scenario is that even if you were able to put your property into an LLC or C Corp., it wouldnt reduce your liability much. Any time you personally do an action you run the risk of being personally liability even if you have an LLC. Driving a car is a good example. Even if a car is owned by by a large company, say IBM and you drive it on IBM business, if you run a red light and hit someone they can sue IBM, but they can also sue you because your personal action caused harm to someone. Even with an LLC if you work on the electrical system and do it improperly and someone gets electricuted, they can sue the corporation but they can also sue you for your negligence as well. The idea of having a corporation is to limit your liability to the money you have invested in it and keep your remaining assets protected from suit. If you personally manage and repair then you are personally liable for most things anyway. Good insurance is a must, especially since you really have no expertise in doing repairs or renting. Direct insurance for a single property is probably best for now, if you acquire several properties down the road, you may want an umbrella policy thar adds addirional insurance to every property in the same form of ownership. Talk to an accountant, a lawyer, and an insurance agent. They will all cost you some money but you need to get it right. They all sell their time to you. Grocery stores dont give you free food, but if you ask they can direct you to the hamburger section instead of the steak section to save you money if you ask. As your business grows so will your need for more services from those professionals, but you will be better able to afford it. As a last bit of advice keep reading and learning. I have owned rentals for quite a few years and I am still amazed at how much I learn from reading posts on BiggerPockets. (I was horrible at renting when I started) It is much easier to expand your business if you expand your mind and knowlege. The amout of time people spend here to help others is truly amazing. I have benefitted from advice so much here myself. Matt Devincenzo, Bill Gulley, and Chris L. regularly give their advice freely to help others. I allmost feel like they are associates even though we have never met, talked, or even seen each other. Best of luck!!!