First rental property - on whose name should we buy?

Question

We are looking to buy our first rental. We are starting very small (with a condo) as we both have separate careers.  We also unfortunately can't run around to find "the deal of the century" where we would make tons of money on the purchase itself. We just want to start investing some money before they burn a hole in our pocket and we end up without them.

We will put about 50% down.

I read somewhere that it is very wise to NOT buy a rental property on our name as private individuals - but to get a business license for a  "limited liability" company and buy on the company's name instead to avoid any potential disasters in the future.  By this I am thinking of situations such as renter breaking their back on your property and then suing you for all you've got.

Is this the correct step to take?

If yes, how much of a hassle is to get a business license in Georgia?

Thank you all so much!

Sara K. · Answer

Look into umbrella insurance as a way to CYA on your rental.

Michael Cohen · Answer

A couple of issues:

1) Condo financing is very dependant on external factors, namely the condo association and/or management company. The condo has to be eligible for that specific loan type; meaning a condo has to be FHA approved to allow FHA buyers into the property. For a conventional loan, each individual lender must be approved to lend within that condo. Many condos are not eligible for either, so they're cash buyers only which drastically limits the pool of eligible buyers - and thus limits the value. That could be a good opportunity for a cash buyer (or PML/HML buyers) looking to rent, however, it makes the property extremely difficult to sell. That's why so many are for rent; the owners haven't been able to sell them.If there is a lot of competition (other open units someone is trying to rent out) then I would suggest you think twice about that property. Consider an SFH or MFH and a good property manager so you are not dealing with the headaches you mentioned.

2) As a new investor/LLC, your company would not be eligible for a traditional mortgage. The risk you're trying to mitigate is limited by proper insurance. Get good insurance and move forward in your personal names. One of the first few BP podcasts (first 10 or so; I can't recall) discussed this.

Jennifer Beadles · Answer

@Cristina S. My thoughts on condos: in my experience condos can be great or a nightmare. I haven't seen much in between. The downside to condos is in the financial health of the HOA. A worse case scenario (though very common) is that other unit owners get behind on their dues, a repair is needed (like a roof replacement) and then each unit owner is slapped with a $10k+ special assessment. OR all is good but you decide to sell in a few years, if the HOA has a 15% or higher delinquency rate (unit owners behind on dues) then no buyer can get financing and you have to find a cash buyer. Just something to be careful of, and if you do stick with condos make sure you do a ton of research on the HOA management and financials.

Benefits of condos include only being responsible for the interior walls so usually less maintenance requirements, but you're paying a premium for that through your HOA dues and hoping the company that manages the dues does so well.

If you want to get the lowest rate loan with the best terms, the property needs to be purchased in your name using a conventional loan, at which point you can transfer to an LLC later for the liability protection you're looking for. Definitely hire an attorney to do this part, and follow the rules of the LLC or else it's no good.

You can buy in an LLC but you'll have to get a special portfolio loan to do that, which comes with a higher interest rate and may not be a 30 year fixed loan.

Erin Church · Answer

@Cristina S. It's quite easy to set up an LLC in GA - fairly cheap (under $250 between name reservation and license) and it's quick.

I'm a newbie, but I've been trying to listen to as much as I can about investing and the part to be concerned about with condos are mostly the HOA's.  If they decide they need a new pool, to resurface the parking spaces, someone mishandles the money, there's a rash of foreclosures and people not paying their dues, then the dues can go up significantly. This can't really be predicted as far as I understand, so it's a risk. With a SFR, you have a little more control.

Antoine Martel · Answer

Cristina.

Yes it is a smart move to buy the property in the name of an LLC. You can use InCorp to create an LLC within a few days and they can help you set it up. Not sure what the laws are around setting up the LLC in Georgia though. You may have to ask your real estate agent or attorney this question.

Not sure if the condo is a good move either because the HOA fees might kill the rents, have you made sure to check that you will cash flow?

Susanna B. · Answer

@Cristina S.  Definitely get a LLC. I am in Georgia and it is not that difficult but you need the protection to keep your business and personal lives separate and safe from one another. If I were you, I would certainly consider the SFR over the Condo.

Cristina S. · Answer

Thank you, Erin. This is helpful!

Bill, we might actually call you if we can't figure it out on our own.

Thanks again!

Bill Hampton · Answer

@Christina S. I can help you create  Georgia  LLC.  Inbox me or call me.

Cristina S. · Answer

Regarding the LLC - should we get a lawyer for this?

I started out thinking this would be as simple as applying for a business license online.  (Slap to forehead).

First rental property - on whose name should we buy?

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