Advice on whether or not to become an LLC?

[Rochelle G.]

Hi all! Brand new into the real-estate investing world and could use some good advice. I currently own a 2 bd/2bath condo that I’m looking to rent out. Or should I say, I currently own a FHA MORTGAGE on a 2 bd/2bath condo. I’m looking to purchase my second property in hopes of renting my current place out. Would it be a good idea to pay to become my own LLC to cover myself in the event of a freak lawsuit from a disgruntled renter? Chances are slim to none, but I do have a decently sized 401k I’d hate to take chances with. Thank you in advance!

[Costin I.]

@Rochelle G. I'm not a lawyer, nor CPA, so take this with due diligence:

1. If you have an FHA mortgage, it's probably with a low DP and pretty good rate. Why risk the DOS clause activation? The mortgage note itself is a form of asset protection, unless you have a good chunk of equity already to worry about. Or excellent cash flow to protect.

2. The 401K is a retirement account and, for all I know, is not subject to creditors. Same with your homestead, although there are limits and depends on your state. In other words, it should have its own protection from a lawsuit from a tenant.

3. You still need to worry proper maintenance, proper insurance and umbrella insurance, proper property management, etc. The LLC is not going to do that for you. Rephrased: take care of the other "asset protection" sides before you worry about LLC.

Here is a diagram to help you with this question: