Explain financing & liability in owner-occupied house hacks

[Julie Williams]

Both in person and in webinars, more than one lawyer has said to only buy a multi-family (or apartments over commercial space) under an LLC and one said not to mix personal and commercial real estate. I want to buy property under an LLC, but if I follow this advice not to mix my personal residence and tenants, I can't house hack. Further complicating matters, when I sat down with my bank to discuss conventional 20% down commercial loans, they were interested, but said that I must not live in the property. A second bank voiced the same concern about a commercial loan. The first bank went on to say my other option was to buy it under my own name with a residential mortgage and quietly put the income from renting to tenants on my personal income tax return but "we wouldn't want to know about it. We don't police that." (In that case is was commercial tenants in a barn. The house was a single family.) The second bank said I must not do that. I only plan to buy investments with an LLC. Owners live in multi-families and rent out units to long-term or short-term tenants all of the time. How do owners live in the building in one of the units, get a loan, and have liability issues addressed well? I found a loan product for owner occupied properties but it was in AUSTRALIA, LOL. I first explored this when I looked at a house on almost 3 acres with a 6000 SF barn with tenants in the barn. That town is strict about zoning and would not guarantee the use would be grandfathered and the property ended up having many other serious issues (flood zone, downstream from an antique dam on a river with a history of flooding and bridges and dams being washed out, the rents were below market, there were three code and zoning violations in the use of the barn and a mildew smell in the house. I ran screaming from that property and it's lovely waterfall view.

[Rick Martin]

@Julie Williams. Is it just duplex or 4-unit? If that is the case, I would just invest as an individual and put a conventional mortgage on it. You can put your investment portions on a schedule E or C as 1099 income. Your CPA will guide you on that at tax time. If it is liability you are concerned about, make sure you have a good insurance policy for mishaps. Personally, I don't really see why you have to "quietly put the income from renting to tenants" on your returns. They can be separated on the schedule C or E, as mentioned. A CPA on here might be able to comment further on this.

If it is a larger building, then yes, I would place it in an LLC.

[Julie Williams]

Thank you for the response. I just spent the day taking a workshop from Anderson Business Associates about business structures and taxes for investors. Aren't you concerned about lawsuits and someone coming after not only the multifamily but your personal assets in the above scenario? @Rick Martin

[Mason Kimball]

@Julie Williams I personally invest in my own name currently, just make sure you have a good umbrella insurance policy. Mine covers for up to $2,000,000 in liability and the premiums are very reasonable.

[Bjorn Ahlblad]

`I have my 12 unit apt building in an LLC it's great because accounting is so orderly. Everything gets paid by CC or check in that name. I have duplexes in my name and I have an umbrella to provide liability insurance for everything. LLC's have their place but there is nothing wrong with properties in your own name. It worked perfectly well for thousands of years and still does.

[Julie Williams]

Thanks for the response, @Bjorn Ahlblad

[Julie Williams]

@Mason Kimball thank for the response. What company do you use for your umbrella policy and is there a name for the insurance product?