Should I LLC my Rental Property?

Question

I've recently purchased my first rental property (single family). I am financing it through a bank. Should I put this only property I have in an LLC? I plan on purchasing more in the next 12-24 months. Will a bank let my put a property owned by them into an LLC? Does anyone have any experience with this?

Thank you.

William Morrison · Answer

Chris, I did just like you when forming a partnership in California and found the high fees and minimum taxes a roadblock to success for a small cash out investment with long term capital gain goals.  We did a limited partnership instead.  The fees in other states are much smaller, they just don't offer the protection some think.The Single Member LLC seems to be changing quickly.  I bookmarked a couple sites that track the changes by state.  Just a few years ago most every state invalidated the Single Member LLC and treated it as a Sole Proprietorship (I maybe using the wrong terms here but I'm close).I have a couple Single Member LLCs for other reasons and found out after they were in operation.  I found out when the state notified me that they now recognize them.  Good for me.  I also have insurance <Grin>.It seems the state trend is to recognize the Single Member LLC but some states are just now passing those laws.  To me the idea is that the states are finding they can more easily track the equivalent of     a Sole Proprietorship and get fees to do it.  And the state defined process is pretty clear for LLCs, so no new regs.

Chris V. · Answer

Hmmm, I am not a lawyer or expert, but before I bought my first properties I looked into the LLC for the same reason that you asked about (lawsuits). What I remember from my research (you should do your own as your state will have different laws!) is that if I were the sole owner of the LLC the LLC would not really shield me. I would have still gotten an LLC but then I found that the yearly  costs of an LLC were significant (I think I remember like $700 or so??).

I am not advising you don't get one (do your own research for your state and situation) but don't do it for the wrong reasons What I did instead is I bought a 10M umbrella liability insurance policy (on top of the 500K that each of my properties has in its regular policy). This is only like $600 per year and covers all policies.

The main thing however, like someone above pointed out: keep your properties in good repair, follow the rules, use common sense, take prudent (and even of the the top) safety measures and in general "do the right thing" BEFORE a situation escalates. If you did everything you could that will help in court if it comes to that, and if it does not.. .Well; at least you'll sleep better:).

William Morrison · Answer

Don't talk to an attorney that produces LLCs about how protected your are, talk to one that takes non frivolous cases and see how little protection you have.
Did you do any maintenance?
Did you do any repairs?
Are they suing you or your property?
Is your mortgage due on sale? What will they do when include in the suit?
Is it a Single Member LLC and what is your states track record for that?

Thomas M. · Answer

I just did this. The downside is you cant really do any kind of refinance or cash out.

Ken Barnett · Answer

Brock,

I've purchased properties in my own name and them moved them over into an LL many times.

Having said that I bought in to all the hype about having an LLC and a Corp. and having a team and buying this and doing that in the beginning. It was a big headache and cost me a ton of money.

The main reason most of us put properties into an LLC is because someone told us we needed to protect ourselves from being sued.

If I had it to do all over again I WOULD NOT have put my properties into an LLC until I had 5 to 10.

Don't do what someone told you to do. Read up on LLCs and find out about the pros and cons yourself.

Most of us don't realize that just because we put our properties in an LLC that doesn't mean we are now bullet proof. Most of us who have an LLC won't run it the way it has to be in order to protect ourselves.

Suggest you read up on pearcing the corporate vail.

Hope this helps.

Chris V. · Answer

Thanks! This is good to know, I did my "research" about 3 years ago and it sounds like things might be changing. I might have to reevaluate.

Either way, I will continue to do everything I can to make sure my units are compliant, save and well maintained, and that issues or perceived issues are taken care of promptly. I think that is a point that is often skipped over in tenant-liability discussions which tend to skip right to the scary frivolous lawsuit part.:)

Julie Falen · Answer

Speaking as a lender, 1. You can "vest  the property into an LLC at closing. Escrow can do it for you - they do it a lot. However, the bank may not like that and may not fund the loan (which comes after vesting and closing) because usually they will want at least 20% down payment or equity, and will want to see the Articles of Incorporation and the Management Agreement etc before approving the loan.  ALSO - you will ALWAYS have to present those docs from that point forward if you want to refinance. 2. You CAN quit-claim later but t is true that can trigger a due on sale. It usually does not but if you change from recourse to non-recourse (i.e. personal to LLC) those odds are higher that the bank WILL.  3.  There is not much benefit to using a single -member LLC as it offers little to no protection from  a lawsuit and costs more than I think it is worth, at least in CA and in many more states too.

It is much better and easier to close and vest in a Land Trust (maybe with an out of state LLC as the beneficiary) as it is not that different from a family trust and a bank does not usually object to that.

I totally are with @Ken Barnett, a single member LC is not necessary at first.  In my opinion it is often the result of hype from folks selling stuff at REIA meetings who know how to emotionally make us feel and believe that we will soon have an empire of properties or several more assets to protect - which of course we all think we will, right?  But truly not worth it unless you have several properties and/or 3 or more members in the LLC.

Sunny Vig · Answer

Brook, after you have close the deal with the bank, then move it into a LLC, or you can tell the bank you want to buy the property and hold title under you LLC. It should be no problem.

William Morrison · Answer

Thomas, did you check into commercial non-recourse products?The rates are higher and the LTV is smaller.   But if the numbers work it might be an option for you.And if you do, and you're running your numbers, check the loan pay down.  Generally when I run rental numbers with a 30 year loan, the first few years the pay down is not significant.  When your amortizing  over 20 years the numbers are worth adding to your return.  I know its not cash but your net worth is rising.  Worth a thought.

Should I LLC my Rental Property?

Most Popular Reply