Investment Rental Properties in LLCs

[James Lim]

So I'm trying to obtain financing for my first investment property, and want to end up holding the rental property in an LLC for asset protection purposes. I understand that conventional lenders will not allow this, and there are other options that typically charge higher interest rates for assuming the risk.

Many lenders have been telling me that it's not possible to close in the LLC, and it requires closing in my own name and then transfer of title and refinancing... all of which I assume would generate more and more origination costs and fees. Am I wrong in thinking this way? Or is this how it's typically done?

Thanks

[Costin I.]

Ok, that changes things - you need to be concerned with both "internal" and "external" attacks. An LLC will protect you from "internal" attacks - a tenant suing you for a rental deficiency, a contractor for hiring/payment/accident problem, etc. It will not protect you from when you crash your car into someone and/or destroy their million dollar Bugatti (hopefully you'll have enough auto insurance for that, plus a good umbrella policy) or from someone suing you in your physician practice - which is an "external" attack to the LLC and rental. In a case like that, I think everything you own is up for grabs and you need more protection.

Again, I'm not a lawyer, so you need to consult an asset protection specialist. I can send you my notes from my extensive research for asset protection primarily for a buy&hold investor, and primarily for "internal" attacks (and that should give you a better understanding on insurance, entity structures, DOS, checklists, etc.) and give you my referral for an attorney.

Normally, my recommendation would be to apply the "2% rule" - the cost of setting up and maintaining your asset protection should be less than 2% of equity you are trying to protect. Let's say, it costs you 1.5K to get your structures in place (holding LLC or Series-LLC, with or without land trusts, with or without separate operations LLC) and 0.5K per year (for maintaining the LLC properly, bookkeeping, lawyer and CPA, etc.) for a total of 2K. You should have 100K or more in equity to protect before it makes sense to spend that money - compare that with how much you spend in annual insurance for the same property/equity.

But then again, you should be equally concerned probably with external attacks, in which the considerations change and you need to consult someone specialized.