Rental Portfolio: How Do I Protect Myself?

Question

HI All-

I am in the midst of closing on my first deal, which will be the first of hopefully many units to be a part of my rental portfolio. However, in the closing of my first unit, I am putting the property under my personal name, which is something that I am somewhat uncomfortable doing, as opposed to seeking limited liability through something like an LLC.

I am seeking to keep myself separate from the business entity, should a deal go sour, such that the bank can not go after me personally, etc etc. Any ideas how to best accomplish this? The LLC is the first thing that comes to mind, but from what I understand they can be pricey to maintain, especially if I am putting each rental unit in its own LLC.

Thanks all!

C

Jeff S. · Answer

You said "banks going after you". Hate to let you know but banks aren't making loans to your LLC w/o your personal guarantee. In fact, banks are unlikely to make a loan to your LLC period.

If I, as a personal lender, make a loan to your business you can be assured you will be personally guaranteeing that loan.

The way you protect yourself is with insurance and education. Run your business in a way that you are less likely to be held accountable for poor judgement.

Colleen F. · Answer

We have properties in an LLC and also outside of one.  The LLC property though has a personal guarantee on the loan so the bank will still go after us. It is more about liability for issues related to the property that we did the LLC.  People sue.

@Jim Walker  I am curious about the umbrella liability. When we looked at it the killer was the cost of the increased auto insurance we would need to have in order to qualify to  get the umbrella not  the umbrella policy itself.  Did you run across the same thing?

Dave Toelkes · Answer

I am not a fan of LLCs or complicated entity structures for new investors unless you have a high seven figure net worth.  The first line of liability protection is offered by your hazard insurance when you purchase a high limit liability rider that just adds a few extra dollars to your premium.  As your net worth exceeds your liability coverage, add umbrella policies.  When your net worth is so large that your liability and umbrella policy fall short, then you probably need some form of entity structure and that does not usually happen until your net worth is in the high seven figure range.

Your second line of liability protection is doing the things that prevent lawsuits --make any needed repairs promptly, treat everyone fairly, keep your property in good repair, and follow the landlord-tenant law for your property location.

If you expect an LLC to block the bank from coming after you, then you will be disappointed.  You will personally guarantee any loan the bank will give you to finance the property, so you will be personally liable whether you have an LLC or not.

If you plan to manage your property yourself, then the LLC will probably not offer you the personal liability shield you are looking for.  When you manage yourself, you are personally liable for everything you did, as well as for everything you should have done but didn't.

I suggest you spend your time and money working on growing your business.  Form the LLC(s) when you have significant equity to protect.   After all, you may quickly decide the rental property business is not for you and you will be glad you did not waste money on forming and maintaining an LLC..

John Chapman · Answer

@Jeff  S.  and @Jim Walker are correct.  For a single rental, which I presume is a house, you are better off just holding it in your own name with good insurance.  If you hold it in your own name you get access to Fannie Mae conventional financing, which is worth it in itself

Moreover, if you are managing the property yourself, and something goes wrong, you will get sued, period.  An LLC is not going to change that.  Also, any judgment against the LLC is still going to be able to reach the house, which is your main asset.  (I say all this as a plaintiff's attorney.)

In my opinion, the real advantage for holding  SFRs in an LLC is if you have another business where there is a concern you will get sued, and you don't want those other creditors to be able to reach the property.  If the property is in an LLC, then all a judgment creditor can get is your interest in the LLC, not the property.   None of this applies to larger commercial properties and more complex property holdings, I'm only talking about smaller portfolios in which an investor is actively involved.  Also, once you've got more than 10 mortgages, then there's really no reason not to go the LLC route, since you can't get conventional financing anymore.

Jim Walker · Answer

For a fraction of the California cost of creating and maintaining an LLC (at least $800 per year) , I purchase an Umbrella policy and have all my assets and personal liability covered up to 2 million.   I could double my liability coverage and still pay less than the $800+ that maintaining an LLC would cost.

By the way, the L in LLC stands for Limited not limitless. If your LLC gets sued, and you are the single owner /managing member of the LLC, count on the plaintiff lawyer piercing your corporate shield.

LLC for a small investor is like a nice vanity plate on your Ford Pinto.

Clay Manship · Answer

I'm aware of what an LLC is for. I was asking for the input of those who have been in the same boat, and want to provide a layer of protection should there be a lawsuit, etc.

Just don't know if forming an LLC for all my properties is worth it, seeing as it has costs associated with running it, is taxed the same (in Indiana) and doesn't ensure personal protection if the loan is to not be paid off for whatever reason.

Chris L. · Answer

Clay,

Completely agree with the other inputs that an LLC is for liability protection  and not for protection if the deal goes south.

A properly structured and run LLC along with appropriate insurance should provide protection for assets not held in the LLC.

Chris

Troy Fisher · Answer

The best way to protect yourself is to purchase correctly.

• Know your market, are you headed up or down?
• Know your vacancy rates
• Make sure that you purchase at the correct cash flow rate
• Ensure that you have high enough cash reserves

The fact that you are thinking that you need to protect yourself in case the deal goes wrong seems like the deal may not be the correct deal.

Jeff S. · Answer

@La Nae Duchesneau you are in a different category having some assets to protect. An LLC can offer an additional layer of protection. This is not a simple subject with varying views on the subject. One attorney will tell you one thing and another will say something different. Lots to read here. Type in LLC in the search section and read up.

Rental Portfolio: How Do I Protect Myself?

Most Popular Reply