LLC or Umbrella Policy, HELP!

[Jonathan G.]

Ok. We have just signed our first contract on a SFH! We are so excited.

Here is a decision we have to make and really need your advice. Since we started this our plan was to open an LLC and put our rental properties in there. As we started doing research on financing, we are finding it is VERY difficult if not impossible to find a lender that will finance to an LLC (even if we are the guarantors). We have gotten a lot of conflicting info. Obviously our lawyers want us to have an LLC and that would give us the most peace. We know many of you have LLCs. How did you do it? We have heard that some people that run into this issue close the deal and then move the property into their LLC. But we have heard that doing this puts you at risk for your loan to be called.

Another option is purchase a $1 million umbrella policy that they use to cover liability risks.

We do not want our family, our home, our cars, etc to be at risk. We want to be smart. But we are about 5 weeks from closing and need to lock in a lender. After meeting with many bankers it looks like we can get loans but getting them into an LLC seems to be the issue. Any advice?

[Darrell Shepherd]

Yup, they are two very different things.  

I wouldn't worry about the LLC so much on one rental property. You should always carry insurance. Usually the normal limits will cover stuff, I don't have an umbrella, but I'm covered in other ways. Umbrellas are cheap- they are cheap because they rarely get used, btw. If you are buying a million dollars worth of coverage for $200, how often do you think they ever get hit to pay a big claim? The risk is simply pretty darn low of you getting into something that they'd go after personal assets anyway. It'd take a pretty major event to go past the limits of your liability policy.

Saying that I personally don't have anything in my own name. I love my LLC's. I have several and like the tax advantages and anonymity and control they give me. I don't do bank financing, though. I'm lining things up to buy some more rentals, though, and I anticipate buying them in my name to get the cheap money, then deeding them to a land trust and having an LLC as the beneficial interest of the LLC. If I do get a loan called due (which is a very rare event), I can just deed it back and/or refi it into a commercial loan based on the income and tax returns and such. They'll lend to an LLC that has 2 years worth of tax returns, they just dont want to loan to one you just created with no history and no income.

Again, first house, worry more about getting the house and tenant, then when you get the business going you'll want to learn all about the LLC's. You can always sell the house to the LLC later.