What are the real benefits of an LLC

Question

Every book I have read about buy and hold investing talks about forming an LLC as an essential part of your business. The line that is repeated over and over is that it protects you from a tenant suing you for everything you own. None of the books mentioned the downside. If you buy a house with the LLC your loan term is shorter, interest rate and down payment both much higher. In addition insurance is more expensive. If you want to do a cash out refi for your property your terms are also way worse if your property is in an LLC. If you buy a house in your name to get better loan terms and then place it in the LLC the bank has the right to call the loan. I know this is anecdotal but no one I know has ever been sued (isn't that what insurance is for anway). I am thinking it would have to be an absolute nightmare scenario in which you were sued, your insurance did not cover the damages, and you would have to start selling personal assets to pay the judgement. If this was a major fear of yours you would have to get a seperate LLC for each property (which would be quite expensive). Am I missing something here?

Chris Soignier · Answer

I'm reading Rich Dad's Real Estate Advantages, by Kiyosaki's legal and accounting advisors, and they recommend using Delaware Statutory Trusts in CA in lieu of LLC's to avoid the expense. I'm no expert on DST's nor offering advice on how to use them, just passing on what I read in that book.

Matthew Kreitzer · Answer

It actually isn't a nightmare scenario where a landlord gets sued and they lose their own personal assets outside of their umbrella policy. These kinds of lawsuits actually happen quite often. Spend some time in your local courts to get a better feel for how often they occur. Much of the problem is that investors rarely see how the sausage is made from a legal standpoint, and don't realize how much risk they may find themselves in. Please, consult with a lawyer before making any decisions.

Ryan Lee · Answer

Please get advice from a accountant. Business entity is not a 1 size fits all. I would contact 3-10 people that invest in real estate in your state, ask them some tips or situation of how they structure their deals. Some people may just do buy and hold, while other fix and flip (1031 exchange possibly after), etc. Ask them whats their strategy and business structure. Once you know that ask them if you can have the person contact that do their taxes. Then you vet the tax accountants!Do your due diligence on vetting people. You may make money on the deals, but if you get tax at a higher rate then it doesn't make sense.

Raphaela Todd · Answer

Hello:If I could add my two cents, I would strongly suggest paying the extra expense in the beginning of owning rental properties as it may cost MUCH MORE if you are not properly protected from tenant lawsuits. (especially those from "Career Plaintiffs" -- people who make a living from suing everyone for any reason) I have worked both sides of the legal fence for the past 26 or so years (Plaintiff/Defense) and I know how lawsuits work. I have been working in the defense field for the past 10 years, and I can tell you about a case I worked on: An inexperienced landlord rented out a single family house that had a built-in swimming pool. The tenant decided to have a small party, which resulted in a drunk 22 year-old college student doing a swan dive into the short end of the pool. He suffered a broken neck amongst a myriad of other injuries. It is likely he will never walk again. So ... the landlord got sued, with allegations that the pool decking surrounding the pool was not maintained properly and therefore caused the drunk guest's traumatic injuries. It doesn't matter that he was drunk and decided to do a swan dive into shallow water (even though he tried his best to convince our client and firm that he "slipped" on the poorly-maintained pool decking and "fell" into the pool. Plaintiff lawyers LOVE these cases because they settle about 95% of the time because of the outrageous expense of conducting trials. It is much better to set up your rental property(ies) defensively so that you are better prepared for any "Career Plaintiffs" you might rent to, or who may be a guest in your tenant's home. Hope this helps!!

Al Wilson · Answer

All valid points. That said, we always buy investment properties in an entity, because asset protection trumps everything else for us. Good luck.

Shalanna L. Pirtle · Answer

Slip and falls are common, particularly if you live in an area of the country that sees significant winter weather activity. Or, if you fail to properly maintain some aspect of your property (even unintentionally!) and a tenant or visitor is otherwise injured or suffers significant property damage, don't think for one second they will hesitate to go after everything you have. Forget about the fact that they should have renters insurance to cover the property because it won't stop a determined litigant from coming after you. You name it, it can happen. It costs a plaintiff very little to file a lawsuit in most cases (couple hundred bucks), and you could be saddled with thousands in costs of defense, be at risk for losing the property, your personal assets, not to mention any other rental properties that you hold in your personal name. The umbrella policy is a start but even it has its limitations. I know that some don't feel the need, and perhaps an LLC is not for you. However, the possibility for exposure to a judgment, and suffering some type of loss, are very real in this business, thus it is critically important that you consult a professional (or two) before you settle on your business formation and asset protection strategy.

Alexander Price · Answer

Another interesting point is the cost of an LLC. For one that makes less than 250k in CA you pay no taxes but, you pay $800 a year to have it. So for a property with a lower NOI, this could be a deal breaker. Talking with my lawyer the best method is to get a great umbrella policy.

Jason Yarusi · Answer

From what I have been told and researched, and of course consult with a lawyer to what pertains to you and your situation, when forming an LLC you want to be the manager not the managing member this dissuades ownership, which is the entire person of having an LLC to make the entity liable and not you personally. As for your role to be fully in effect you have to make sure to properly sign every document as Aka John Smith, manager. Also do not commingle funds between your personal accounts and that of an LLC because depending on what state your are in this may pierce the corporate veil and cause the protection you thought you had with an LLC to be null and void. Also Nevada is supposed to be the best place to start a small business LLC for tax and liability reason and have difficult it is to pierce the corporate veil. Delaware for larger businesses. Again consult a lawyer but just something to think about.

Christian Sifuentes · Answer

Any good Real estate attorney in Carroll County Maryland?

Jeremy Pace · Answer

@Paris Akins I have a recommendation for you, message me.