First investment property, with a mortgage - asset/liability protection question

[Amanda Hensley]

This is my first post at BP. This set of forums has been incredibly, incredibly valuable for us to get started in real estate investing. Thank you all for taking the time to keep it up.

So we just signed the sales contract on our first rental home, in rural TN. It's a Fannie Mae home, and we will be carrying a Fannie Mae mortgage on it.

Totally separately is my day job - I am in IT and have an LLC (taxed as S-Corp) for that business. This LLC has its own business insurance. Separately my husband and I carry an "umbrella policy", aside from our primary home and auto insurance.

So now that we're adding a rental house to the mix, I'm wondering what our protection strategy should be.

I will talk to a lawyer as well (though I'm not certain if I should talk to one locally in WA where I am, or in TN where the rental house is - I suspect WA since that is where the majority of our assets is)..

Anyway, I'm thinking the best option for us right now is to increase our umbrella policy, if needed (and of course to obtain adequate landlord insurance on the rental home). It doesn't seem like it would help liability-wise to put the home into its own LLC, since we still have to carry the mortgage personally and as such, the lines between business and personal assets are cloudy and wouldn't hold up in court if we were sued (and most likely the lender wouldn't allow us to transfer the home into another entity anyway). And putting it into the LLC I already have for my career doesn't seem smart as it's mixing two different things, and could open my other business into issues, assuming I even could from a lender perspective.

Am I on the right track, or are there things I haven't considered?

[Mitch Kronowit]

Originally posted by Amanda Hensley:

It doesn't seem like it would help liability-wise to put the home into its own LLC, since we still have to carry the mortgage personally and as such, the lines between business and personal assets are cloudy and wouldn't hold up in court if we were sued (and most likely the lender wouldn't allow us to transfer the home into another entity anyway). And putting it into the LLC I already have for my career doesn't seem smart as it's mixing two different things, and could open my other business into issues, assuming I even could from a lender perspective.

Correct on your second point, not so much on your first.

I agree you do not want to place a rental property into the same LLC as your IT business as you would be exposing one to the liabilities of the other. However, you can place the rental property into its own LLC and help protect yourself from bottom-up creditors, e.g., somebody tripping and falling in the rental. Of course, you'll still need liability insurance, a fire policy, loss-of-rental income riders, etc.

Fannie Mae probably won't let you transfer your loan into your LLC, i.e., you'll still be personally on the hook for it, but they can't stop you from transferring the title to an LLC. Sure, they can try and call the loan and all that other nonsense, but as long as your LLC is paying the mortgage and keeping it current, you will remain so below Fannie Mae's radar, I doubt you'll ever hear a peep from them.