Is a quit claim my answer?

Question

Good evening everyone!

I am looking for some advice on the proper way to turn my current primary property into my investment property. I currently have a LLC that I would like to transfer my property into but I've read that can cause some legal issues. I've been suggested to proceed with a quit claim, I just want to make sure that would cover all legal issues that could arise. Any advice, suggestions, or recommendations are GREATLY appreciated!

Nathan Gesner · Answer

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted. Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation. ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own. LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets. Additional thoughts: 1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc. 2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account. 3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less. 4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits. 5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.

Jason Campbell · Answer

Outstanding answer.

Dave Rav · Answer

@Nathan Gesner awesome summary and overview. I couldn't have said it better.I remember all the hype about the Series LLC a few years back. Dont hear much about it anymore. Was it possibly a (manufactured) important topic designed to put money in the pockets of those who help construct these entity types? Not saying Series LLCs are bad, but are they appropriate and helpful to say 90% of investors out there? Maybe not.Thank you for posting.

David M. · Answer

@Lauren BeechI've part of the bunch that is NOT really big on LLC's especially when starting out. That's been pretty well addressed above.As for the bank accounts, it really depends on your State's requirements and how you'd like to personally operate. Some require you to hold the deposits in a separate account and NOT comminngle the funds. Others, like where I am in NJ, only require that you put the deposit in an interest bearing account. Since my checking account is interest bearing, I just run everything out of one bank account. Everything is accounted for with my bookkeeping. This is a major advantage to using a LLC, for example.However, there is nothing stopping you from doing your operations as if you had a LLC. If you prefer to have a separate bank account, go ahead. If you want to dedicate one your credit cards for just your rental expenses, that's fine too. Good luck.

Nathan Gesner · Answer

You need two accounts: checking and savings. If the properties are split into more than one LLC, then each LLC will need its own accounts.Checking: collect all income here, then use it to pay bills. Pay the mortgage. Pay for maintenance. If you are setting aside funds for capex, taxes, insurance, or other expenses that don't occur monthly, transfer those funds to Savings each month and hold them there until it's time to spend them. You will receive the security deposit in Checking but then transfer it to Savings. Savings: Hold the deposit here so it's separate from operating funds. You can also hold money for maintenance, capex, taxes, insurance, or other projected expenses. When a tenant moves out, transfer the deposit back to Checking so it's ready to apply towards expenses or to refund to the Tenant.If you end up with excess funds in the Checking account, I recommend you transfer it to a third account that is specifically designated for future investments. That ensures you don't spend it on other things and that you know exactly how much you have available to spend on the next purchase. If it's mixed in with your deposits and reserve funds, you may accidentally spend money you shouldn't have.

Terrell Garren · Answer

I have one LLC. For $200 a year (NC) it is worth the separation of business and personal assets for me. An unknown is the number of times someone considered litigation but saw the LLC and thought better of it.

Lauren Beech · Answer

Thank you so much for your input, Nathan. This does lead me to another question, if you feel for my first property I am okay to manage with out an LLC could I just open a new bank account soley for that property to use and operate out of it as long as I have books/records showing everything?

Chris Seveney · Answer

@Lauren BeechWhy do you want to put it in a LLC? If it’s for asset protection a quit claim to your LLC is a false sense of security and does not provide you asset protection.Also a LLC is a pass through entity so it doesn’t really do anything for taxesNote not an attorney or accountant but sharing based on spending thousands of dollars working with them.Best to keep it in your name and save money and troubles of putting it in a LLC