One SFR rental property LLC or no? Additional coverage?

Question

Greetings all,

I've read a lot here and have heard conflicting opinions. Wanted to just gather some data and see where the current thoughts on the topic are landing...

I'm a California resident. I own a 3 bd SFR in the Las Vegas area. (Since 2016)

Currently I am not using an LLC for the property. I looked into it last year, but decided not to right now and I won't give the reasons... rather I'd like to hear any input.

I have homeowner's/hazard insurance on the property through my mortgage, but I do not have any additional landlord insurance or other coverages.

We (wife and myself) do have an umbrella policy.

Do I need to change anything in this scenario?  (Add/change coverages, add LLC etc?)

With the market climate being how it is, and tenant quality becoming more challenging... I'd love to hear any input from those who have knowledge.

Thanks in advance!

Tracy Minick · Answer

We require the tenants to prove a landlord liability policy for $100k. I would also suggest encouraging them to have "renters" insurance. Renter's insurance ensures that if something happens to the unit that renders it uninhabitable that they have a policy in place to provide financial relief for relocating. Also, I don't feel like an LLC is necessary for 1 property.

Katie Balatbat · Answer

@Bryan Christopher

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.  Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.

California is generally more cumbersome than other states when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don’t buy CA property as a CA resident.

Any lawsuits should be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC.   Or, a charging order may be granted.

If you're going the umbrella insurance route, perhaps see if it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

Creating an LLC in California could cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation.  California does not recognize series LLCs.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a fairly new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship.  The information contained in this post is not to be relied upon.  Readers should seek professional advice.

Bryan Christopher · Answer

Thanks Tracy, 10-4 on the renters insurance suggestion. Can you explain this statement a bit more for me?  "We require the tenants to prove a landlord liability policy for $100k."

I haven't heard of this practice, sounds interesting....

One SFR rental property LLC or no? Additional coverage?

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