Rental properties in LLC

[Luke Eastman]

Hello I had a question, my father passed away a few years ago and left us two rental properties in Virginia. Both properties owned free and clear by our mother but my brother has the power of attorney. We are trying to get everything in order and are thinking about forming an LLC for them. We live out of state. I was wondering, should the LLC be registered in our home state or in the state where the properties are? Also, should it be a separate LLC for each house? And on a different note, each property has had the same tenants for 10+ years now but we haven't raised rents in maybe 7 years and they are way too low, is there a legal process you have to go through to raise rents or can we just tell the tenants that rent is increasing by a few percent? In case you couldn't tell, we are new at this and any help is much appreciated. Thanks!

[Glenn Cross]

Quote from @Luke Eastman:

Hello I had a question, my father passed away a few years ago and left us two rental properties in Virginia. Both properties owned free and clear by our mother but my brother has the power of attorney. We are trying to get everything in order and are thinking about forming an LLC for them. We live out of state. I was wondering, should the LLC be registered in our home state or in the state where the properties are? Also, should it be a separate LLC for each house? And on a different note, each property has had the same tenants for 10+ years now but we haven't raised rents in maybe 7 years and they are way too low, is there a legal process you have to go through to raise rents or can we just tell the tenants that rent is increasing by a few percent? In case you couldn't tell, we are new at this and any help is much appreciated. Thanks!

 Luke, I am not an attorney. Take the below with a grain of salt.

When deciding whether to form an LLC in the state where your real estate property is located or in the state where you reside, several factors need to be considered:

1. State Laws and Requirements

• Local Laws: Real estate is generally governed by the laws of the state where the property is located. Having an LLC in that state may simplify compliance with local regulations, tax filings, and property management.
• State-Specific LLC Requirements: Each state has different requirements for forming and maintaining an LLC. Forming the LLC in the state where the property is located might be more straightforward, avoiding the need to register as a foreign LLC in that state.

2. Tax Implications

• State Taxes: If you form an LLC in your home state, but the property is in another state, you might have to file tax returns and pay taxes in both states. Forming the LLC in the state where the property is located may help avoid double taxation or the need for additional filings.
• Franchise Taxes and Fees: Some states have franchise taxes or annual fees for LLCs. These costs can vary significantly by state, so it's important to compare the financial impact of forming the LLC in either state.

3. Liability Protection

• Asset Protection: The primary reason for holding real estate in an LLC is to protect your personal assets from liability. Forming the LLC in the state where the property is located may offer clearer legal protections under that state's laws.
• Corporate Veil: Courts tend to respect the corporate veil (the legal distinction between the LLC and its owners) more when the LLC is properly formed and operated in the state where the property is located, reducing the risk of personal liability.

4. Operating Convenience

• Administration: Managing the LLC might be easier if it's formed in the state where you reside, especially if you plan to handle administrative tasks yourself. However, you would still need to register it as a foreign LLC in the state where the property is located, leading to additional paperwork and costs.

5. Foreign LLC Registration

• Dual State Requirements: If you form the LLC in your home state, you'll likely need to register it as a foreign LLC in the state where the property is located. This involves additional registration fees, annual reports, and possibly hiring a registered agent in the state where the property is located.

6. Privacy Considerations

• Anonymity: Some states allow LLC owners to maintain greater privacy by not requiring public disclosure of the members. If privacy is a concern, consider the state's rules on anonymity and how they align with your goals.

7. Professional Advice

• Consult with a Professional (both an attorney and an accountant)! I highly recommended you consult with a real estate attorney or tax professional who understands both states' laws. They can provide specific advice based on your situation, goals, and the nature of the property.

Sorry this post is a lot longer than I intended. 

[Bill Hampton]

@Luke Eastman

How you raise the rent depends on the lease. 

If they are on a one year lease you usually have to give notice  one or two months before the lease expires. 

If they are on a month to month lease you can immediately give one or two months notice. 

Check the rental laws in the state to determine the notice period. 

Since you are new to this you may want hire a property manager to handle managing the properties for you. 

Good luck. 

[Nathan Gesner]

Quote from @Luke Eastman:

Talk to an attorney about putting the properties in an LLC to see if that's the best option for you. The attorney should be capable of explaining the pros and cons of different options.

There's no rent control in Virginia, so you can raise as much as you want as long as it meets the terms of the lease. You can't increase rent on an existing lease. If their lease term expired, then they are automatically converted to a month-to-month lease and you can give them 30 days notice.

I recommend you study the market to determine an accurate rent rate. Talk to your tenants and see if they are interested in staying with a rent increase. Bump them up close to market rate, but consider keeping it 5-10% below market as an incentive for them staying. For example, if they are at $1,000 now and market rent is $1,600 then I would offer an increase to $1,500 as an incentive to stay. If they choose to leave, then I would give them no more than 60 days to vacate, clean the place up, and rent it for market rate. If they choose to stay, check their income to verify they can afford the new rent rate.

[Adam Bartomeo]

Putting it in an LLC will allow protection for you and your brother. Which state depends on where you live and the strength of the LLC in that state. You will have to do your research on legalities and paying taxes. You can raise the rent when you go to renew the tenant, if you have a lease in place. If they are month to month you can give them 30 days notice, we give 60 as we feel that it is fair. You are probably going to need to have a conversation with the tenant before you raise it so you can smooth it over.

[Drew Sygit]

@Luke Eastman what's probably more important, is to speak with an estate planning attorney.

Your mother should probably have a Trust, to avoid the properties having to go through probate when she dies.

As part of the Trust, the estate planner may recommend an LLC or not.

[Luke Eastman]

Quote from @Glenn Cross:

Quote from @Luke Eastman:

Hello I had a question, my father passed away a few years ago and left us two rental properties in Virginia. Both properties owned free and clear by our mother but my brother has the power of attorney. We are trying to get everything in order and are thinking about forming an LLC for them. We live out of state. I was wondering, should the LLC be registered in our home state or in the state where the properties are? Also, should it be a separate LLC for each house? And on a different note, each property has had the same tenants for 10+ years now but we haven't raised rents in maybe 7 years and they are way too low, is there a legal process you have to go through to raise rents or can we just tell the tenants that rent is increasing by a few percent? In case you couldn't tell, we are new at this and any help is much appreciated. Thanks!

 Luke, I am not an attorney. Take the below with a grain of salt.

When deciding whether to form an LLC in the state where your real estate property is located or in the state where you reside, several factors need to be considered:

1. State Laws and Requirements

• Local Laws: Real estate is generally governed by the laws of the state where the property is located. Having an LLC in that state may simplify compliance with local regulations, tax filings, and property management.
• State-Specific LLC Requirements: Each state has different requirements for forming and maintaining an LLC. Forming the LLC in the state where the property is located might be more straightforward, avoiding the need to register as a foreign LLC in that state.

2. Tax Implications

• State Taxes: If you form an LLC in your home state, but the property is in another state, you might have to file tax returns and pay taxes in both states. Forming the LLC in the state where the property is located may help avoid double taxation or the need for additional filings.
• Franchise Taxes and Fees: Some states have franchise taxes or annual fees for LLCs. These costs can vary significantly by state, so it's important to compare the financial impact of forming the LLC in either state.

3. Liability Protection

• Asset Protection: The primary reason for holding real estate in an LLC is to protect your personal assets from liability. Forming the LLC in the state where the property is located may offer clearer legal protections under that state's laws.
• Corporate Veil: Courts tend to respect the corporate veil (the legal distinction between the LLC and its owners) more when the LLC is properly formed and operated in the state where the property is located, reducing the risk of personal liability.

4. Operating Convenience

• Administration: Managing the LLC might be easier if it's formed in the state where you reside, especially if you plan to handle administrative tasks yourself. However, you would still need to register it as a foreign LLC in the state where the property is located, leading to additional paperwork and costs.

5. Foreign LLC Registration

• Dual State Requirements: If you form the LLC in your home state, you'll likely need to register it as a foreign LLC in the state where the property is located. This involves additional registration fees, annual reports, and possibly hiring a registered agent in the state where the property is located.

6. Privacy Considerations

• Anonymity: Some states allow LLC owners to maintain greater privacy by not requiring public disclosure of the members. If privacy is a concern, consider the state's rules on anonymity and how they align with your goals.

7. Professional Advice

• Consult with a Professional (both an attorney and an accountant)! I highly recommended you consult with a real estate attorney or tax professional who understands both states' laws. They can provide specific advice based on your situation, goals, and the nature of the property.

Sorry this post is a lot longer than I intended. 

 Glenn, 

That is a lot of good information, I didn't even think about most of that so thank you. Its looking like we will be doing it in Virginia to make things easier, more straightforward and to avoid the extra taxes. Thank you!

[Luke Eastman]

Quote from @Drew Sygit:

@Luke Eastman what's probably more important, is to speak with an estate planning attorney.

Your mother should probably have a Trust, to avoid the properties having to go through probate when she dies.

As part of the Trust, the estate planner may recommend an LLC or not.

 Thanks Drew,

Is it common to run into issues with the probate process? I know everything is in order with her will and I am the executor of it, would you still recommend a trust? I appreciate the feedback!

[Luke Eastman]

Quote from @Nathan Gesner:

Quote from @Luke Eastman:

Talk to an attorney about putting the properties in an LLC to see if that's the best option for you. The attorney should be capable of explaining the pros and cons of different options.

There's no rent control in Virginia, so you can raise as much as you want as long as it meets the terms of the lease. You can't increase rent on an existing lease. If their lease term expired, then they are automatically converted to a month-to-month lease and you can give them 30 days notice.

I recommend you study the market to determine an accurate rent rate. Talk to your tenants and see if they are interested in staying with a rent increase. Bump them up close to market rate, but consider keeping it 5-10% below market as an incentive for them staying. For example, if they are at $1,000 now and market rent is $1,600 then I would offer an increase to $1,500 as an incentive to stay. If they choose to leave, then I would give them no more than 60 days to vacate, clean the place up, and rent it for market rate. If they choose to stay, check their income to verify they can afford the new rent rate.

No rent control in VA is good to know we wont have to deal with any of that. I did look at the market rates over there and they are both paying about 300$ below market rate and so far we haven't increased it because the properties are located in a very small town so we don't want to lose the them as tenants. But I like your idea of just talking to them first and also checking their income. But either way we will definitely keep it below market rate so they have that incentive to stay. Thank you!

[Ashish Acharya]

To manage your inherited rental properties in Virginia, it's generally best to form an LLC in Virginia, where the properties are located, to simplify legal and tax matters. Even if you create an OOS LLC, you must register in the state of asset for legal protection. Talk to an attorney on this.

Having multiple LLCs will not have tax benefits. LLCs issues need to be discussed with an attorney. There is no income tax impact on rental properties.

You have the right to raise rents, but you'll need to follow Virginia’s laws. Virginia typically requires 30 days' notice for rent increases if the tenants are on a month-to-month lease. Given your newness to this, consulting a real estate attorney could be helpful to ensure everything is handled correctly and legally.

[Drew Sygit]

Quote from @Luke Eastman:

Quote from @Drew Sygit:

@Luke Eastman what's probably more important, is to speak with an estate planning attorney.

Your mother should probably have a Trust, to avoid the properties having to go through probate when she dies.

As part of the Trust, the estate planner may recommend an LLC or not.

 Thanks Drew,

Is it common to run into issues with the probate process? I know everything is in order with her will and I am the executor of it, would you still recommend a trust? I appreciate the feedback!

 Check with an attorney.

In Michigan, probate is always required and a will can be challenged.