Quick Case Study/Questions for First Rental Purchase

[Chris T.]

Hello - Hope everyone is doing well today!  I'm close (30-60 days out) to purchasing my first rental property and would like some perspective on how I should handle financing, llc or not, and a few other items.  I currently have total assets (primary house, investments, etc.) of ~$1M and debt of ~$170k.

The investment property market value is ~100k and purchase price ~ $70k.  The rental will be a buy and hold.

Questions:

1) To LLC the investment property or not? If not how much of an umbrella should I add to my personal insurance?

2) I will need additional cash to purchase the property.  Should I refinance my primary house (value = $400k: $161k balance) and cash out the $70k or go another route?  I can refinance @3.75% with $500 closing.

3) If no LLC, what do others do to separate personal and rental cash flows? Do you have a separate bank account?

4) If I form an LLC and pay cash from my refinance, how do I handle the cash for tracking in the LLC? Do you deposit the check from the bank in the LLC bank account prior to the closing and write a check from that account for the purchase?

Thanks!

[Christopher Morin]

BLUF: Ask a tax attorney.  The questions you are asking need to be asked to a estate lawyer or CPA, which I am not, so my this is not advice, this is opinion and you need to talk to a professional.

1) For liability purposes, I believe that a single person LLC is essentially useless. If someone were to attempt and hold the LLC liable, then the liability would pass through the LLC directly onto you and the purpose of having the LLC would be void.

2)  As far as refinancing, what's your current interest rate? Whats your goal with the property? Why are you paying full cash? Unless cash is necessary, you may want to consider lowering your initial investement and putting only a lower down payment.  A rough example... you could use 100k to put down 10 x 10% down payments and generate rental income from 10 properties, or you could outright own one and only get income from 1 property.  Every investment has an opportunity cost. 

3) I personally use difference bank accounts to manage my rental cash flows.  It lets me have a no-kidding perspective of my income/expense without having to decipher my personal expenses as well.  I'm also told mixing professional and personal funds can be very painful for you to wade through if you ever get audited.

4) The cash tracking and tax purposes of the LLC need to be handled by a professional, but an LLC has pass-through taxation which means you will absorb the tax burden of the LLC. As far as liquidity of funds right before closing... no idea, that seems like a hairy situation to get into though.

Good luck!