LLC for rental properties?

Question

I own two homes. One of them I live in. I rent out the other. Annually I collect $25k-$30k gross for rental income total for both properties (sometimes rent a room out in my other house). I am considering buying a 3rd property this year and of coarse would like to continue to expand from there. Does it make sense for me to start an LLC property management company in my name to collect rent money? I am not familiar with the fees associated with and if I'd end up saving money on my taxes.

Peter Mckernan · Answer

Hello @Jeremy ClarkeI would first go talk with your lawyer (or a lawyer that can answers these questions more depth). LLCs are great for asset protection as are S-Corps. LLCs have been around so long that they are tried and true for investment properties. The LLC will give you the added asset protection, which will give you that added protection if any litigation were to ever come up. For taxes you'll have to pay an extra LLC fee in your state, I'm not sure what that amount is; however, in Ca it's an $800.00 fee when filing (you should research your state).The highest hurdle for you is placing the current properties into the LLC. You'll have to notify the lender of each property that you want this to be performed, and they may be okay with that happening, or they may call the loan due (which causes a huge headache). The best time to perform this act is when you are about to close escrow on your next property. You'll have the deed and title show your LLC instead of your name.Good Luck!

Jonathan J. Miller · Answer

From the lending point of view they like to work with LLC's. When you have reached you 10 limit it will be a lot easier to portfolio if they are in an LLC. It is also more difficult to add properties to a newly created LLC. In my opinion all acquisitions moving forward should be under that protective umbrella.~Jonathan

Luis Melendez · Answer

If you can find a lender that will fund your deal u see an LLC that would be a good idea. I tried to do that but unless it's a commercial property no lender would loan to me. I then started to get a million dollar umbrella policy but the insurance companies said I need a certified lead inspector give an abatement before I could get the policy so that's what I'm working on now. If you have luck finding a lender who would lend under an LLC for a residential property please let me know. Good luck

James O'Connor · Answer

Due on sale clause is something a lot of people are bringing up as the hurdle when transferring to LLC. It is written in most mortgage loans.Really great info on this thread:https://www.biggerpockets.com/forums/109/topics/71346-mortgage-called-due-upon-llc-transferThis was written by Bill Gulley"1. You signed the note personally, any transfer of the property will note keep a lender from going after you personally in the event of default or deficiency, regardless of who else or where the collateral sits...2. Generally, if you transfer a property as part of an estate planning scheme and there are no other members in your LLC, banks usually will overlook the transfer.3. Since the popularity of investors transferring properties to LLC and then selling the LLC or doing similar pops, lenders are cracking down. Use to be, I'd say do it (as I have in the past) but now I'd say proceed with great caution. If they see that you are in the business and especially if you have done similar deals in the past, I'm sure they will win out using the DOS clause.4. Depends on the lender, your ability to deal with the lender and what is legally customary for your area, that will be true in all cases."

Mayank S. · Answer

If you own your properties free and clear, it makes sense to put them into LLC otherwise you may run into risk of loan being called in full with note due on sale clause. Likelihood of note being called in full is very rare but still a risk. I would rather have umbrella insurance to get some protection. LLC are no way a full asset protection thing and attorneys can pierce the corporate veil if not formed correctly.

Jason Arcuri · Answer

@melissa gittens that is true to a certain extent. If it is his own propertIes he can put them in his llc, he just can't manage anyone else's property

John Nisewonger · Answer

I was just going to ask this question but found your forum question first. I also currently have 2 properties that I am renting. With the info I found and was told, LLC is the best option. If you do not put your properties in an LLC you should still treat them like a business. Create a separate bank account to collect rent and pay the mortgage and other expenses. Do not comingle your assets. If you do end up going to court for something serious, at least the lawyer can fight your case and you will just lose your business properties and not your personal assets.This is just what I was told. I will be asking my attorney very soon about this. I did not know that some lenders will call your loan if they see you transfer to an LLC. Guess you could always call and ask first

Jeremy Clarke · Answer

@Jonathan J. Miller Are you saying that if i want to continue to add more properties to my portfolio (which i do), i should get an LLC created sooner than later but for now just get an umbrella policy?Also, when you say my limit is 10 properties, what are you referring to exactly?

John Arendsen · Answer

Not sure how it works in Colo but in Cali you need to have an RE license to be a PM. You may be wise to just stay an owner/landlord. I'm a RE broker and PM but have realized that I really don't need to be a PM for my own properties. I'm not really that active as a broker anymore and at 70 don't really want to be. I'm in wind down mode. I guess it really depends on what mode your in and what your short and long term goals are.

Jacob Sampson · Answer

I didn't start an LLC until we had 7 properties. I just didn't care until I had made enough forward progress that I wanted to protect it. This is certainly a question for a professional since your financial situation will be entirely different than mine. Currently I have a $1,000,000 umbrella policy and all properties are owned by an LLC.You shouldn't have trouble getting financing but you are going to have to personally sign for the mortgage.