Pros & Cons on having the LLC manage the rental property

[Shana Williams]

I plan on turning my condo into a rental unit. I have already checked with my lender and they confirmed that if the property gets transferred into a LLC, the due-on-sale clause will take effect. With that being said, I am looking into getting an umbrella insurance for added protection.

So my question is, are there any additional benefits of having a LLC manage the property? The note will still be in my name, however, outside of not having any difference in taxes, are they any pros/cons of having the LLC manage my property?

Thanks

[Frank Chin]

I owned rentals for nearly 40 years and have yet placed any of them into an LLC. As you mentioned, I make sure I have enough umbrella insurance.

I also engaged in other businesses, so I also file returns for LLC's, S Corp, and even a C Corp for a while, so another LLC for the rentals would just be another return. I used a separate personal checking account for my rentals anyway.

People point to lawsuits and the LLC would protect you from lawsuits. They don't realize that attorneys will sue you anyway, filing lawsuits against the LLC and you personally, under the theory that you are personally negligent as the property manager. That's besides piercing the corporate veil. So the way around it is to get a property manager, which costs you 10% of rents in fees, so you'll be covered under the PM's E&O insurance. The theory here is you are only an investor. Umbrella insurance is much cheaper.

One last thing is if you operate thru S Corps and LLC's when you get insurance, make sure to get an endorsement covering you personally as well. I know someone who didn't know that, his insurance agent didn't think of that, and only found out when he also sued in a $3 million dollar lawsuit. I called my agent about it when I heard about this lawsuit, and was told I was covered. I talked to the person who was sued, and he mumbled, I was told this S Corp or whatever shielded me.