Should I create a LLC - CA Rental

Question

I just rented my place in the Bay Area, CA. but live in texas. I’m trying to determine if I should open a LLC to protect my personal assets or just go with an Umbrella? Since the property is in CA, I assume I would need to create the LLC in California, correct? Any suggestions of attorneys /way to start? And cost implications for doing an LLC long term? And any benefits or drawbacks from being your own registered agent/ having someone you trust in Ca be your registered agent?

Amit M. · Answer

Whoops, the CA LLC game May very soon change- keep an eye on AB 1482, the CA rent control measure. Basically SFH’s and condos will be exempt, UNLESS they are owned by a REIT, Corp or LLC. Doh!

Ali Boone · Answer

I chose the umbrella route. Here's why (and especially with being in CA)-

https://www.biggerpockets.com/...

Katie L. · Answer

@Alice Chan

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.

Any lawsuits would 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). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure 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 would 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.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a 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.

Scott Smith · Answer

It's a very common question. The discussion about insurance versus LLC fits into the "second pillar" of asset protection. And the DST is something that would fit into the "third pillar," for California investors.

When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.

The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.

The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can’t touch you or the other properties. You should use either LLC’s (the old and expensive way,) a Series LLC (a more cost/time effective way thanks to scaling,) or for investors dealing with California - the Delaware Statutory Trust. No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely at no additional cost. If you’re interested in using an LLC, this article  also further explains the advantages of a Series LLC.

The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a “asset holding company”) and a completely separate company handles all of your operations (this is a traditional LLC a/k/a “operating company”) For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

The fifth pillar is owning everything anonymously. If people don’t know that you have assets, then they are less likely to sue because there’s no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn’t matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.

Ideally you are aiming for the strongest level of protection that doesn't kill your returns. For the majority of investors who own property in California it makes sense to use a DST from the tax savings, in comparison to an LLC.

Tommy Brown · Answer

@Alice Chan

As in insurance agent in the SF Bay Area of California, I speak with many clients about your question or LLC vs Umbrella. The above information is absolutely great advise, and you should definitely follow it!

Regarding the liability exposure for California, in lawsuit in this stat, you could potentially received a judgment that is equal to your net assets (with a few exceptions) and up to half of your current income for the next 10 years. My recommendation is generally to have a high enough umbrella liability limit to cover your entire net worth and addition to half of your income for the next 10 years to adequately protect your liability exposures.

Since you live in another state, it would be best to speak to your legal counsel regarding your asset exposure and what could be included in a judgment and what limitations apply. Often for property investors with only a few properties, a large umbrella policy make sense. As you expand your business of property ownership, it is a great idea to begin separating your personal assets from your rental properties through different legal entities.

Regards,

Tommy Brown

CA DOI License #0K51144

Costin I. · Answer

Most of the time, you need an umbrella insurance policy. And that is not a "umbrella or LLC" question, as the umbrella is not an alternative or replacement to the LLC and vice-versa. You need it before the LLC and even if you have an LLC.

Question is if you need an LLC for your asset protection. The mortgage note in itself is a form of protection and you need substantial equity before you need to worry about an LLC, and even then you still need to do other forms of risk mitigation.

Plus, with the rental in CA, that comes with additional complications due to the expensive $800/year/LLC fee so other structures might be more beneficial (like DSTs) - talk with @Scott Smith, he can provide expertise to the particulars of your situation.

Here is a diagram to help you on your quest: asspro-cya-diagram-v6a-solo-401k (but half of it might not apply to your case as you might need/want a DST):

Tommy Brown · Answer

Hi Jason,

Insurance rates are determined by individual characteristics, the underwriting company, and the rates filed with each state. If AAA will not write the umbrella liability insurance, than you could check with a broker who represents RLI, USLI, or personalumbrella(dot)com. Feel free to message me should you have any additional questions!

Regards,

Tommy Brown

CA DOI License # 0K51144

Alice Chan · Answer

@Amit Saini thank you so much for the step by step and info! Really appreciate it!!

Jason Graves · Answer

@Tommy Brown

I’m with AAA and they said they don’t do umbrella policy.

I own real Estate in California and KS MO

Any suggestions on who offers the best rates?

Amit Saini · Answer

1. Insist that tenant have renters insurance

2. Get landlord insurance package for your rental property (for yourself)

3. Get umbrella insurance (for yourself) to cover your assets & add your rental property to the umbrella

4. Avoid LLC crap unless you are rent out large multi-family units. For a single SFR/condo/TH, LLC is an overhead that is best avoided.

I have rental property in CA and TX and have opted to go the umbrella route (for now).

Should I create a LLC - CA Rental

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