LLC question for first time rental property owner

[Dave M.]

Hello! I found this EXTREMELY helpful forum while Googling for info on LLC's as they relate to rental property ownership. I've already ready a ton of very good info, but I have some specific questions I can't find answers to.

My wife & I are purchasing a small piece of vacant land (~2.5 acres and hopefully closing by end of this month), and will be immediately starting to build a small log cabin that will be used as a rental property and personal "getaway" a few times per year.

We currently DO NOT have an LLC, and will be purchasing the land with our own personal funds (no loan). We're working with a bank now to finance the rest of the project, with the land as our "equity" in the deal.

Further, our builder also operates a rental property management business and we will be using his services since we live about 3 hours away from the property (in the same state - Ohio). He will handle bookings, collect rent, clean the cabin, maintenance, etc, and send us a check every month after deducting his management fee.

So.... Having said all that. The builder/manager recommends we form an LLC for the property. He owns 4 or 5 cabins of his own and has an LLC for each. If this project goes well, we plan to rinse and repeat to build up a small portfolio of cabins as well. My attorney actually advised against forming an LLC, and just recommended having a good umbrella liability insurance policy. However, I don't believe he specializes in this area of law.

In all the reading I've done so far, I tend to disagree with my attorney. My wife & I would feel a little better by having everything in an LLC.

Finally to my questions: :)

1. Do you experienced property owners recommend forming an LLC in this situation where it's our first property, but we have plans to grow?

2. If we do form an LLC now, before closing on the property, how would we treat the money we're using to purchase the land? Obviously the LLC has no assets until we purchase the land out of our own pockets and deed it to the LLC at closing. Would that just be counted as our initial investment in the LLC and be reflected on the LLC Operating Agreement as such?? Do we have to purchase in our own name first, and then "sell" it to the LLC?? If so, how would the LLC purchase it with no assets?

Thank you in advance!

Dave

[Clint Coons]

Dave,

Here are a few points to consider:

An umbrella policy only covers you when your underlying policy pays. If your landlord insurer refuses coverage then you are without protection from the Umbrella. Further, some claims such as mold i.e., environmental are not covered under your policy, earthquakes, floods, drug labs.

A land trust does not offer asset protection but it does provide "due on sale" protection for transfers into LLCs.

A LLC will provide ample protection for a relative modest outlay. When considering protection, keep in mind that once your LLC is in place it costs very little to maintain (annual state filing fee is typically less than $200 for most states).

Typically for an investor such as yourself I would recommend establishing a land trust to hold title to your rental and a LLC to hold the ownership of your land trust. Once you close on the property, deed your rental to the land trust and subsequently assign your beneficial interest to your LLC.

If properly set up, neither your trust nor your LLC will require a tax return. Also keep in mind that you can place more than one trust in a LLC. I typically advise my clients to hold up to $250k in equity and no more than 4 properties per LLC.

Kind regards,

Clint Coons