Should residential properties be under Individual LLCs?

Question

Hello,

I have been advise so many different ways to structure rentals. Most recommended to open an LLC for each property and title the rentals to the LLC.

It is a lot of administrative work and I am not sure what will be the most proper and beneficial way. Any advice will be greatly appreciated.

Thank You!

Alexander Szikla · Answer

LLCs are not a lot of admin work. You can pay a registered agent $150 to do it. The bigger concern is moving properties into an LLC if they have financing. Not all lenders allow this.

If you close with an LLC, your interest rate will be more expensive.

However, LLCs are a great practice for insulating liability.

Moran Eldar · Answer

the loan was under my name after three months of living in the home,  I rented it out. It was not an issue, so the lender did not require anything just I had to let my home insurance know. However, if I change the name on the deed, I don’t know what will happen with the mortgage.

Also, does anyone know when I sell if I change it to an LLC will my capital gain tax will be higher?

One more thing, what if I have an umbrella policy that covers the worth of my assets, will that not be sufficient to protect me against liability?

Bryant Naylor · Answer

I'm not sure about that one. Sorry.

Steve Morris · Answer

"Many lenders will require that they loan to a legal entity, and not an individual, when it comes to investment property purchases."

Not quite - You sign the loan personally in the name of the deed holding title.  The bank (in lien-theory) gets a trust deed against the property owned by the LLC if you default.

Original question - Yes, I would set up separate LLCs since their main purpose is to limit recourse to the assets in the LLC.  Less assets in the LLC means less risk to you.

Moran Eldar · Answer

@Bryant Naylor

Thank you! Do you know what happen if I move a property to an LLC and later on decide to sell? Will capital gain taxed the same?

Moran Eldar · Answer

@Bryant Naylor thank you Bryant!

Bryant Naylor · Answer

From what I've heard/read, if you move your property into an LLC and your loan gets audited, there's a chance they will call your loan due. You can technically do it - just understand the risk. I talked to an advisor who told me in his 18 years in the business, he's heard of it happening once - and the mortgage company contacted the lady and had her move the LLC back in to her name. Two months later she moved first into a Land Trust then back into the LLC and has been fine since. That was 10+ years ago apparently. The advice he gave me was - if you're going to move your properties into an LLC, don't draw any unwanted attention to yourself by paying your mortgage on time all the time. Anyway - that's my two cents. Cheers. r/Bryant

Moran Eldar · Answer

Thank you! Most of the properties are paid off. The properties are in Colorado and it is not much to form an LLC $50 each and $10 yearly.

If a mortgage exist, can I transfer the deed to the LLC? I called my mortgage company and they didn’t have an answer for me. I called the recorder office and they told me I need a quite claim deed.

Now, If I open an LLC to the one that has mortgage will it cause issue with my mortgage? Can i not title it to the LLC? If I get audit when I do my taxes will it cause an issue that the condo not title to the LLC?

George C. · Answer

Many lenders will require that they loan to a legal entity, and not an individual, when it comes to investment property purchases. At a minimum, having an LLC gives you options when pricing out loan options so that you don't have to eliminate any lender that has this requirement.  The LLC also limits your personal liability which is its primary benefit.

Most of the clients I work with form an LLC and have purchased multiple investment properties under the same LLC. This is really a personal choice in terms of how they want to set up their investment business. Most of them do it to avoid the paperwork and costs associated with setting up individual LLCs, with the downside being that should a claim be made against the LLC for one property the rest of those properties under the LLC are assets that can also be pulled in to settle any claim. Whereas individual LLCs per property "insulates" all other properties.

End of the day it is a personal decision how you want to set up your investments going forward but at least one LLC is highly recommended given it protects your personal assets from liability claims. Hope this helps.