Does it make sense to set up an LLC?

[Michael Waskiewicz]

Hello,

I own a home in Westchester NY that has an accessory dwelling unit which is a small apartment above the detached garage. Would it make sense for me to set up an LLC and what type of benefits would I receive from doing so? From the little bit of research I did it seems that typically the LLC owns the property, but in my scenario the main house (where I live) and the apartment are on one tax lot, so I'm not sure I would be able to separate the two. Any advice?

Thank you,

Mike

[Joe Jor]

Why are you leaning towards an LLC?  The main benefit is if you get sued, the liability is separate from your personal assets.  If you get a big honkin' umbrella insurance policy you will have similar protection with less paperwork.

Also, if the loan is in your personal name, the bank won't allow it.  You can probably get away with it, but you risk the unlikely chance the loan gets called.

Joe

[Michael Waskiewicz]

Thanks Joe, I appreciate your response. I have a few coworkers who have income properties and mentioned that putting those under an LLC was a good idea due to liability reasons. In my case its a bit different since it is all included on the same property that I live on. I guess it would be a good idea to look into an LLC in the future if I ended up purchasing a separate property for rental purposes, since in this case I wouldn't be able to separate this from my primary residence. The timing of my question is due to my first tenant, who has been a pleasure to deal with, she is moving out on April 1 and I realize that I may not be as lucky going forward so wanted to make sure I was protected.

[Nathan Gesner]

Quote from @Michael Waskiewicz:

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.

If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.