Setting up an LLC for one Rental Property

[Carlos Lopes]

I’m new to real estate investing, so I have many questions. 

I currently only own one rental property in Florida. Only became my rental because I moved to California for work reasons so I decided to keep it. 

I'm now looking into buying more real estate, but I first want to make sure I have things setup correctly. Currently the one property, I manage it myself and don't have an LLC setup. Really all I have setup for the property is a separate checking account and have a landlord specific home insurance policy.

The questions are as follows: 

1) Should I set up an LLC for just one property? Pros and cons? If so, do I set up that LLC in California (since that's where I live now) or do I have to set it up in Florida since that's where the property is?

2) If I do setup an LLC, is transferring a property from your name to the LLC pretty straight forward? (I’m also still paying a mortgage). Will this trigger any clause on the mortgage lender side for a conventional loan? Ideally I would just transfer the property over and keep paying the mortgage as an individual. 

3) Lastly, what are people’s thoughts on umbrella insurance? I see a lot of people mentioning those. I have my regular insurance on the rental property, but should I be concerned with looking into umbrella policies for extra liability protection?

I know this is a rabbit hole, but just looking for some guidance on how to make sure I’m properly setup before I start looking into buying more properties. Thanks in advance! 

[Katie Balatbat]

@Carlos Lopes

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. Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.

California is generally more cumbersome than other states when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don't buy CA property as a CA resident.

Any lawsuits should 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, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. Or, a charging order may be granted.

If you're going the umbrella insurance route, perhaps see if 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 could 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. California does not recognize series LLCs.

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