House Hacking Leasing - Under my name? LLC?

[Rebecca B.]

Hi everyone,

I'm new to house hacking and to landlording. I purchased a property as a primary residence and converted the garage into a studio apartment that will be ready for renting this September. I've spoken to a lawyer about putting the property into an LLC but he advised against it since I would lose my homestead protection, not to mention lose my homestead exemption tax discount. He recommends waiting until I move out to transfer my currently property into an LLC, which we agreed was the appropriate action. I plan to manage renting out the ADU myself, when I move out, the main house will also go up for rent and I'll manage that, and when I purchase my next primary home it will be a multifamily to house hack again and manage any additional doors from that property as well.

Does it make sense to create an LLC to use to rent and manage the property out? Lawyer mentioned creating a series LLC if I plan to own multiple properties, but should the property management LLC separate? Any advise?

[Scott Trench]

Everyone will vary here, and it is good to see that you have an attorney who is not blindly encouraging you to do an LLC on a house hack. They might be a keeper.

Personally, I think that the LLC comes with tradeoffs:

In the pros category is:

- Liability protection

In the cons category are: 

- Complexity

- Cost 

- Maintenance requirements

- Risk of triggering the due on sale clause

I think that the pro outweighs the cons when there are meaningful external assets to protect. "Meaningful" is different for everyone. For me, I was comfortable with no LLC until my net worth outside of property equity exceeded $1M. Now, I like to protect ~$1M in total equity with each LLC. But, no point setting up an LLC when essentailly all my wealth is in my 401(k) plan (a little more difficult to lose in a judgment depending on your state, per my understanding) and the equity in a single property.

Even today, if I were to do an LLC for every property, I might be creating too much complexity for not enough protection.

I also have good insurance to mitigate risks. 

Lastly, the old "due on sale" clause that technically enables the bank to require you to payoff the mortgage when you transfer ownership of the asset. The risk of triggering this is remote, as investors here are happy to debate, but so is the risk of a lawsuit that would result in substantial damages that an LLC could prevent.

No easy answers here.