Why do people use LLC for "buy & hold" rentals that have mortgages?

[Dan N.]

I am confused on this topic and I would like some input. I am going to acquire a few long-term rentals over the next few years. All properties will be acquired with a mortgage. Initially, I was sure I was going to create an LLC (for legal protection) for each.

But over the past few weeks, I have discovered:

1. LLCs that are owned by one person don´t really provide any protection

2. Umbrella insurance seems to cover you and your assets better than an LLC in case of a lawsuit.

3. If I buy a house under my name, and transfer it to an LLC owned by me, there is a slight chance it could trigger a due-on-sale clause (especially if interest rates rise).

What am I missing? Why do so many people purchase long-term rentals (with a mortgage) under an LLC?

Thanks in advance for your feedback.

[Kaitlyn Beard]

Dan, 

It took me a couple years reading a stack of books and actively investing into real estate to have the EXACT realizations that you have. As Allan has mentioned as well, LLCs protect you.... but don't. The more I network with other successful investors, the more I refrain away from obtaining an LLC for future properties. Take note, that I have numerous properties, of course all without an LLC. There are multiple layers of protection such as home insurance, possibly requiring tenants to have rental insurance, having property managers in the property (they have insurance too), and simply being a good landlord! That sounds so cheesy but imagine a terrible land lord that refuses to replace things, or call a plumber, or doesn't address health concerns such as mold or whatever it be! If those things happen, the likelihood of having a tenant that would want to sue you goes down. Of course, mistakes and accidents happen so you could always be an amazing landlord/property manager that gets sued, but that's why many tap into umbrella policies. Not sure if that's value added, but sure hope it is!