How to structure first rental in NJ: Should I use an LLC? Land Trust?

[Zachary Sakena]

I am moving out of a home that was my primary residence, and it is becoming a rental. the mortgage is currently in my name. This will be my first rental. Should I set up a land trust then put the beneficiary as an LLC? The property is in NJ.

any and all advice/guidance would be appreciated. 

[Jonathan Greene]

That isn't necessary for your first rental in my opinion. Where did you read about doing that and for what purpose?

[Stuart Udis]

Can you take the steps you suggest? Sure. Is it necessary? Probably not.   The best way to avoid conflict and liability is by being proactive in the way in which you manage your property.  Be a good communicator and responsive to tenant's reasonable requests. Avoid premises liability exposure.  Screen your tenants well. Carry appropriate insurance (property, general liability and make sure you are listed as additional insured under tenant's renters policy and 3rd party vendors). Hire licensed and insured vendors.  Stay up to date on all licenses and permits that may be required. Use a well drafted and fair lease. Do those things consistently and you will avoid most liability and conflict you are concerned with.

Ironically it's normally the individuals who go to the greatest lengths believing they are protecting themselves who are the most reckless in the way in which they operate their real estate. They are also the same individuals who are constantly involved in conflict, have terrible loss run histories and therefore higher insurance premiums and are paying far more on legal. It's something I have been observing more and more. That's the property owner profile you want to avoid. 

[Nathan Gesner]

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

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 egregiously violating the law. You are more likely to be struck by lightning twice. The vast majority of lawsuits against landlords involve wrongful eviction, security deposit disputes, and Fair Housing Violations. Your primary insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 14 years of 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 expected to be higher, 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 extra, on-going effort to maintain.

[Zachary Sakena]

Quote from @Jonathan Greene:

That isn't necessary for your first rental in my opinion. Where did you read about doing that and for what purpose?

Likely just asset protection. I read it a lot of different places including on bigger pockets. Probably the most popular person who talks about it is Clint coons and Toby Mathis on their YouTube channel. They are attorneys. I’m sure it’s a way to get business in the door for them however but does seem like an actual structure to have down the road at some point with more properties.

[Zachary Sakena]

Quote from @Stuart Udis:

Can you take the steps you suggest? Sure. Is it necessary? Probably not.   The best way to avoid conflict and liability is by being proactive in the way in which you manage your property.  Be a good communicator and responsive to tenant's reasonable requests. Avoid premises liability exposure.  Screen your tenants well. Carry appropriate insurance (property, general liability and make sure you are listed as additional insured under tenant's renters policy and 3rd party vendors). Hire licensed and insured vendors.  Stay up to date on all licenses and permits that may be required. Use a well drafted and fair lease. Do those things consistently and you will avoid most liability and conflict you are concerned with.

Ironically it's normally the individuals who go to the greatest lengths believing they are protecting themselves who are the most reckless in the way in which they operate their real estate. They are also the same individuals who are constantly involved in conflict, have terrible loss run histories and therefore higher insurance premiums and are paying far more on legal. It's something I have been observing more and more. That's the property owner profile you want to avoid. 

Thanks for the advice. At what point and how many rentals would you suggest to set up a structure like I explained?

[Zachary Sakena]

Quote from @Nathan Gesner:

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

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 egregiously violating the law. You are more likely to be struck by lightning twice. The vast majority of lawsuits against landlords involve wrongful eviction, security deposit disputes, and Fair Housing Violations. Your primary insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 14 years of 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 expected to be higher, 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 extra, on-going effort to maintain.

I appreciate the advice. So as a new real estate investor, you would just keep it as is?

[Stuart Udis]

@Zachary Sakena Purchasing properties through an LLC is all you truthfully need and that is more for business planning than anything else (if you consistently follow through on the items I previously shared). Technically nothing Anderson recommends is wrong but in most instances what they recommend is completely unnecessary. The issue in most instances is the inability to articulate the risks and how these structures will actually help and therein lies the issue and why most go over the top on asset protection expenditures. Unfortunately there's a lot of alarmist/scare tactics utilized to upsell these services that do nothing but generate revenues for those who are selling the service and often leave the clients with recurring expenditures i.e annual maintenance costs.

[Zachary Sakena]

Quote from @Stuart Udis:

@Zachary Sakena Purchasing properties through an LLC is all you truthfully need and that is more for business planning than anything else (if you consistently follow through on the items I previously shared). Technically nothing Anderson recommends is wrong but in most instances what they recommend is completely unnecessary. The issue in most instances is the inability to articulate the risks and how these structures will actually help and therein lies the issue and why most go over the top on asset protection expenditures. Unfortunately there's a lot of alarmist/scare tactics utilized to upsell these services that do nothing but generate revenues for those who are selling the service and often leave the clients with recurring expenditures i.e annual maintenance costs.

Can I transfer my house into a single-member LLC that I own? I understand I need to consult my lender for an official answer. I have a Freddie Mac mortgage, so if I make this transfer, would it trigger the due-on-sale clause, or would the mortgage company allow it as long as I am the sole owner of the LLC?

[Stuart Udis]

I don't believe that will be allowed. It seems you are falling for the alarmist rhetoric you've been reading and watching online. Before you spend any more energy or resources on this endeavor explain the precise fear that has you wanting to transfer this property to an LLC. By this I mean the liability event that has you so concerned.

[Nathan Gesner]

Quote from @Zachary Sakena:

Yes, I would keep the property in your name. As I mentioned above, the risk of being sued, found guilty, and fined more than your insurance will cover is almost non-existent. 

[Shawn Mcenteer]

HI @Zachary Sakena putting property into LLC in my opinion depends on that strategy you are looking to implement for next property and if you want to leverage property moving out of into LLC. Something to keep in mind is the lending options change when in LLC, so leverage owner occupied loans for Refi/HElOC etc go away once you move out. Make sure you situate (if you plan to) prior is crucial. Personally looking back at it switching into LLC was a more of a headache for me and did not do much for adding a level of protection that insurance did already handle.

[Alvin Sylvain]

Quote from @Nathan Gesner:

Quote from @Zachary Sakena:

Yes, I would keep the property in your name. As I mentioned above, the risk of being sued, found guilty, and fined more than your insurance will cover is almost non-existent. 

My question is, what about setting up an LLC and/or a land trust to avoid probate when you pass on? The risk of being sued may be vanishingly small, but the risk of death is 100% certain. Avoiding probate sounds like a useful goal.

Thanks!

[Nathan Gesner]

Quote from @Alvin Sylvain:

I don't know of any special protection afforded you by placing the property in an LLC. Your estate could still go through probate to determine how the LLC and other assets are distributed.

You may be able to record a "transfer on death" deed for your property so it automatically transfers to another person when you die. More commonly, a Revocable Living Trust ensures your assets are passed to a trustee upon death.