All Forum Posts by: Jon Pitcher

Write a check to your LLC. Account for it as a capital contribution in your company records. This does not create an "alter ego" problem.

I helped a friend/investor purchase a $50,000 single-family house to hold as a rental in Del City, Oklahoma (a suburb in SE Oklahoma City).  The sale closed on 5/12/2017.  This house needs a light rehab.  Major systems (roof, HVAC, foundation, plumbing) are in good shape, but the former owner was a smoker.  I used to run a house flipping business, so I have my old rehab crew lined up to help get this place ready to rent.

Here are the numbers:

3 bedroom, 1.5 bath, appr. 1,000 sq ft.  

1 car garage, plus carport

Purchase Price: $50,000

Rehab Budget: $6,000

Projected Rent: $850/month

I will manage the property for 8% of rent collected.  Tax and insurance will run around $150/month.  

My investor paid cash and is not planning to take a loan. I set up a single-member LLC for him to hold the property. In Oklahoma, a single-member LLC is sufficient to avoid personal liability, if you maintain the entity properly and can avoid activity (such as managing the property yourself) that will cause a direct lawsuit against you personally.

The rehab will include tearing out all of the carpet, putting tile in the entry, living room, hallway and bathrooms, plus carpet in the bedrooms.  We also need to replace a few doors and a couple of appliances, and fully re-paint all of the walls and ceilings.  Plus a few miscellaneous repairs.

The house was occupied prior to purchase, and we had a professional home inspection.  In addition, the City of Del City requires a city inspection and certificate of occupancy to be issued whenever a property changes ownership or changes residents.  So we required the seller to have the home inspected by the City and make any City-required repairs.

Rehab began over the weekend.  Carpet has been torn out.  Tile install and painting will begin this week.

Including some "before" pictures (I don't know how to rotate these):

@Ganesh Rao

If you own the properties free and clear, then transfer them into your LLC with quit-claim deeds. If any property has a conventional mortgage on it, the due on sale clause is an issue (as @Thomas S. mentioned above).  So you should leave it where it is or consult and attorney to see what your options are.

For future properties, if you're paying cash, buy them through your LLC. If you are financing, you need to weigh the potential benefit of conventional financing (lower rate and longer fixed term) versus the flexibility of a portfolio loan, which can be done in the name of your LLC.

@Kristina Inglis

I have heard the reason lenders cannot do conventional loans to an LLC even with a personal guaranty is because the loans cannot be packaged and sold on the secondary market or sold to Fannie/Freddie if the debtor is an LLC.

@Gilbert Tirado

Keep your rentals in an LLC and use a separate S-Corp for your flips. That may already be your intention, but I couldn't tell from your post.

As to the management LLC, you aren't going to get any liability protection if you personally are the manager - any plaintiff is going to sue you personally for any negligent act you commit. And it would have the consequence of turning your passive rental income into earned management income. So generally not a good idea to form a management LLC if you are only managIng your own properties.

I'm not licensed in California or Indiana, but I think option 1 will work and be much cheaper than forming a California LLC. You aren't doing business in California, so I don't know of any reason you would need to have an entity there.

@Jamal Page

Start by review the trust agreement and determining who has the power to decide what happens with the property.  Relevant questions include:  who is the trustee?  does the trust have funds available to rehab the property?  what rights to the beneficiaries have?

@Jeff B., @Surender Singh

These generalizations about LLCs are not accurate in all jurisdictions.  Statutes and case law regarding LLCs are state-specific, and what is true for you in California or Florida could be completely wrong for the original poster in Georgia - he should talk to an attorney in his state.

In both of the jurisdictions in which I am licensed (Texas and Oklahoma), state law says the exclusive remedy for an LLC member's judgment creditor is a charging order. The statutes do not limit this protection to multi-member LLCs. I cannot find a case in either Oklahoma or Texas where the court has pierced an LLC because the LLC had only one member (if anyone knows of one, please post or send it to me).

This link suggests the same may be true in Georgia:  http://www.nolo.com/legal-encyclopedia/llc-protect...

An LLC does need its own separate funds, and it needs to keep company records in compliance with its operating agreement and state law. But in my two states, an LLC is not required to hold annual meetings, or even have a board. So that would be a very odd reason for a court to pierce the structure.

The LLC is not right for every situation, and a multi-member LLC is preferable to a single-member LLC for asset protection. But the single-member LLC can be a useful tool in some jurisdictions, and should not be dismissed without understanding the applicable state law.

@Neil Goldman

A standard landlord policy on each property, with the maximum amount of liability coverage (should be at least $500k, some providers will go higher).  You could also look at an umbrella policy on top of that if think you need it.

As to your business arrangement, you could still use an LLC, but leave the properties titled as they are now. Or you could do a joint venture agreement or something similar that would not require a business entity. Either way, the concept is to share the rents and expenses across the two properties. And possibly share in profit/loss upon a sale of the property.

I wouldn't necessarily use an LLC here - if you transfer ownership of the properties, you trigger the bank's right to call your loans due. You could just contractually agree to share income and expenses and keep separate ownership of the properties. And use insurance to mitigate the liability risk.