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LLC for rental properties?
Old 09-10-2009, 11:03 AM   #1
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LLC for rental properties?

I'm considering my liability exposure on my rental properties and thinking of purchasing a personal umbrella to sit over my homeowners policy, or possibly putting the deeds to my rentals into an LLC.

Does anyone here to the LLC thing? Can it take the place of umbrella coverage? Do I need to do the LLC if I purchase enough umbrella coverage?

My first quote for umbrella coverage was $800 for 4M through Geico (where I have my auto policies). What does an LLC cost to set up and keep current?

Thanks in advance for all the replies I'm sure I will get on this very interesting and fascinating subject!
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Old 09-10-2009, 11:32 AM   #2
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Cardude, the real experts will be along shortly, but I have looked into this in the past and would get my rentals into an LLC and also get serious umbrella coverage. LLC costs vary with your state but you can often use templates to set it up on your own if so inclined. Fees can be a few hundred bucks a year and there is some reporting homework every year.

Be aware that to clinch the LLC liability protection the lease needs to be with the LLC and the renter needs to know that; I am told it is wise to have all rent checks made out to the LLC, all hired repair work done throught the LLC, etc. You shouldn't just make the switch and not tell the renter. And of course if you do your own repairs, the LLC doesn't help you if you cause harm -- no liability protection in that scenario.
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Old 09-10-2009, 11:38 AM   #3
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Rich,

Hey thanks for the reply. Your post points to what I was thinking-- for the amount of work and expense and hassle of setting up and operating an LLC, why don't I just buy the umbrella insurance and forget the LLC since the LLC would only cover rentals but the umbrella would cover "everything".
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Old 09-10-2009, 11:53 AM   #4
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Originally Posted by cardude View Post
Hey thanks for the reply. Your post points to what I was thinking-- for the amount of work and expense and hassle of setting up and operating an LLC, why don't I just buy the umbrella insurance and forget the LLC since the LLC would only cover rentals but the umbrella would cover "everything".
To be more clear as to what I meant, I am suggesting that you do both: the LLC plus plenty of insurance. I don't think an LLC is all that much hassle, especially after initial setup, and you still need protection from your own acts for which the LLC does not protect you.

Then again, I'm the last person you want to get legal advice from .
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Old 09-10-2009, 02:56 PM   #5
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Quote:
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I'm considering my liability exposure on my rental properties and thinking of purchasing a personal umbrella to sit over my homeowners policy,
Do it. I've got them on my rentals, even though you have to carry max liability coverage fire policies on each property.

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or possibly putting the deeds to my rentals into an LLC.
If you do this you should consider: 1. lender loan acceleration upon title transfer. 2. Set up costs. 3. Record keeping & CPA filing costs for both Fed & state. 4. Decide if all rentals go in 1 LLC or a separate LLC for each rental. 5. To maintain operational separation, you have to give up all incidence of control, so the LLC has to hire management for day to day operations. And you cannot control them, otherwise it defeats the function of a separate organization.

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Does anyone here to the LLC thing?
Every time I look into it I come to the same conclusion. Just get an umbrella.

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Can it take the place of umbrella coverage?
No, the LLC will have to have its own insurance, liability, errors and omissions etc. And they cost 1.5 to 2 times as much as the same insurance for an individual.

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Originally Posted by cardude View Post
Do I need to do the LLC if I purchase enough umbrella coverage?
I don't think so.

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Originally Posted by cardude View Post
My first quote for umbrella coverage was $800 for 4M through Geico (where I have my auto policies).
Try with your property insurance broker.

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What does an LLC cost to set up and keep current?
Depends on legal charges & CPA charges. Harvard or Yale graduates charge more than state school graduates.
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Old 09-10-2009, 03:06 PM   #6
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But you did a fine job Rich!

Number one importance is getting the umbrella liability insurance, as Rich says even if you have the properties in LLCs that will not protect you from claims due to your own negligence.

Even if you put them in LLCs you are on the hook personally for any debt you incurred to buy the property because you signed the loan documents. You are on the hook personally for your own negligence. If there are other claims arising out of the property (for example, personal injury unrelated to your negligence, claims for unpaid debts which you don't guaranty) the LLC will confine those claims to claims against assets held by the LLC. But you still will need insurance for the LLC and as the previous poster said, it may be more expensive.

Transferring the property to an LLC may be a technical default under your financing documents. Check with your insurance company to make sure that they will insure the property when it is held by the LLC instead of by you and won't increase the cost substantially. You ust transfer utilities and everything (including rental agreements) into the name of the LLC and use a separate bank account in the name of the LLC for all the property's business. Etc. We would name our LLCs the same as the address of each property, it made it easy for tenants to write checks and easy to differentiate everything.

If the LLCs are going to be single member it will all be simple to form and taxes will be done the same as you would without the LLC.

I suggest chatting this over quickly with your lawyer.
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Old 09-10-2009, 04:37 PM   #7
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HPryder:

I was under the impression I got the umbrella on my homeowner's policy on the house I live in, not on each individual rental house. In other words, the umbrella kicked in when needed over the 500K limit on my homeowner's policy if something happened at one of my rentals or wherever.

Are you saying the ins company made you raise the underlying limits on each rental house in order to write the policy?

Martha:

I must be a lazy slob, but it sure sounds like more trouble than it's worth to me setting up these LLCs. Why not just do as HPryder says and just "umbrella up" and fuggetaboutit?
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Old 09-10-2009, 06:09 PM   #8
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Rich,

Hey thanks for the reply. Your post points to what I was thinking-- for the amount of work and expense and hassle of setting up and operating an LLC, why don't I just buy the umbrella insurance and forget the LLC since the LLC would only cover rentals but the umbrella would cover "everything".
Umbrellas don't cover everything, they have exclusions just like any other
insurance product, read the fine print. Then make your decision.
Also, remember that in today's world, you can run into large settlements
that blow through the umbrella limit.
I guess it depends on how much you have to lose.
TJ
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Old 09-10-2009, 06:26 PM   #9
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TJ

Did you miss the "" I put around everything? Just kiddin with ya dude, but that was my attempt at toung in cheek.
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Old 09-10-2009, 07:00 PM   #10
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Cardude, back in my 20's I set up a dba for almost nothing and used it for rentals. I had no worries, no NW either.
Today it would be LLC AND Liabililty Ins might do an LLC per rental or do a couple rentals per LLC but it would be both. You can have an LLC up and running for < 1K, if you shop it probably just a couple hundred bucks annual paperwork is a few forms and < 100 bucks not difficult to maintain.
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Old 09-10-2009, 07:50 PM   #11
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I must be a lazy slob, but it sure sounds like more trouble than it's worth to me setting up these LLCs. Why not just do as HPryder says and just "umbrella up" and fuggetaboutit?
Me too. It's my impression that an LLC doesn't offer any additional protection that a dedicated legal expert couldn't pierce anyway.

Now more than one rental property, or a property with more than one tenant... that's more complicated.
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Old 09-11-2009, 07:09 AM   #12
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3 partners and I own 3 rental condos. We have an LLC that was set up before we purchased the condos. The LLC seems like the way to go for us due to tax reasons and to the complexities of having multiple owners of multiple properties. All of our insurance is under the name of the LLC
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Old 09-11-2009, 10:17 AM   #13
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Quote:
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Martha:

I must be a lazy slob, but it sure sounds like more trouble than it's worth to me setting up these LLCs. Why not just do as HPryder says and just "umbrella up" and fuggetaboutit?
We are down to one property, the fourplex we live in. We don't have that in a LLC, partly because it would lose homestead status. We umbrella up, behave ourselves, and keep it maintained.

The most important thing is the insurance.

Without knowing your situation I can't say what is best or adequate for you.
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Old 09-11-2009, 12:23 PM   #14
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I was under the impression I got the umbrella on my homeowner's policy on the house I live in, not on each individual rental house. In other words, the umbrella kicked in when needed over the 500K limit on my homeowner's policy if something happened at one of my rentals or wherever.
The umbrella covers liabilities above the liability limits on all the listed insured items. If you want the rentals covered, they have to have individual fire liability policies or have extended liability coverage from your homeowners ( assuming your homeowners allows this), and be listed on the umbrella policy. Since the umbrella covers above the liability limits, umbrella insurance co. typically require the maximum liability limits on the underlying policies ( i.e. individual fire policies and / or homeowners extensions).

If you want your cars covered also, they have to be listed and meet the umbrella underlying limits also.

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Are you saying the ins company made you raise the underlying limits on each rental house in order to write the policy?
Yes.
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Old 09-11-2009, 12:50 PM   #15
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I was rejected for an umbrella because I had too many units (more than 6). Properties would be excluded if I went forward ... didn't make any sense.

So I went with an S Corp. Tax filing is a hassle and expensive. If I had it to do again I'ld do a LLC for each property. Idea being, any suit can only take to corporate asset (1 property).
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Old 09-11-2009, 04:50 PM   #16
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Me too. It's my impression that an LLC doesn't offer any additional protection that a dedicated legal expert couldn't pierce anyway.
LLCs don't protect you against you, so if you do some bad electrical work,
and it causes a fire, then they can sue you. So if you have an LLC, let
others do the maintenance. Other than that, they can't be pierced.
TJ
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Old 09-12-2009, 08:51 AM   #17
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Quote:

so if you do some bad electrical work,
and it causes a fire, then they can sue you
Interesting ... so the fire policy pays off then the insurance company comes after the electrician (you). Something that wouldn't happen to a home owner (weekend electrician).
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Old 09-12-2009, 09:53 AM   #18
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Interesting ... so the fire policy pays off then the insurance company comes after the electrician (you). Something that wouldn't happen to a home owner (weekend electrician).
We're talking liability only, you did the electrical work that caused a
fire that resulted in the death of love one.
Case 1: You did the electrical work:
They going to sue you (you did the electrical work),
which means they get ALL your LLCs and anything else you own, with possible exception of your home and retirement accounts.
Case 2: If you had a qualified electrician,
They sue the electrician, they sue the owner of the property. IF the rental
property is in an LLC, that will only be able to get LLC assets. IF the
electrician was an employee of an LLC, ditto for them as well.
Case 3: You had your brother-in-law the accountant do the work
They will sue you, but they will argue you didn't do due diligence,
so you are partially responsible, hence piercing the LLC. And they will
sue your brother-in-law.

LLCs do not protect you from you, they only protect the LLC owner
if they act like an owner, once you start doing the work and acting
like an employee, you open yourself up to liability.

As far as doing work on your own house, because you aren't going to
sue yourself ;-) you should be safe.
TJ
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Old 09-12-2009, 10:01 AM   #19
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If you transfer the deed to an LLC after you purchased the house; often times you are technically in violation of the mortgage "due on sale" close. 95% of the time its not a big deal, but in this day in age, who knows what happens.

If you tell the mortgage company right up front that you are purchasing in an LLC , 90% of them will increase their rates.

Average cost for an LLC is $600 / year in my state when you look at business taxes, accounting, etc.

It really depends on whether you are doing one property or multiple. I did the LLC thing for about 10 properties earlier in the decade , but sold them all in 2006. Now I'm buying again but keeping them in my name with a large umbrella.
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