Should I have a LLC for my rental?

[Ronnieboy]

Hi,

I became a reluctant landlord when I couldn't sell the house we moved from in a reasonable amount of time and in the soft market.

So far it hasn't been bad and I am actually looking at maybe buying another house to rent out since we have had good luck with this one.

The question is, should I create some type of LLC company to run all the rent and pay bills through?
Is there some kind of protection in case of lawsuits (renters dog bites someone and they go after me as the home owner)?
Are there tax benefits?

 

[Sandhog]

Formation of LLC is to protect yourself from personal and other business assets. If it's multi-family, having LLC would be recommended but for single family residence, you still have home owner's insurance and you won't get extra benefit from it. Unless you file as C-corporation rather than S-corporation with IRS.

Whenever renters get sue, you are automatically named in the suit as the owner of the property regardless of LLC or sole proprietor. Either way, you'll have your home owner's insurance company to represent you. If you lose and claim is greater than the rental property, they can forcefully go after your other assets but rarely due to negligence of your tenants.

 

[teejayevans]

If you have an LLC, be sure to have others do the maintenance work. So if the stairs collapse, LLC or no LLC, if you did the work, you are responsible.
TJ

 

[calmloki]

We've never had an LLC for our rentals. Maybe rolling the dice, but I don't overthink it - carry good insurance, do right, tune your nose for a whiff of litigious potential tenant.

 

[Livefree]

I think you can purchase an Umbrella Policy that would protect your properties from liability problems..

 

[teejayevans]

I think you can purchase an Umbrella Policy that would protect your properties from liability problems..

Depends on how big policy is and how much you are worth, the more you are worth, the more likely they are to go after you.
Today where you can sue for spilling hot coffee on yourself, I would have one. There is a local ad on the radio from a law office: call us if you have been injured, even if its your fault, we can get the money you deserve
TJ

 

[NW Landlady]

We've never had an LLC for our rentals. Maybe rolling the dice, but I don't overthink it - carry good insurance, do right, tune your nose for a whiff of litigious potential tenant.

+1
I have seen rentals treated both ways, and there is a lot of extra administrative work with LLCs if you own several properties, so that is the down side. I have just carried high umbrella policy limits & try to be a good landlady.....

I think the biggest downside to Not having a LLC is that even a $10 MM limit umbella policy can be exceeded if there is a catastrophic event, such as a multi-unit fire that could result in several deaths. If that sort of exposure exists and you are really worried about it, an LLC might be the right thing for you.

 

[LightningDawg]

I have owned several condos which were rented out, for years. My college roommate, who is now a real estate attorney, advised me to form LLC's and make them the owner of each condo. He told me this would provide protection for me....so I had a separate LLC for each unit.

Then again, I never had a problem from the renters, and as of last summer, am now out of the landlord business.

BTW....it doesn't cost much at all to form LLC.

 

[ChrisC]

I own several properties, and I placed one of them in an LLC. My reasons for dropping one of them into an LLC: (1) the property was inherited property, initially owned, tenants-in-common, with my siblings, (2) it's a small apartment building in NYC in which I'm an out-of-state owner, (3) it's a very old building which will require significant renovations, which I alone am funding, (4) needed a mechanism to have my interests in the building easily held by my spouse jointly with me and (5) was afraid of potential liability during renovations and afterwards and my wife and I are the deep pocket, not my siblings.

Regarding homeowner's insurance, your present homeowner insurance carrier might not insure a residential building now owned by an LLC. This happened to me. Fortunately, the commerical policy I obtained for the LLC was much better in scope at the same price than the old homeowner's policy as the commercial policy covered loss of rental income and had better casualty and liability coverage.

Doing the paperwork for an LLC can be a bit expensive; I'm a lawyer so I handled most of this myself, except transfer of title into the LLC, but the out-of-pocket expenses in NYC (filing fees, publication fees, etc) were a bit high to me. I had an accountant prepare the tax returns for the LLC (you file as a partnership return) which wasn't expensive -- there is software out there to do this too.

 

[Nords]

So far it hasn't been bad and I am actually looking at maybe buying another house to rent out since we have had good luck with this one.
The question is, should I create some type of LLC company to run all the rent and pay bills through?
Is there some kind of protection in case of lawsuits (renters dog bites someone and they go after me as the home owner)?
Are there tax benefits?

My first comment is that if you're enjoying the landlord experience then you don't have enough landlord experience. But spouse and I are still landlords.

Second, this "honeymoon" period is a great opportunity to educate yourself before paddling out into the deep water. You may find out that you're the next Sam Zell of landlords, or you may decide that one is more than enough. Try a book like (1) Investing in Real Estate, 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions) or (2) Landlording by Leigh Robinson (7th edition or later) or the free parts of this website: Real Estate Software for Investors and Developers

Finally, an LLC is not necessary for the vast majority of landlords. Attempts to use them to shield or shelter your other assets are easily pierced by any competent lawyer or opposing insurance company.

Your money is better spent on a good umbrella-liability policy.

 

[teejayevans]

Finally, an LLC is not necessary for the vast majority of landlords. Attempts to use them to shield or shelter your other assets are easily pierced by any competent lawyer or opposing insurance company.

Your money is better spent on a good umbrella-liability policy.

Says who? Are you a lawyer? Can you quote me case law where the LLC
was pierced?

As long as you properly document that you are a LLC (its on all lease agreements, all checks should be made to the LLC, etc) and you don't do any repair work yourself (so you are not directly responsible), hire outside contractors to clear the sidewalks, etc, the LLCs are bulletproof. Your lawyer should give you the dos/donts.

Whether they are worth it depends on how much you have to lose.
TJ

 

[Nords]

Says who? Are you a lawyer? Can you quote me case law where the LLC was pierced?

My goodness.

I'm going to let the board's real lawyers weigh in on your response.

Perhaps your faith in the armor shielding of an LLC is as overblown as my skepticism. I hope you're getting your money's worth.

 

[Sandhog]

My goodness.

I'm going to let the board's real lawyers weigh in on your response.

Perhaps your faith in the armor shielding of an LLC is as overblown as my skepticism. I hope you're getting your money's worth.

I concurred. Reason for having LLC is when you have multiple properties with LLC for each property that you owned in the event you loss the law suit no fault of your own, your other properties and your personal assets are protected. Just because you have LLC doesn't mean you can not lose entire asset under your LLC.

 

[teejayevans]

I concurred. Reason for having LLC is when you have multiple properties with LLC for each property that you owned in the event you loss the law suit no fault of your own, your other properties and your personal assets are protected. Just because you have LLC doesn't mean you can not lose entire asset under your LLC.

OR, if you want to protect your personal assets.
TJ

 

[ChrisC]

I'm a lawyer, owner of multiple properties and posted earlier in this thread. And I consider myself a competent lawyer in corporate law. It's not easy to pierce the corporate veil of an LLC, if members of the LLC adhere to the formalities of the corporate form -- why on earth would the legislatures of all States authorize the creation of LLCs for mitigating liability if corporate piercing were the norm?

I think if one weighs the cost and efficiency of creating an LLC (with or without additional insurance coverage) against complete reliance on an umbrella insurance policy, the LLC in most cases wins! I wouldn't create an LLC simply for one property unless there were special circumstances to shield one against potential liability (and umbrella policies don't insure against all risks), but with multiple properties it can make sense, especially if you want to protect personal assets which might not be completely protected by an umbrella policy.

 

[Niko]

. . . the LLCs are bulletproof.

Famous last words. Sorry, but I'm with Nords on this one. A good umbrella policy will likely offer more protection at a better price. When I was practicing (real estate, land use, and corporate law), I told my mom and pop landlords that their first and primary defense should be a solid insurance policy. Let's face it, you're going to have to buy insurance in the name of the LLC anyways, right? If not, a plaintiff's attorney will have a good argument that the LLC is under-capitalized. Easy as that, the veil is pierced.

If I were a plaintiff's attorney and my client suffered a loss that exceeded the value of an uninsured LLC (the equity, if any, in the property), I wouldn't think twice before naming the LLC owners in the lawsuit.

Also, in terms of putting everything in the name of the LLC . . . good luck getting the lender to transfer the note and trust deed to the LLC and dropping the personal liability. Ain't gonna happen.

One other thing to consider before simply dropping encumbered property in an LLC -- technically that would trigger a due-on sale in most standard trust deeds/mortgages. Will your lender ever find out (or even care)? Who knows? But it's a risk you should consider carefully before transferring encumbered property into an LLC.

My experience is that mom and pop landlords typically don't gain much liability protection by putting their single property in an LLC. Now, there may be other reasons to create an LLC (tax, accounting, etc). The liability protection is stronger for the true business that is in the day-to-day business of managing property. They have employees, they acquire property in the name of the LLC, etc.

My two pesos.

 

[glippy]

I wouldn't think twice before naming the LLC owners in the lawsuit.

Name whoever you like. It'll likely just get dismissed if there's any kind of typical home insurance policy, and no indication of outright fraud or an intentional tort.

The area is so complex though, even if you survive a motion to dismiss, I hope your client will be prepared to pay you to take it to the state's various appeals courts to clear it all up.

"Exactly when the veil of limited liability can and will be circumvented to reach into a shareholder’s own assets has befuddled courts, litigants, and scholars alike.... Not surprisingly, veil-piercing has been decried as an "intellectually disturbing" and "incoherent" doctrine whose "ambiguity and randomness" resembles "lightning, in that it is rare, severe, and unprincipled." SSRN-Veil-Piercing by Peter Oh


Another aspect of this isn't to protect you 100%, which an LLC may very well do. But to make it so hard to obtain a judgment, and then furthermore to collect on it, that the TV lawyers on a fishing expedition will just move on to the less protected landlord with a sue-happy tenant and leave you be after a little discovery work. Whereas, if their little discovery work turns up a giant umbrella policy, it may have the opposite effect, painting a big bulls-eye on your client in hopes of getting a large settlement from the insurance company.

I agree about mortgaged properties though. It can be tricky to move a mortgaged property to the LLC, but it can be done either by quit-claiming the property to the LLC with the lender's approval or paying off the mortgage in full, transferring it to the LLC, and then originating a mortgage in the name of the LLC. Worth the hassle? I guess that depends on how deep your personal pockets are.

 

[ChrisC]

If not, a plaintiff's attorney will have a good argument that the LLC is under-capitalized. Easy as that, the veil is pierced.

If I were a plaintiff's attorney and my client suffered a loss that exceeded the value of an uninsured LLC (the equity, if any, in the property), I wouldn't think twice before naming the LLC owners in the lawsuit.

"Easy as that?"

I'm very familiar with D&0, professional liability and shareholder derviative lawsuits as the gang I run alongside probably files more of these plaintiff's lawsuits than any entity in the world. Yep, in the world. And under-capitalization might be a factor in corporate piercing, but standing alone, it's not sufficient nor necessary.

Name as many members of the LLC as you want, but if your claim is frivolous or potentially vexatious, you'll be faced with a motion for Rule 11 sanctions. It's a motion I think I'd win if you simply filed against members of the LLC because the LLC was "underinsured" or undercapitalized in your judgment.

 

[Ronnieboy]

My first comment is that if you're enjoying the landlord experience then you don't have enough landlord experience. But spouse and I are still landlords.

I wouldn't necessarily say 'enjoy' but I have to admit from all the horror stories I have heard, in comparison, it hasn't been horrible (knock on wood). And I am the first to agree I don't have enough landlord experience, I will look into the suggested reading.

 

[teejayevans]

I never said the LLC replaces an umbrella policy, AGAIN, for millionth time, it depends on how much you have to lose, LLC provides a firewall of protection. Moving a property into a LLC should not be difficult, but may require going up the food chain at your local bank.
TJ