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I'm considering buying a rental property. Would it make sense forming an LLC and purchasing it in the name of my company, rather than owning it directly?

Considerations:

pros:

  1. I don't want my name to appear on public records as the owner, I get enough spam mail for owning my own residence.

  2. I want the LLC protection (I'll be paying a management company for day-to-day managing the property).

  3. I want to be able to have a RE portfolio and maybe add investors later by selling shares of my company (for example, form a family business of rental properties).

  4. This purchase will be cash, but maybe later I'll want to take loans for my investments, will having a "history" for the LLC help?

cons:

  1. This is my first investment property, and the income expected will not be high, so the LLC fees will hurt the ROI.

  2. The property is not at the state I live in, so maybe I'll have to pay LLC fees for more than one state (I don't know, is it so?)

The question - are my pros and cons correct (especially con #2 and pro #4), and did I miss other potential land mines?

  • Some of the laws can vary greatly by state. In some states LLC protections may make sense in others not so much. In addition owning property in some states, New York comes to mind, may complicate your personal income tax filings. As an LLC you may also lose some homeowner protections available to individual owners, but this also varies by state. – user4127 Nov 11 '11 at 13:47
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    hello, if you dont mind me asking, how much does the management company charge you? I plan to do something like this in the future – CQM Nov 13 '11 at 0:07
  • @CQM well, one of the realtors I work with has a management company that charges $75 per property. Here in California the prices are higher, I'm looking at Arizona for investment. – littleadv Nov 13 '11 at 0:37
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    $75 per property ... per .. month? – CQM Nov 13 '11 at 0:38
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    yes, per month. – littleadv Nov 13 '11 at 0:38
8

As far as the spam mail goes, I own a rental (in Connecticut) and live in Massachusetts, I get very little mail related to this property. I view this as a non-compelling reason.

Your other reasons pick up quick in value. The protection from the rest of your assets is helpful, and the one con for most is the inability to get a loan with such a structure, but in your case, a cash purchase is mentioned.

I don't know what the fees are to start an LLC, but overall, I believe the pros outweigh the cons. Yes, your Pro 4 looks good, an ongoing business with a track record will help the next purchase.

  • Do you own your rental through LLC? If so, is it a MA LLC registered as foreign in CT, or a CT LLC that has nothing to do with MA? – littleadv Nov 11 '11 at 20:43
  • I don't. I lived in it, bought with normal 20% down, and then moved out but kept it. – JTP - Apologise to Monica Nov 11 '11 at 21:28
7

I'd have a good look at how much anonymity an LLC offers in your state - as far as I'm aware this varies from state to state. Out here in NV an LLC owner's privacy is supposedly fairly well protected, but in other states, not quite as much.

Also keep in mind that while the LLC offers some protection (and I'm a big advocate of this sort of structure if you're taking larger risks that might have a big impact on your overall personal finances), this might not apply to financing. A lot of banks tend to require an LLC's owner to guarantee loans to an LLC once they go over a certain amount or even in general. Do some research in this area because the LLC would be worth less as a protective shield to you if you're on the hook for the full amount of the loans anyway.

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    I don't mind to be on the hook for the loans as much as I mind the liability... Would personally guaranteeing the loan make me also liable for whatever happens at the property (other than defaulting on the loan)? – littleadv Nov 12 '11 at 21:06
5

Consider that there are some low-probability, high-impact risk factors involved with property management. For example, an old house has lead paint and may have illegal modifications, unknown to you, that pose some hazard.

All of your "pros" are logical, and the cons are relatively minor. Just consult an attorney to look for potential landmines.

4

Don't worry about the spam mail. If you get a loan, it will be based on your personal credit. I don't know if you can get a real estate loan for your LLC, even if it owns many properties. Typically you get the loan in your own name, then transfer title to the LLC.

The LLC does offer good liability protection.

The downside is that it can be expensive (at least in California) and requires some work. You may have to pay an annual tax, and file (multiple) tax returns. It may not be worth it for one property. But it definitely a good idea if it is not too expensive.

3

IANAL, but if you're planning to sell shares in your LLC you may be disappointed in the protection granted. I looked into this corporate structure for the same purpose myself, and my attorney said something like, "If an owner of one of the shares of your company is driving to look at one of the properties, and gets into a wreck for which they were found negligent, the injured party can sue the corporation."

  • "the injured party can sue the corporation" - not me personally. However selling shares is a future prospect, and is not very likely. But thanks for the insight! – littleadv Nov 28 '11 at 19:23
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    Correct, they couldn't sue you personally, but if you lose half of your houses that will certainly affect you personally. Btw, I nearly went with an S corp for this, before my atty convinced me to have one trust per building. They're crazy complicated (more money for my atty!) but have tons of benefits that really outweigh the cost. – Justin R. Nov 28 '11 at 19:59
  • Yes, that's what seems to be the safest way - one LLC per building, shielding all the rest. It's too expensive though, in California, so I'll probably use one LLC for several properties and assume the risks. Still, shielding my own home, income and savings is good enough reason. – littleadv Nov 28 '11 at 20:49
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You need to first visit the website of whatever state you're looking to rent the property in and you're going to want to form the LLC in that particular state. Find the Department of Licensing link and inquire about forming a standard LLC to register as the owner of the property and you should easily see how much it costs.

If the LLC has no income history, it would be difficult for the bank to allow this without requiring you to personally guarantee the loan. The obvious benefit of protecting yourself with the LLC is that you protect any other personal assets you have in your name. Your liability would stop at the loan.

The LLC would file its own taxes and be able to record the income against the losses (i.e. interest payments and other operating expenses.). This is can be beneficial depening on your current tax situation. I would definitely recommend the use of a tax accountant at that point.

You need to be sure you can really afford this property in the worst case scenario and think about market leasing assumption, property taxes, maintenance and management (especially if you've moved to another state.)

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    It's actually incorrect. LLC will not file its own taxes, its a disregarded entity. All the taxes will be filed in my personal report on schedule C and schedule E. – littleadv Nov 19 '11 at 0:30

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