I am closing on my first income property purchase on July 1st. $110K fully renovated 4-unit in Wilkes Barre, PA. Projected rental income $1950. I am buying the property in my name. I was planning on creating an LLC to begin my rental property business. Since the LLC would be so new, I would be unable to buy more properties in the LLC’s name alone without a personal guarantee. If I created an LLC, we’ll call it ABC Property Management, how would I handle the accounting. Tenants would write monthly payments to ABC PM, LLC. ABC would then transfer $xxx to mjg289 in order to pay the bank on the note out of mjg289’s bank account. ABC would operate as its own entity besides transfering money each month to mjg289 since the property would be in mjg289’s name at the bank. What would that be called on the ABC books? Interest and Principal Payment of long-term note? Would I create a document that basically stated the mortgage terms and that ABC owed mjg289 $xxx every month? And then in the future when I buy a property in my own name, repeat this process? How do you guys handle this? Any help would be greatly appreciated.
What’s the point of the LLC if it doesn’t own the property?
Well if you never open the LLC, then you will always have to buy property in your own name. If someone owns 10, 20, 30+ properties, are they all in your name? How does everyone chose to handle their properties?
In the situation you described, you own the property and the LLC manages it. The LLC needs to own the property to create any separation between you and the business. Even then, managing property yourself creates a way around it. You can avoid all this convoluted accounting by buying property in the name of the LLC directly. There are banks that will do that.
I bought my property under an LLC with a personal guarantee of the loan. A local bank made the loan to the LLC, but since it was new I had to personally guarantee the loan. You probably wouldn’t find anyone to loan to a new entity without a personal guarantee. The benefit of doing it this way is that the loan won’t show up on your personal credit so it won’t limit you if you try to buy a new vehicle or whatever. You are simply saying you will pay for the loan if the LLC can’t. As BLL stated, your accounting will be simpler if you buy using the LLC. Make sure you set up a business checking account for your LLC and make all transactions through there to avoid commingling funds. If the LLC needs money, you can loan it money and write a check to it. Just make up a promissory note for the loan. Do not pay for the LLC’s bills and mortgage through your personal checking account. Do some searching on here for some old posts about people becoming strapped for financing after awhile because they have about 10 loans under their personal name. That’s another reason to keep it off your credit.
You might want to look at the IRS form you would file for your LLC to help you in figuring the best way to handle your bookkeeping. I journalize all of my transactions from the year. Then I make an income statement. I use IRS form 1065 for a partnership. I breakdown my expenses according to the categories on the form to make my expense statement.
So even though you personally guarenteed the loan, if someone slips and dies on the property, there’s no way they could come after you?
Also, if I open ABC LLC, say a bank will loan me $100K to run ABC LLC. If ABC LLC’s main business function is acquiring and managing real estate properties, could you use a portion of that $100K to make a down payment on a property? And then secure a mortgage in ABC LLC’s name?
Thanks for all the help.
Do some searching in the Asset Protection, Legal forum for LLCs and liability. It sounds like one of the few ways to really protect yourself from a liability standpoint is if you don’t actively manage your property. So that means you have to hire property management and also hire someone else to perform your repairs. All that obviously cuts into your bottom line. Seems like the consensus on this site is to just insure yourself really well because a majority of cases are generally settled for your liability insurance amount or less. One other thing to keep in mind when shopping for insurance quotes is that it doesn’t generally increase your premium much at all to go from several hundred thousand up to $1 Million for liability insurance. My premium only went up $20 per year to go from $500K to $1 Million liability.
As for your loan, it looks like you’re saying you would like a bank to do a personal loan to you for $100K to run ABC LLC. I guess depending on your finances and credit it’s possible, but probably unlikely for those of us who don’t have huge incomes and reserves.
What I was getting at is you could come up with whatever down payment for a property you’re wanting and loan that amount to your LLC (with a promissory note). Then you would get the bank to loan ABC LLC the balance of the purchase price for the property. Your new LLC will not have a credit history and thus will probably not be able to acquire credit on it’s own. Therefore, you would personally guarantee the loan for the LLC. Think of it as you are co-signing for your LLC.
A personal guarantee doesn’t create liability, except for the payment of the debt. Keep in mind the LLC provides no protection to you if your personal actions caused the injury (i. e. your repair created the trip hazard that caused the injury). The only personal assets immune to creditors are exempt assets (life insurance, annuities, certain retirement plans, homestead etc.)
The only restriction on the money are the terms of the loan/mortgage.
Was just throwing a number out there…
Thanks for all the help everyone. :biggrin