I currently own a few SFH rentals and 1 personal home. and I helped with a substantial amount down to purchase one as a rental for my S/O who may well end up as my Legal wife soon.
That house is titled in her name, the 2 others in mine. To protect us both for a number of reasons *Should we consider transfer title of the homes to an LLC? What protection would that afford us? What might the cost be $$?
Would that give us protection of liability from the outside… Maybe even from each other in the event of marraige/divorce… I am not clear on the use of an LLC other than to separate the liability holdings from personal assets.
The first issue you will have is that your lender will not allow you to transfer the title into an LLC. You could do it beind their back, but that is your call.
Setting up an LLC could run you from $500 to $1500 depending on your state fees and such.
LLCs, depending on how they are formed, and if you keep meeting notes or not, can still be included in a lawsuit. Just having an LLC doesn’t really protect you. You have to run it as a company.
In case of divorce, you both own a company that owns houses. It goes down to an agreement to resolve it, one selling his interest to the other, or judge order.
Thank you for your insight…
IF I understand you correctly, If the lender buys off on it, the protection the LLC
offers may well be a moot point in some cases.
LLC cannot own a personal residence. It will be treated as if you still owned it in your own name. Trusts are a better way to hold and and protect personal assets.
The problem with LLCs for rental property is that managing them and taking an active part in the operation of the business create an easy way around the LLC if you are the one whose actions caused an injury. They can be very handy if you own it with non-spouse members or use a PM firm to manage the rentals.
Fadi brings up good information on costs and the bank. Additionally, you will have annual fees to the state, registered agent fees and may need a lawyer to represent the LLC in court.
All deals are off in a divorce. There won’t even be a need to buy out one spouse. The judge will simply award the LLC membership interest to the other spouse.
Legal aid losers don’t have the resources to win an excess judgment. Typical slip and fall and other claims they usually take settle for the insurance limits. You would have to do something incredibly stupid to expose yourself to a multi-million dollar judgment and, at that point, the DIY and guru plans fall apart when challenged. The real question is do you have the $30K to set it up properly and the 50-100K to defend yourself? Are you even willing to spend the money? Are you willing to spend the time and effort to make sure your plan is updated every year to reflect new case law and legislation?
Thanks BLL, I was thinking the same thing. I just don’t see the reason to spend that much $$$ on something that is useless anyways. Everyone is telling me i’m crazy for owning low income apartments in my own name.
An LLC is just a tool. I recommend it be used with other tools to create a comprehensive system that meets the needs of the individual. An LLC used for asset protection like the way most people use them is pretty useless.
An LLC will also give you more tax advantages. I would not own an investment property not in one of my LLCs. Since everyone has different needs, I recommend sitting down with a CPA and lawyer to see what fits you best. Many will offer a free 1hr consultation.
It will provide you “some protection” - but you’ll want insurance too.
In Dallas it’s real easy to put property in an LLC. You just need a warranty deed & $16 cash for a recording fee at the county records building.
Just draft a simple warranty deed (see http://www.ilrg.com/forms/wrntdeed.html) or have your lawyer do it, and sell the property from yourself “John Doe” to your single-member LLC “Diamond Investments LLC” for $0.01. Nice & easy. If you have a multi-member LLC (2+ members), and you don’t want to share equity in full with both partners, you’ll need a lawyer to property draft your LLC operating agreement before you do that.
Don’t forget insurance is your ultimate protector though! A single-member LLC can protect you some, but a lawyer will almost always try to sue YOU along with the LLC if you have one. They’ll probably do that with a multi-member LLC too. So always, always, always get insurance for every single property and an umbrella once you get several properties.
Like the other posters, not an attorney but I have attended several presentations from Lenders.
For asset protection:
Don’t own investment property in your own name. Some form of corporate entity will help, talk to an attorney & tax person to see which form of ownership gives you the best tax advantages. While rentals are usually owned in an LLC, it is not necessarily the best option for you.
Hold insurance. If there is a problem at a rental and you are insured, the people will go to your insurnace. when they sue use is usually when your insurance will not pay for the problem.
Have systems in place that are verifiable that you are maintaining the property and fixing anything that could be a hazard that the tenants could sue you.
Personally I would not own anything in my name.
Back to the Due on Sale Clause - in every mortgage there is a Due on Sale Clause - go read your mortgage documents and you will find one. Please note that every one I have read says something to the effect that the lender MAY call the note due an payable upon the transfer of ownership of the property. The question is - how would they know you changed ownership, they don’t have time to check up on every borrower to see if title changes. And if you are paying them the way you promised, why would they care.
The due on sale clause was instated back when interests rates were climbing very quickly and the lenders did not want person B assuming Person A’s loan at 10% interest when the going rate on a new loan would be 12%, they wanted to keep making new loans.
So talk to your attorney who also knows about corporate law & real estate as well as your CPA or tax person to see what they tell you.
Then the question becomes how many properties in one llc - some say only 1, while I am in the school of - about $50,000 in equity per LLC.
To set up one - I just did one using a kit from John Hire that only cost me state fees and my time - about $250 - but if you have never set one up and are not sure on the right form or the correct language, please have your attorney set it up and again that could be anywhere from $500 to $1500.
Check with your local Real Estate Investor Group to see if they might be able to direct you to more education on this subject or look in the Free Books and Articles for info from Bill Bronchick or John Hyre.
Kim in Kansas City
Mid-America Assoiciation of Real Estate Investors :shocked