Round 2: Make it a legit biz

This is one I haven’t seen much on in the REI books I’ve read. Is it better to set up an LLC, Corp, or just buy the properties in my name?

My understanding is that it may be easier to get financed in my name (using my good credit score) than if it was through an LLC or Corp. Is this true?

I’m worried about liabilities if the property is in my name. I’ll carry whatever insurance is required/recommended but if their is an accident, and someone gets hurt, can I be sued? What if the property is somehow destroyed (fire, flood, earthquake etc), can the tenants sue me for loss of their personal property? What if the tenants completely destroy the property, how can I protect my personal finances?

Taxes and expenses - I need to hire an accountant/tax consultant, but is it better running this as a business or keeping it all under my name?

Basically it boils down to, do I just buy these properties in my name, or would I be better off setting up an LLC, or Corp?

Thanks - End of Round 2

For newbies, it’s easier to operation in their own name with adequate insurance. The typical investor can get away with this set up until a net worth of about $5M. At that point, spending the money to do it right isn’t so much relative to what’s being protected and you most likely have the resources to defend a suit. Keep in mind that defending against a multi-million dollar judgment with a determined creditor can cost as much as $50-100K. In the past, people would just go the bankruptcy route if things got really bad. Given the new BK law, I don’t know how viable that option is anymore.

I think that is true for people who use conventional financing. You won’t have a problem if you use a local or regional lender that will evaluate your situation and hold the loan in-house. They can set more liberal policies and aren’t slaves to a system designed for the masses.

If you did something or failed to do something that caused the injury, you are personally responsible. It doesn’t matter if you have an LLC or any other kind of asset protection combination you can imagine. The simple fact is that you are personally responsible for your own personal actions. LLCs and such can protect you from the misdeeds of others who work for the entity, but that doesn’t help if it’s just you.

You are liable only if you did something or failed to do something that caused the fire. Floods, earthquakes and other natural disasters are covered by renter’s insurance and aren’t your problem.

Screen well and rent only to collectible tenants.

Entities require more work from a tax and record keeping perspective. Your state may not allow you to represent the entity in court and you will be forced to hire a lawyer. You need to weigh the added costs of the entity against the benefits you receive.

One way isn’t better than the others. Each one is more appropriate for a given situation. You need to sit with a qualified planner to determine which one is most appropriate for you.