Rental Properties and LLCs

[930LDR]

I am about to become a landlord. Renting out my Condo in Chicago as I relocate to San Francisco. Friends have mentioned that I may want to form an LLC for the rental property. Don't really have any basis to decide on that and plan to meet with an attorney on Friday to discuss. Wanted to make sure that the issue wasn't black and white and as such that I may be wasting my money to buy an hour or so of the attorney's time.

Thanks!

[Dueller]

Not knowing what your precise situation is, generally speaking you use an LLC to limit your potential liability exposure. There is virtually no tax advantage to concern yourself with. as such, be prepared to discuss your liability exposure concerns. A good lawyer will be able to walk you thru it in an hour or so. It will be money well spent in my opinion.

[126coupe]

More importantly, make sure your tenant can pay rent, ie credit worthiness, background check ect. Hire a reputable property manager.
Insurance too.

[Dueller]

PS: You may want to take a copy of your note/deed of trust/mortgage and condo association rules/bylaws to make sure you don;t have any hidden restrictions.

[silverwhaletail]

Originally Posted by 930LDR

Friends have mentioned that I may want to form an LLC for the rental property.

LLC will cost you $800 or so per year to maintain... I dont know what your situation is (net worth, exposure, other ventures that you could hide behind this same LLC) but if you do form an LLC, www.legalzoom.com is a painless way to do it.

my advice? If this is your only rental, forget the LLC and buy extra insurance with the $800 per year. A huge liability rider costs practically nothing.

of course if your insurance company fails... (AIG...)

[911Rob]

Here comes the Canuck again.....
do you guys have sole proprietorships there? If so, that'd be a better way to go imo.
LLCs are for sole proprietors that have tax challenges.
Councillor?

[Don Plumley]

An LLC has the protection advantages of a corporation, and the tax advantages of a partnership (pass through loss or income through a K-1). You can elect the corporate tax option, but that is typically not an advantage. Some LLC's will elect the partnership taxation during the time when the company loses money, then convert to corporate tax status when very profitable to distribute income through capital distributions (to be taxed at the lower capital gains rate).

To your question, I assume the benefit of the LLC for a rental property is to help shield your personal assets from any issues that arise from your rental property. e.g. people/renters get hurt, find mold, etc. and sue the property owner/landlord.

[fastfredracing]

I am an amatuer at this, we only have 4 rental properties, but we have 3 under one LLC , and one , and the next two properties will go on another LLC, our legal advisor explained that this is the best way to protect yourself . If you have a major loss on one property, you cannot lose the whole basket. I actually think an LLC may be wise for even only one property, If you were to have a fire/death, major injury on your property , this could help you sheild your personal assets. Just my 02 cents. I think an hour with your attorney would be very wise, and as mentioned above, Background check , background check, background check. for potential tenants. I NEVER rent to anyone without talking with their last landlord.
Good luck , you're in for some intersting times ahead, but can be worthwile , if mangaged properly .

[KFC911]

Originally Posted by silverwhaletail

LLC will cost you $800 or so per year to maintain... I dont know what your situation is (net worth, exposure, other ventures that you could hide behind this same LLC) but if you do form an LLC, www.legalzoom.com is a painless way to do it.

my advice? If this is your only rental, forget the LLC and buy extra insurance with the $800 per year. A huge liability rider costs practically nothing.

of course if your insurance company fails... (AIG...)

Forming and maintaining an LLC or a million+ umbrella policy are 1/4 of that here in NC. Either will work depending upon your circumstances and what your goal is. I've done both, and now do the liability rider route. I realize a million may not sound like much to you folks in CA, but here in the "real world", it still counts . One other thing, unless you want to keep several eggs in one basket, you'd typically want an LLC per property, and a blanket policy can cover them all...that's why I switched - KISS.

[turbo6bar]

This is a hot topic on mrlandlord.com forum. I am in the sole proprietorship camp. Get a huge umbrella policy to ride atop the liability insurance on each property. You'll come out cheaper for the same protection. If you get sued AND lose AND the award exceeds your umbrella policy limit, well, you done fuched up and perhaps you deserve to pay.

That said, the LLC does hide your assets a bit better, and may reduce the chance of being sued.

I presume you're a first-time landlord, so I strongly recommend you study the other aspects of landlording. As suggested by merc126, finding good, creditworthy tenants that pay on time and take care of the place is job #1.

[mudman]

Not meaning to hijack...

Hey landlords, what are some good online resources for this stuff? Haven't looked at mrlandlord.com yet but will in a few moments. So far I'm comfortable with my plan but always looking for more information.

I'm closing on my first investment property in a few days and am quite excited! Thanks to all who have provided great RE/investment advice in previous threads!

[KFC911]

Originally Posted by mudman

Not meaning to hijack...

Hey landlords, what are some good online resources for this stuff?...

He posted right before you on this thread . I haven't been reading on Mrlandlord.com in a while, but that's a good place to start. Do NOT underestimate the advice to find "good tennants"!!! I've had one "bad one" (I'm a novice compared to some here), and although the rent was always paid, his family (kids & friends) simply trashed a "doll house" that I had put a LOT of sweat equity into prior to thier move in (in only 18 months time). I don't have to "cash flow" as my rentals are paid off, but I'd rather have one sit empty before renting to someone who isn't going to take care of the property in a reasonable fashion. Live & learn ...

ps: The rest of my tennants have been "like gold", so just be VERY sellective before you hand over the keys.