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LLC for rental home

2,727 Views | 23 Replies | Last: 2 yr ago by heavily intoxtricated
DargelSkout
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10:23a, 10/30/23
AG
I have a house at the coast that I'm getting ready to put into the short term rental market. The house it currently in my and my wife's name. Should we create an LLC and put the title under that name instead?

I feel like it would be wise to take our name off the property, but maybe I'm overthinking it.
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heavily intoxtricated
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11:18a, 10/30/23
Everyone will tell you it's better to have it in an LLC, and it is better. But if you do nothing with your LLC other than purely use it to hold this house, in practice, it's not going to help you much if you get sued.

So short answer, yes it is better, with the caveat that it's not ultimately going to matter a whole lot under your facts.
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Agilaw
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11:20a, 10/30/23
AG
You will get a couple of different recommendations on this: set up llc; don't worry about llc and just make sure you have adequate insurance in place. I prefer the llc route with adequate insurance in place. Best of luck in your venture.
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SteveBott
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11:58a, 10/30/23
AG
Does it have a Mortgage?
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DargelSkout
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In reply to SteveBott • 12:33p, 10/30/23
AG
Yes
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Cyp0111
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12:41p, 10/30/23
due on sale provision, be comfortable with that risk.

Matters who you are asking, insurance people and attorneys will have differing opinions.
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SteveBott
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12:51p, 10/30/23
AG
The lender could call the note. As Cyp said. Will they? Highly doubtful. Probably less than 1% chance. But the risk is there.

My attorneys advise is just load up on insurance and not pay the expense of an LLC. But is your place and your decision
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Cyp0111
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In reply to SteveBott • 12:52p, 10/30/23
If the house is in good condition, you don't have any glaring issues that are open risk items, lots of insurance makes sense vs LLc
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jja79
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In reply to SteveBott • 1:24p, 10/30/23
AG
I think the investors that hold low rate mortgages are probably more proactive looking at this in the current rate environment.
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DargelSkout
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1:33p, 10/30/23
AG
Good point. I hadn't thought about that provision. We'll keep it the way it is and increase the insurance. Thanks for the advice.
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Captain Winky
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1:37p, 10/30/23
You can always speak to the mortgage company and confirm if there is due on sale clause. Even better if you get it in writing from them.
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SteveBott
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1:37p, 10/30/23
AG
Look into an umbrella policy. They used to be relatively inexpensive and cover multiple risks
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Jay@AgsReward.com
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In reply to DargelSkout • 4:52p, 10/30/23
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AG
Is it a Fannie or Freddie loan? Meaning was it a conventional loan when you took it out? and if so, was it after 2016? The reason I ask is because if so you do not have to worry about the note being called as long as you follow the requirements:


Fannie Mae transfer to LLC

That being said, as mentioned above there is limited utility to the LLC, but it cannot hurt.
Sponsor Message: AgsReward.com - See Reviews and Check Our 5-Star Rating on Shopper Approved.
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YellAg2004
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In reply to heavily intoxtricated • 4:17p, 11/1/23
AG
heavily intoxtricated said:
Everyone will tell you it's better to have it in an LLC, and it is better. But if you do nothing with your LLC other than purely use it to hold this house, in practice, it's not going to help you much if you get sued.

So short answer, yes it is better, with the caveat that it's not ultimately going to matter a whole lot under your facts.
I'm going to piggy-back onto this thread since it seems OP got some direction.

We're in a similar boat (townhome wanting to make a regular rental). It's paid off, so no concern about a mortgage.

When you say "if you do nothing with your LLC...it's not going to help you much if you get sued", can you please elaborate on this or explain what you mean by "do nothing with your LLC". Also, how would it not help you if you got sued? Is that not the point of the LLC?

Disclaimer: I haven't started digging into the details on how we want to handle this rental property, but it's quickly coming up on time to put it on the market and free time to research is in extremely short supply currently.
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heavily intoxtricated
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In reply to YellAg2004 • 7:47p, 11/1/23
YellAg2004 said:
heavily intoxtricated said:
Everyone will tell you it's better to have it in an LLC, and it is better. But if you do nothing with your LLC other than purely use it to hold this house, in practice, it's not going to help you much if you get sued.

So short answer, yes it is better, with the caveat that it's not ultimately going to matter a whole lot under your facts.
I'm going to piggy-back onto this thread since it seems OP got some direction.

We're in a similar boat (townhome wanting to make a regular rental). It's paid off, so no concern about a mortgage.

When you say "if you do nothing with your LLC...it's not going to help you much if you get sued", can you please elaborate on this or explain what you mean by "do nothing with your LLC". Also, how would it not help you if you got sued? Is that not the point of the LLC?

Disclaimer: I haven't started digging into the details on how we want to handle this rental property, but it's quickly coming up on time to put it on the market and free time to research is in extremely short supply currently.

I don't have time to go into great detail, but I speak from experience as a trial lawyer having sued many people individually and successfully held them personally liable even though they were operating through an LLC or some other business organization.

There are many theories of vicarious liability that can be used in litigation to pierce the corporate veil or otherwise hold individuals jointly and severally liable with their entities. Among these would be alter ego, joint enterprise, conspiracy (for intentional torts), agency, and several others.

Alter ego and joint enterprise would be your primary concern if you just start an LLC, buy a house, put the house in the LLC, and do absolutely nothing else (which is what many people do). In that instance, (1) you're not following any corporate formalities like holding meetings, keeping minutes, etc., (2) the entity doesn't have its own bank account, so (3) you're probably commingling funds and paying the note on the property with personal funds, (4) you have total ownership of and control over the entity, (5) the entity is probably undercapitalized, and (6) the entity has no separate office and conducts no business of its own apart from just holding your house and paying you rent.

If you and your LLC get sued for negligence, for example, it's going to be pretty easy in that instance to prove that your LLC is just your alter ego, which will result in personal liability to you if you ultimately lose. The LLC exists only on paper and does nothing but hold your house, pay you money, and otherwise do whatever you make it do to serve your personal interests. That's alter ego.

Don't get me wrong. It is better to have your house in an LLC than not. It is at least an extra hoop for a plaintiff's lawyer to jump through to get to you individually, and there is no downside. But in the situation we're talking about here, it's not going to offer a whole lot of protection.
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scrap
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In reply to SteveBott • 7:16p, 11/2/23
AG
SteveBott said:
The lender could call the note. As Cyp said. Will they? Highly doubtful. Probably less than 1% chance. But the risk is there.

My attorneys advise is just load up on insurance and not pay the expense of an LLC. But is your place and your decision
A couple of things to call into play. Over the last 20 years interest rates have been drifting lower. Thereby not giving the banks any economic incentive to call in loans using a technicality. However, I have already heard of a case that did just that. If you are sitting on a 4% loan and you give the bank a reason to call in the loan where they can redeploy that money at 8% or better there is definitely an economic reason to do so.

Second, using a LLC doesn't guarantee liability protection. If the incentive is there, a good lawyer can usually find a way to pierce the LLC. I do like the Umbrella approach. Makes it so easy to manage all your rental vs LLC, one at a time. When pricing an Umbrella policy, one should price out the 1, 3 and 5 million policies as they are not linear in pricing. Cheers.
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Medaggie
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11:15p, 11/2/23
I have many more properties than you and I did not get an LLC. I went with a big umbrella policy to cover all of them.

There are alot of unintended issues with an LLC including having to file a separate tax return and cost associated with it.

The nebulous small liability protection comes with a bunch of extra work.
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Agilaw
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In reply to Medaggie • 8:38a, 11/3/23
AG
Separate tax return on a single member LLC (disregarded entity)?
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Cyp0111
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In reply to Agilaw • 8:57a, 11/3/23
you set it up as a single member (disregarded entity). Not to say it's not a pita, the taxes shouldnt be an additional reason.
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Pinochet
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In reply to heavily intoxtricated • 12:36p, 11/3/23
heavily intoxtricated said:
YellAg2004 said:
heavily intoxtricated said:
Everyone will tell you it's better to have it in an LLC, and it is better. But if you do nothing with your LLC other than purely use it to hold this house, in practice, it's not going to help you much if you get sued.

So short answer, yes it is better, with the caveat that it's not ultimately going to matter a whole lot under your facts.
I'm going to piggy-back onto this thread since it seems OP got some direction.

We're in a similar boat (townhome wanting to make a regular rental). It's paid off, so no concern about a mortgage.

When you say "if you do nothing with your LLC...it's not going to help you much if you get sued", can you please elaborate on this or explain what you mean by "do nothing with your LLC". Also, how would it not help you if you got sued? Is that not the point of the LLC?

Disclaimer: I haven't started digging into the details on how we want to handle this rental property, but it's quickly coming up on time to put it on the market and free time to research is in extremely short supply currently.

I don't have time to go into great detail, but I speak from experience as a trial lawyer having sued many people individually and successfully held them personally liable even though they were operating through an LLC or some other business organization.

There are many theories of vicarious liability that can be used in litigation to pierce the corporate veil or otherwise hold individuals jointly and severally liable with their entities. Among these would be alter ego, joint enterprise, conspiracy (for intentional torts), agency, and several others.

Alter ego and joint enterprise would be your primary concern if you just start an LLC, buy a house, put the house in the LLC, and do absolutely nothing else (which is what many people do). In that instance, (1) you're not following any corporate formalities like holding meetings, keeping minutes, etc., (2) the entity doesn't have its own bank account, so (3) you're probably commingling funds and paying the note on the property with personal funds, (4) you have total ownership of and control over the entity, (5) the entity is probably undercapitalized, and (6) the entity has no separate office and conducts no business of its own apart from just holding your house and paying you rent.

If you and your LLC get sued for negligence, for example, it's going to be pretty easy in that instance to prove that your LLC is just your alter ego, which will result in personal liability to you if you ultimately lose. The LLC exists only on paper and does nothing but hold your house, pay you money, and otherwise do whatever you make it do to serve your personal interests. That's alter ego.

Don't get me wrong. It is better to have your house in an LLC than not. It is at least an extra hoop for a plaintiff's lawyer to jump through to get to you individually, and there is no downside. But in the situation we're talking about here, it's not going to offer a whole lot of protection.

Trial attorney? Username checks out.

I kid, I kid.
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Medaggie
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In reply to Agilaw • 12:36p, 11/3/23
Don't you have to file something with the state for LLCs? The property will have income/losses correct, thus you need to file it?

I assumed all LLCs have to file some type of business forms every year.
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Cyp0111
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In reply to Medaggie • 12:38p, 11/3/23
I have to file a franchise tax but most fall below thresholds for that tax.

Again, it is a PITA but as others have said, you have to actually run it like a business.
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Agilaw
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1:01p, 11/3/23
AG
If it is set up as a single member llc and treated as a disregarded entity, you will simply continue to file your individual tax return. If the llc's annualized total revenue is below the no tax due threshold of - $1,230,000 for reports due in 2022-2023 - you will file a franchise report with no tax due. Pretty simple and takes only a couple of minutes online.

For those who don't recommend an llc, who will get sued if a legel issue comes up with one of your properties?

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heavily intoxtricated
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In reply to Medaggie • 1:55p, 11/3/23
Medaggie said:
Don't you have to file something with the state for LLCs? The property will have income/losses correct, thus you need to file it?

I assumed all LLCs have to file some type of business forms every year.

You have to file a "no tax due" form every year with the State of Texas and I think a public information report, which I'm pretty sure don't cost anything. You don't have to file a separate tax return for what the OP is talking about. It's a disregarded entity.
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