I posted this on the B&I board before I remembered the Real Estate board was here.

We bought a house last fall that we are planning on renting out as a vacation rental.

I've got an LLC set up and we have a rental company that will be handling the renting but on our end, I would like to have the house rented through the LLC for liability purposes.

I contacted the company that has our mortgage on the property and the lady that was helping us seemed really confused but said she thought we'd have to pay the mortgage off to move it to the LLC. I've been told/ know people who have their LLC take over their mortgage and personally guarantee the loan and their lender is ok with it.

I've also had someone suggest that we personally lease the property to the LLC and then the LLC lease the property to the rental company. So the rental company would be paying the LLC and the LLC would pay us.

My question is if we go the route of leasing to the LLC and the LLC leasing to the rental company, does that cover us personally as far as liability goes or do I need to push harder on the mortgage company about swapping it over?

If the "Us to LLC to Rental Company" covers us then that's an easy enough route but if I'd hate for something happen and us get sued personally.

Do many people do LLCs for just one property? I didn't consider it b/c I'd always heard it wasn't really necessary. I only have 2 properties so I did add an umbrella policy, which is pretty cheap.

I've also heard it's easy to pierce the liability veil with such an arrangement. Maybe a question for a lawyer?

Is the loan a Fannie or Freddie owned loan?

and yes, the way vast majority of mom and pop landlords manage their LLC's they are not worth much or anything except the headaches It has to be a real business and treated as such. We have a blog about it here:

https://hurstlending.com/the-savvy-investors-guide-traditional-loans-vs-llc-loans-your-path-to-real-estate-success/

This is not intended as legal advice and I am not your lawyer. Consult an experienced real estate attorney.

I think it is wise to keep rental property in separate LLCs. Complying with LLC requirements aren't that difficult honestly. Make sure you follow your bylaws. Keep personal and business accounts separate. Pay your franchise tax. Carry sufficient general liability insurance. There's more to it than that, but nothing that should scare you off from availing yourself of the protection afforded by keeping and operating the property as a separate legal entity from yourself.

A few years ago, my firm represented an individual in a personal injury suit who had accumulated a nice residential rental portfolio of about ten properties owned in his individual name and operated only using a d/b/a. Defendant ran a red light and allegedly caused significant injuries to a family in the other vehicle. The Plaintiffs' seven-figure judgment far exceeded the policy limits of the auto policy, and because of the (lack of) corporate structure and sufficient insurance, Plaintiffs were able to force the liquidation of the entire portfolio.

Also not intended as legal advise, and you should consult with a real estate attorney.

There is nothing illegal about transferring/selling the property to your LLC, but there is risk. Your lender will have a "due on sale" clause in your mortgage contract that allows them to make the entire mortgage due immediately upon a transfer of the property. The lender is not obligated to enforce that right, and most will never do so as long as they keep getting paid. You have to account for the risk though.

The lease option may be viable to avoid the due on sale clause, but you will need to consult with an attorney to prepare the lease since certain terms may be deemed a transfer (e.g., a lease over 3 years, an option to buy, etc.). Even if done properly, you will still have some liability as the property owner that you cannot escape through contract (i.e., failing to repair dangerous conditions).

Also as P.H. said, the LLC is only valuable if you actually operate it as a real business, not just as a pass-through. You will need to set up separate bank accounts, obtain insurance in the name of the LLC, have some funds set away as reserves, create an actual operating agreement (the governing documents) for the LLC, etc. Otherwise, any attorney with his shirt will "pierce the veil" and attack your assets personally.

My advice would be to consult with an attorney and continue to discuss with your lender. You may be better off having a significant umbrella insurance policy to cover your risk to an acceptable limit.

P.H. Dexippus said:

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This is not intended as legal advice and I am not your lawyer. Consult an experienced real estate attorney.

I think it is wise to keep rental property in separate LLCs. Complying with LLC requirements aren't that difficult honestly. Make sure you follow your bylaws. Keep personal and business accounts separate. Pay your franchise tax. Carry sufficient general liability insurance. There's more to it than that, but nothing that should scare you off from availing yourself of the protection afforded by keeping and operating the property as a separate legal entity from yourself.

A few years ago, my firm represented an individual in a personal injury suit who had accumulated a nice residential rental portfolio of about ten properties owned in his individual name and operated only using a d/b/a. Defendant ran a red light and allegedly caused significant injuries to a family in the other vehicle. The Plaintiffs' seven-figure judgment far exceeded the policy limits of the auto policy, and because of the (lack of) corporate structure and sufficient insurance, Plaintiffs were able to force the liquidation of the entire portfolio.

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This is not intended as legal advice and I am not your lawyer. Consult an experienced real estate attorney.

This does not necessarily mean an LLC is the answer. If your person had a sufficient Umbrella policy that would have protected them as well.

A wise attorney can usually pierce the LLC protection, especially if a novice is managing it. Also, in the example you provide opens up a new can of worms. A large portfolio, most likely, could not be adequately protected with a single LLC. Yeah, I know some people promote the series LLC concept; yet to really be tested in court.

An Umbrella policy is a tax write off and protects everything you own. If considering one look a a 5 million dollar policy, not much more expensive than a 1 million dollar policy and you will get their best set of lawyers if you get sued.