How to hold title to rental properties

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unclescrooge
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How to hold title to rental properties

Post by unclescrooge » Wed Nov 13, 2019 6:49 pm

I have 2 rental properties I've owned since 2005 out in the midwest. Both are long-term rentals managed through a property management company.

Each of them has about $75k equity in them, and is worth $150k.

Our personal residence is based in California and has ~$1 million equity in it.

The rentals are solely in my name, and the house is solely in my wife's name.

We have $1 million in umbrella insurance and the rentals are covered under that.

Is there any benefit to putting the rentals in an LLC?
Yes, I know it's the most iron-clad way to protect my other assets, but is it really worth the headache of annual filings and paperwork?

Since there are so many pro-real estate members on this board, I thought I'd ask the collective wisdom how they normally hold real estate.

TIA!

fabdog
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Re: How to hold title to rental properties

Post by fabdog » Wed Nov 13, 2019 8:22 pm

Maybe the folks at biggerpockets.com would have more feedback

Mike

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unclescrooge
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Re: How to hold title to rental properties

Post by unclescrooge » Wed Nov 13, 2019 8:39 pm

fabdog wrote:
Wed Nov 13, 2019 8:22 pm
Maybe the folks at biggerpockets.com would have more feedback

Mike
True, but the best ones are here already :mrgreen:

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ResearchMed
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Re: How to hold title to rental properties

Post by ResearchMed » Wed Nov 13, 2019 8:53 pm

unclescrooge wrote:
Wed Nov 13, 2019 6:49 pm
I have 2 rental properties I've owned since 2005 out in the midwest. Both are long-term rentals managed through a property management company.

Each of them has about $75k equity in them, and is worth $150k.

Our personal residence is based in California and has ~$1 million equity in it.

The rentals are solely in my name, and the house is solely in my wife's name.

We have $1 million in umbrella insurance and the rentals are covered under that.

Is there any benefit to putting the rentals in an LLC?
Yes, I know it's the most iron-clad way to protect my other assets, but is it really worth the headache of annual filings and paperwork?

Since there are so many pro-real estate members on this board, I thought I'd ask the collective wisdom how they normally hold real estate.

TIA!
If you equity is less than the "worth" amount, that suggests a mortgage?
If so, then is the mortgage in *your* name?
... and IF so, then there is no point in an LLC (except as window dressing), as you cannot (yet) truly separate yourself personally from the property.

RM
This signature is a placebo. You are in the control group.

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unclescrooge
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Re: How to hold title to rental properties

Post by unclescrooge » Wed Nov 13, 2019 9:06 pm

ResearchMed wrote:
Wed Nov 13, 2019 8:53 pm
unclescrooge wrote:
Wed Nov 13, 2019 6:49 pm
I have 2 rental properties I've owned since 2005 out in the midwest. Both are long-term rentals managed through a property management company.

Each of them has about $75k equity in them, and is worth $150k.

Our personal residence is based in California and has ~$1 million equity in it.

The rentals are solely in my name, and the house is solely in my wife's name.

We have $1 million in umbrella insurance and the rentals are covered under that.

Is there any benefit to putting the rentals in an LLC?
Yes, I know it's the most iron-clad way to protect my other assets, but is it really worth the headache of annual filings and paperwork?

Since there are so many pro-real estate members on this board, I thought I'd ask the collective wisdom how they normally hold real estate.

TIA!
If you equity is less than the "worth" amount, that suggests a mortgage?
If so, then is the mortgage in *your* name?
... and IF so, then there is no point in an LLC (except as window dressing), as you cannot (yet) truly separate yourself personally from the property.

RM
Makes sense.
Yes, the mortgages are in my sole name.

J295
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Re: How to hold title to rental properties

Post by J295 » Wed Nov 13, 2019 9:32 pm

I would put both properties in an LLC to gain the added liability protection. It’s not the mortgage liability that is the issue here, it’s a potential liability claim that exceeds insurance, including the umbrella. Yes, statistically it’s reasonable to guess that the risk of such a liability claim is small. However, if such a claim occurs your personal assets are at risk. Think black swan or read a few cases online with unique facts and you will see that there is landlord liability exposure.

Moreover, if these are titled in your name and you live in another state, when the owner dies there will need to be, in all likelihood, and ancillary probate to handle passing title… Unless the state an issue has a deed on death statute and you’ve already handled that issue. You should be able to avoid such an ancillary probate in the context of an LLC.

Typically the “paperwork” is not material for a single member LLC, which is a pass-through entity.

Stormbringer
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Re: How to hold title to rental properties

Post by Stormbringer » Thu Nov 14, 2019 3:21 pm

J295 wrote:
Wed Nov 13, 2019 9:32 pm
Typically the “paperwork” is not material for a single member LLC, which is a pass-through entity.
I think you mean to say it is a disregarded entity. All LLC's are pass-through. Single-owner LLCs can be disregarded, meaning they don't need to file a separate tax return.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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4nursebee
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Re: How to hold title to rental properties

Post by 4nursebee » Thu Nov 14, 2019 3:29 pm

As someone said or alluded to one can’t LLC properties that a bank holds a note on. My plan is payoff then look at LLC structures.

Bigger pockets is marketing more heavily and has a lot of quick money grabbers, atypical financing,low money down types.
4nursebee

Stormbringer
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Re: How to hold title to rental properties

Post by Stormbringer » Thu Nov 14, 2019 3:30 pm

unclescrooge wrote:
Wed Nov 13, 2019 6:49 pm
Is there any benefit to putting the rentals in an LLC?
Ideally yes, because when you own them directly, you have unlimited liability.

However, there are practical reasons why you might not want to:
  • You may have to pay a transfer fee (tax) when the ownership changes. State laws vary.
  • If you have mortgages, it would trigger the due on sale clause, causing you all sorts of problems with the bank.
  • If you refinance them with an LLC as the owner, you are generally locked out of government backed (e.g. Fannie Mae) mortgage market. This means the bank is putting up their own money, and the terms are likely less favorable. The loan may be adjustable, have a balloon payment after a certain number of years, require paying points, have a pre-payment penalty and a higher interest rate.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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unclescrooge
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Re: How to hold title to rental properties

Post by unclescrooge » Thu Nov 14, 2019 4:59 pm

Stormbringer wrote:
Thu Nov 14, 2019 3:30 pm
unclescrooge wrote:
Wed Nov 13, 2019 6:49 pm
Is there any benefit to putting the rentals in an LLC?
Ideally yes, because when you own them directly, you have unlimited liability.

However, there are practical reasons why you might not want to:
  • You may have to pay a transfer fee (tax) when the ownership changes. State laws vary.
  • If you have mortgages, it would trigger the due on sale clause, causing you all sorts of problems with the bank.
  • If you refinance them with an LLC as the owner, you are generally locked out of government backed (e.g. Fannie Mae) mortgage market. This means the bank is putting up their own money, and the terms are likely less favorable. The loan may be adjustable, have a balloon payment after a certain number of years, require paying points, have a pre-payment penalty and a higher interest rate.
Definitely something to think about.

CheepSkate
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Re: How to hold title to rental properties

Post by CheepSkate » Fri Nov 15, 2019 2:50 pm

Hypothetical:

Would the OP - assuming no mortgages- be able to skip some closing costs if s/he could just sell the LLC and all properties inside it to a cash buyer rather than doing an actual real estate transaction with all the associated fees, taxes, etc?

Or more directly, is there a way to put RE in some kind of corporate container and then just sell shares in the corporation to someone else? Obviously the buyer would not be able to get a mortgage but in theory if the buyer and seller split the savings on closing costs, that would be a good deal for some people.

WJW
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Re: How to hold title to rental properties

Post by WJW » Fri Nov 15, 2019 2:57 pm

Before going the LLC route check with your insurance company. I bought a property in an LLC years ago in NJ and my insurer claimed it as commercial. The premiums were 400% more than if it was in my name. All my current properties are in my name and I carry an umbrella policy in addition to regular property insurance.

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ResearchMed
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Re: How to hold title to rental properties

Post by ResearchMed » Fri Nov 15, 2019 3:14 pm

WJW wrote:
Fri Nov 15, 2019 2:57 pm
Before going the LLC route check with your insurance company. I bought a property in an LLC years ago in NJ and my insurer claimed it as commercial. The premiums were 400% more than if it was in my name. All my current properties are in my name and I carry an umbrella policy in addition to regular property insurance.
Just make certain that you have the correct coverage type, LLC or not.

Our insurers (in two states, two different companies) both required that ANY rental (annual or vacation rental short term) have insurance as a business/commercial enterprise, both for basic (fire/etc., and liability) and also the umbrella policy added on.

If we had had them insured as personal, and had a claim, once the usage was determined, any claim would have been denied.

RM
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WJW
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Re: How to hold title to rental properties

Post by WJW » Fri Nov 15, 2019 3:58 pm

ResearchMed wrote:
Fri Nov 15, 2019 3:14 pm
WJW wrote:
Fri Nov 15, 2019 2:57 pm
Before going the LLC route check with your insurance company. I bought a property in an LLC years ago in NJ and my insurer claimed it as commercial. The premiums were 400% more than if it was in my name. All my current properties are in my name and I carry an umbrella policy in addition to regular property insurance.
Just make certain that you have the correct coverage type, LLC or not.

Our insurers (in two states, two different companies) both required that ANY rental (annual or vacation rental short term) have insurance as a business/commercial enterprise, both for basic (fire/etc., and liability) and also the umbrella policy added on.

If we had had them insured as personal, and had a claim, once the usage was determined, any claim would have been denied.

RM
Thanks, I use a Dwelling Fire Policy for rental properties that the owner does not occupy - with endorsements including liability and loss of use.

I went through the coverage in detail with my agent to be sure it included everything that I need.

J295
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Re: How to hold title to rental properties

Post by J295 » Fri Nov 15, 2019 4:16 pm

CheepSkate wrote:
Fri Nov 15, 2019 2:50 pm
Hypothetical:

Would the OP - assuming no mortgages- be able to skip some closing costs if s/he could just sell the LLC and all properties inside it to a cash buyer rather than doing an actual real estate transaction with all the associated fees, taxes, etc?

Or more directly, is there a way to put RE in some kind of corporate container and then just sell shares in the corporation to someone else? Obviously the buyer would not be able to get a mortgage but in theory if the buyer and seller split the savings on closing costs, that would be a good deal for some people.
This would really limit your pool of potential buyers. If I’m a buyer, I’m not buying someone else’s entity, which would include all liability of that entity, irrespective of what the seller tells me or agrees to indemnify for me. If I buy the real estate straight up, it is a known type of transaction without those potential unknown liabilities.

Kennedy
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Re: How to hold title to rental properties

Post by Kennedy » Sat Nov 16, 2019 1:27 am

* If you purchase the property initially in your own name and then later deed it to your LLC, two things will happen: The title insurance policy will be void. The transfer of title will trigger the due on sale clause if you have a mortgage

* If title is in the name of your LLC and you are personally negligent in some aspect that causes damages related to the rental property, the LLC will not protect you. You can be sued individually in addition to the LLC. An example is if you do a repair job at the property and don't exercise reasonable care or fail to warn of a danger, you can be successfully personally sued in ADDITION to the LLC. A further example is if you do not exercise reasonable care when selecting a worker to work on the property, your tenant or his guest suffers damages, you can be successfully sued. For example, you hire "some guy" off craigslist that you failed to properly vet.

Most people are better off just having a hefty umbrella policy. One of the few exceptions is protection in the reverse. For example, a person who negligently causes the death of a high profile person (say in a car accident) may be able to shield the rental property titled in the name of his LLC should the judgment/settlement exceed the umbrella policy limit.

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