Rental Real Estate Mortgage in LLC or Personal Name?

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arsenalfan
Posts: 454
Joined: Mon Dec 09, 2013 12:26 am

Rental Real Estate Mortgage in LLC or Personal Name?

Post by arsenalfan » Mon Oct 09, 2017 8:55 pm

Buying $400k rental real estate property in NC. Have ~$5MM net worth personally. 2 options for mortgage:

1. Mortgage in my name: 30 yr fixed rate 3.5%, is in my own name. Get lots of general liability and umbrella insurance covering property, run all rental business through LLC name.
2. Mortgage in LLC name: 4.5% 5 year ARM, resets every 5 years to T+3%, ceiling 9%, 25 year amortization.

What would you do? Have heard totally disparate advice from lawyers/real estate investors I trust and know are successful.
Some say do option 1: lock in cheap cash as rates only going higher, fixes the MAIN variable in cashflow for property, and lots of insurance is cheap will ensure personal assets won't get touched. Also, LLCs can be easily pierced.
Some say do option 2: Don't be penny wise and pound foolish and risk $5MM in personal assets for a $400k rental investment.

For converstaion's sake, please assume I'm going ahead with this (don't debate wisdom of rental property, etc, etc).

ResearchMed
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Joined: Fri Dec 26, 2008 11:25 pm

Re: Rental Real Estate Mortgage in LLC or Personal Name?

Post by ResearchMed » Mon Oct 09, 2017 9:07 pm

arsenalfan wrote:
Mon Oct 09, 2017 8:55 pm
Buying $400k rental real estate property in NC. Have ~$5MM net worth personally. 2 options for mortgage:

1. Mortgage in my name: 30 yr fixed rate 3.5%, is in my own name. Get lots of general liability and umbrella insurance covering property, run all rental business through LLC name.
2. Mortgage in LLC name: 4.5% 5 year ARM, resets every 5 years to T+3%, ceiling 9%, 25 year amortization.

What would you do? Have heard totally disparate advice from lawyers/real estate investors I trust and know are successful.
Some say do option 1: lock in cheap cash as rates only going higher, fixes the MAIN variable in cashflow for property, and lots of insurance is cheap will ensure personal assets won't get touched. Also, LLCs can be easily pierced.
Some say do option 2: Don't be penny wise and pound foolish and risk $5MM in personal assets for a $400k rental investment.

For converstaion's sake, please assume I'm going ahead with this (don't debate wisdom of rental property, etc, etc).
This may all be state specific, but the advice we received was to keep everything "rental" totally separate from personal assets.
In our case, we couldn't really do that, because with a new rental business, we couldn't get mortgages in the LLC name; they had to be in our personal names.
However, we did use an LLC name on all bank accounts, registrations, and email/correspondence.
Only if someone checked on the mortgages would it be obvious that we weren't totally separate.
We did have high commercial umbrella policies for the rental properties.

That's all in the past now, and we never had any claim against us.
But it was definitely a sleep well at night help.

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

boglerdude
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Re: Rental Real Estate Mortgage in LLC or Personal Name?

Post by boglerdude » Mon Oct 09, 2017 9:37 pm

> Only if someone checked on the mortgages would it be obvious that we weren't totally separate

Which they will do when there's millions at stake :)

I suppose you also need a property manager when using an LLC, because the idea is that you could not have been aware of any hazardous conditions at the property?

OP, ask your lawyer to find an example of where an LLC actually saved a landlord. That is, a landlord was sued for an amount beyond their umbrella+underlying policy limit, lost the trial, the plaintiff was awarded an amount larger than the insurance, and the court upheld the LLC. If you find any cases like this let us know

For less than the costs of an LLC you could probably get millions more in umbrella, and that umbrella also protects your primary residence and your cars (auto being 10x(?) more likely to result in a huge suit)

ResearchMed
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Joined: Fri Dec 26, 2008 11:25 pm

Re: Rental Real Estate Mortgage in LLC or Personal Name?

Post by ResearchMed » Mon Oct 09, 2017 10:13 pm

boglerdude wrote:
Mon Oct 09, 2017 9:37 pm
> Only if someone checked on the mortgages would it be obvious that we weren't totally separate

Which they will do when there's millions at stake :)

I suppose you also need a property manager when using an LLC, because the idea is that you could not have been aware of any hazardous conditions at the property?

OP, ask your lawyer to find an example of where an LLC actually saved a landlord. That is, a landlord was sued for an amount beyond their umbrella+underlying policy limit, lost the trial, the plaintiff was awarded an amount larger than the insurance, and the court upheld the LLC. If you find any cases like this let us know

For less than the costs of an LLC you could probably get millions more in umbrella, and that umbrella also protects your primary residence and your cars (auto being 10x(?) more likely to result in a huge suit)
Yes, we knew that the LLC would be of zero value in case of real injury. We did not expect it to "save" us from anything at all.
We had also hoped to refi and get the mortgage in the LLC name, but never went forward with that, given the amount of commercial umbrella insurance we had.

For us, it was necessary to have personal umbrella coverage for home/personal property/car., and a separate commercial umbrella policy for the rental properties.
That may vary by state (?).

And we had a manager given the distance. That made us more concerned, because we figured a manager would never take the same care WE would if we were able to keep tabs. On our occasional visits/stays, we always found something(s) that ticked us off... but I digress :annoyed
It would have worked MUCH better if we could have been there much more often, even if we still had a manager to oversee the regular cleaning and maintenance, etc. (However, I guess that "our managing" might have interfered with any true "LLC separation". But that's a legal issue we have no experience with it, as it wasn't relevant.)

RM
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unclescrooge
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Re: Rental Real Estate Mortgage in LLC or Personal Name?

Post by unclescrooge » Mon Oct 09, 2017 11:13 pm

I've never owned real estate in an llc. An umbrella should be enough.

But then I'm not worth $5 million....just barely broke a million last year.

Hulu
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Joined: Wed Oct 22, 2014 7:55 pm

Re: Rental Real Estate Mortgage in LLC or Personal Name?

Post by Hulu » Thu Oct 12, 2017 12:23 am

You have a lot to lose. I'd either:

1.). Lock in the fixed personal rate, make a couple payments, let them know you're changing the title to an LLC anyway and change the title.

Or

2.). Start and keep it in an LLC. Yes it's more expensive initially however LLCs are just another form of insurance.

You're probably fine with umbrella but there must be a reason it's inexpensive...either LLCs aren't that useful or the insurance doesn't cover

EasilyConfused
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Re: Rental Real Estate Mortgage in LLC or Personal Name?

Post by EasilyConfused » Thu Oct 12, 2017 1:04 am

boglerdude wrote:
Mon Oct 09, 2017 9:37 pm
OP, ask your lawyer to find an example of where an LLC actually saved a landlord. That is, a landlord was sued for an amount beyond their umbrella+underlying policy limit, lost the trial, the plaintiff was awarded an amount larger than the insurance, and the court upheld the LLC. If you find any cases like this let us know

For less than the costs of an LLC you could probably get millions more in umbrella, and that umbrella also protects your primary residence and your cars (auto being 10x(?) more likely to result in a huge suit)
Yes. The generic advice is to use an LLC to protect yourself from liability. But I've never met any attorney, RE person, insurer, banker, etc. who has ever been able to give me an example in my state of a landlord being saved by his LLC. And like you, I've run into financing hassles when I've tried to go the LLC route with the bank. Also, your personal umbrella insurance doesn't cover your LLC and vice versa, so you'll likely end up buying two different policies.

I just hold my properties in my name and buy a ton of insurance. It's a lot less expensive than trying to finance properties in an LLC.

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