How to "hold" real estate?

[Havoc]

Sort of a tangent to tbirds' question about cash generation vs. equity build-up, but didn't want to hijack the thread...

For those of you with rental property, how do you hold your property? In an LLC? And if so, how do you move $$$ from the holding entity and your personal accounts? Are mortgages listed in the LLC's name, or yours?

I have some rental property, and am looking to get more Before The Whole Thing Blows Up so that I can lock in some good mortgage rates... but around here a lot of landlords just hold the house in their own name (which we do also atm, but I am very uncomfortable with it) and don't want to go this route with future property.

Thanks for any advice!

[brdsl]

I hold mine in my own name.

I would think that putting them in an LLC would mire things too much for the benefit. I have read that some put 2 houses in each LLC, so if something goes wrong.

I believe you would have to "pay" yourself via w-2 from your llc to keep from piercing the veil. You cannot co-mingle funds from personal to the llc. So, you need to fix a door handle. If the "LLC" account doesn't have the funding in it, you cannot simply buy it with your funds. You would have to loan the LLC $$$ from your personal account, then could buy the parts.

FWIW, I am not a big RE investor, yet.

[Gardening Grandma]

We hold ours in our name. But we only have one rental property. I don't think we'd go to an LLC unless we had more than three or four.

[Savoir Faire-Demogague in NJ]

Holding rental properties in one's own name is very risky from a liability perspective.
You are opening up the risk of your personal assets as well as other properties to liability if you get sued by tenants.

[Gardening Grandma]

Mar 31, 2011 9:02:36 GMT -5 Savoir Faire-Demogague in NJ said:

Holding rental properties in one's own name is very risky from a liability perspective.
You are opening up the risk of your personal assets as well as other properties to liability if you get sued by tenants.

Isn't that what liability insurance is for?

[brdsl]

"Holding rental properties in one's own name is very risky from a liability perspective."

umbrella policy.

[Savoir Faire-Demogague in NJ]

Isn't that what liability insurance is for?

Not enough.

And insurance on rentals and liability may not be covered by a personal umbrella policy because rentals could be considered commercial.

If it were me, I would be consulting and obtaining professional advice, from someone such as a financial advisor who likely has 100s of clients in this sort of situation.

[Deleted]

The problem with any liability is that there is no magic bullet in preventing it. The more roadblock you put up such as having liability insurance, setting up LLCs, etc are all very good in reducing your exposure, but none of them are a guarantee in preventing personal losses.

[Gardening Grandma]

Mar 31, 2011 9:23:51 GMT -5 Savoir Faire-Demogague in NJ said:

Isn't that what liability insurance is for?

Not enough.

And insurance on rentals and liability may not be covered by a personal umbrella policy because rentals could be considered commercial.

If it were me, I would be consulting and obtaining professional advice, from someone such as a financial advisor who likely has 100s of clients in this sort of situation.

Hmmm, Well, SF, you've motivated me to get off my butt and get an umbrella policy - and I guess I'd better make sure that it will cover the rental.... Thanks, I think.

[Savoir Faire-Demogague in NJ]

but none of them are a guarantee in preventing personal losses.

...and with all decision regarding "large financial" transactions, one should obtain professional advice.

[Savoir Faire-Demogague in NJ]

Hmmm, Well, SF, you've motivated me to get off my butt and get an umbrella policy - and I guess I'd better make sure that it will cover the rental.... Thanks, I think

I hope I've motivated you to seek out competent professional advice.

[brdsl]

SF,

Do you recommend doing anything yourself? Without professional advice?

What if the "professional advice" is an umbrella policy?

[DVM gone riding]

SF-before buying rental property I verified with my insurance company that my personal umbrella covered that, they did make me get a certain level of liability on the property as well before the umbrella would kick in, I think this is something you need to be very honest with your insurance company about to make sure they cover you but isn't so far out of the norm for them.

[Deleted]

Mar 31, 2011 9:33:16 GMT -5 Savoir Faire-Demogague in NJ said:

but none of them are a guarantee in preventing personal losses.

...and with all decision regarding "large financial" transactions, one should obtain professional advice.

Of course.. did I post something to the contrary?

;D

[Savoir Faire-Demogague in NJ]

Do you recommend doing anything yourself? Without professional advice?
What if the "professional advice" is an umbrella policy?

You've been on these forums long enough to read 100s of threads posted by people who have done all sorts of large financial transactions, thinking they are doing the right thing, or helping their kids/grand kids, relatives, etc., and doing nothing but opening up a can of worms and creating a legal and financial quagmire, and creating massive headaches for their heirs.

I will pose a question to you. Do you, know all the ins and outs, all the gotchas, relative to the number of ways a rental property can be held, the financial, legal and tax ramifications; and all the nuances in property and liability insurance as it would apply to rentals?

[brdsl]

" Do you, know all the ins and outs, all the gotchas, relative to the number of ways a rental property can be held, the financial, legal and tax ramifications; and all the nuances in property and liability insurance as it would apply to rentals? "

No. Nor would a professional adviser. Multiple ones, and then you the ultimate decision will be up to you....because they can advise, not recommend.

"You've been on these forums long enough to read 100s of threads posted by people who have done all sorts of large financial transactions, thinking they are doing the right thing, or helping their kids/grand kids, relatives, etc"

Sure, and with a 5 minute google search or reading a book on the subject, they would have learned the pitfalls, and re-thought their position. But hey, why do anything yourself? Just dial up your adviser for that.

[Savoir Faire-Demogague in NJ]

No. Nor would a professional adviser. Multiple ones, and then you the ultimate decision will be up to you....because they can advise, not recommend.

You are incorrect on this. They would know, it is their job to know.

Sure, and with a 5 minute google search or reading a book on the subject, they would have learned the pitfalls, and re-thought their position. But hey, why do anything yourself? Just dial up your adviser for that.

So, you know all the facets and nuances of estate planning?
You qualified to represent yourself in court, since you can easily google anything???

[ronbuck]

Mar 31, 2011 8:45:06 GMT -5 Havoc said:

For those of you with rental property, how do you hold your property? In an LLC? And if so, how do you move $$$ from the holding entity and your personal accounts? Are mortgages listed in the LLC's name, or yours?

An LLC does require a seperate set of books and a seperate tax return each year. Money is put into the LLC is in the form of an shareholder equity account. Money taken from the LLC is a distribution. Your tax liability from the LLC is reported on a K-1. The profit of the LLC flows through to the shareholders.

The liability protection of the LLC requires documentation that this is being run as a business. Minutes of meetings including the principles, resolutions to take action.....stuff like that.

Edited to add. The LLC would be the legal entity holding property and borrowing money. But the bank is also going to want personal guarentees for any loans.

[brdsl]

Since we are "posing" questions.

Do you currently own any rental property?

[brdsl]

"You are incorrect on this. They would know, it is their job to know."

A test: Go out and interview no less than 5 of these professionals, see if will give you consultation on all of the areas you stated above.

My results: They will consult you on their area of expertise, and then point you to someone else if the question isn't in their area.


"So, you know all the facets and nuances of estate planning?
You qualified to represent yourself in court, since you can easily google anything???"

No, but I can google whether or not I should be looking into an estate. If I have the assets necessary, and whether or not it would be in my best interest to setup one. I wouldn't walk into a planners office and say..."I want to set up an estate." If there is no way it will benefit me.

[Savoir Faire-Demogague in NJ]

A test: Go out and interview no less than 5 of these professionals, see if will give you consultation on all of the areas you stated above.

That is pretty easy. Any financial advisory firm has professional staff on board who are SME's.

I hit that one out of the park.

[brdsl]

"That is pretty easy. Any financial advisory firm has professional staff on board who are SME's."

Good, now get them to agree....

"I hit that one out of the park."

Yes, but you failed to step up to the plate on this one....

"Do you currently own any rental property?"


PLAY BALL.

[tskeeter]

As always, this is a question for which there is no single "correct" answer. It will depend on your situation.

Reasons to use a corporate entity to hold rental property. Limits your personal liability if you should be sued by a tenant. This probably becomes more of an issue if you have multi unit buildings rather than single family homes. Allows a highly leveraged landlord to limit losses if things go south. This would require multiple corporate entities. May protect certain assets in the event of a divorce, personal financial problems, etc. Can simplify decisions to sell property, etc. as corporate rules can be set up for majority of shares rules, vs. partner-owners, which may require a partition lawsuit if one partner-owner with a very small interest doesn't want to sell.

Reasons not to use a corporate entity to hold rental property. It complicates life. More tax returns. Creating corporate entities costs money. It adds another layer of regulations specific to corporations that you must be aware of and comply with. May tie up assets to comply with minimum capitalization requirements. May increase your risk of litigation if tenants and others believe that they are dealing with an evil corporation with deep pockets vs. Louie, the guy I rent from. You must act to keep the corporate activities separate from your personal activities. Use a rent check to make a deposit on a car for your daughter and a plaintiff could successfully claim that the corporation is a sham and you could lose the protections that a corporation provides.

I'm sure there are more issues on both the pro and con side. The right decision for you depends on your taste for risk, the amount of rental property you own, your financial situation, your marital situation, whether or not you have partners, and a variety of other factors. One size fits only you.