curiousgeorge
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Post by curiousgeorge on Apr 14, 2011 6:32:47 GMT -5
Can rental property be in an LLC? If so, is there a minimum rental income that would make it beneficial? What would the advantages and disadvantages be? Thank you!
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Deleted
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Post by Deleted on Apr 14, 2011 7:13:00 GMT -5
Any kind of real estate can be held in an LLC. Just don't expect to get an owner occupied loan if your house is owned by an LLC!
Most people form real estate LLCs as a way to protect their other assets in the event they get sued because of activities related to that asset. But to do it right, each piece of real estate should be in its own LLC or else what's the point? If you have 5 properties in one LLC and you get sued, that judgment could apply to all 5 properties.
A main disadvantage to LLCs besides costs is the issue of financing. Other than long established LLCs it will be very difficult to obtain financing. So you will need to co-sign or personally guaranty the real estate loan. So in the case of default, the bank will come after you personally. I also suspect that in the case of non recourse states (like CA & AZ) these loans are actually commercial loans and are therefore recourse.
Which leads me to my next point. I think LLCs can be useful if you are effectively putting together investment partnerships and need a structure to spell out roles, terms et cetera. But I question its use as a useful liability shield for a single member or husband and wife. I think it's pretty easy for a good lawyer to "pierce the corporate veil" for these small LLCs and attach other assets.
Many of us small LLs keep the properties in our own names and buy an umbrella liability insurance policy. Without a doubt if you're in this business you do need to stay on top of maintenance and other issues to be a responsible LL.
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Deleted
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Post by Deleted on Apr 14, 2011 7:21:01 GMT -5
Also,
Once you personally guarantee a loan for your LLC you pierce the protection of the LLC and open up your personal assets to law suits.
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curiousgeorge
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Post by curiousgeorge on Apr 14, 2011 19:21:26 GMT -5
Thank you! How about taxes? Are there advantages for a separate LLC tax return over a 1040 Schedule E?
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mesquite77
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Post by mesquite77 on Apr 14, 2011 20:37:05 GMT -5
Also, Once you personally guarantee a loan for your LLC you pierce the protection of the LLC and open up your personal assets to law suits. Archie, where did you get that? We're putting a million of property in each LLC. Can't borrow without a person guarantee. If you treat the LLC as a business, I see the LLC as much stronger protection than an umbrella with pages and pages of exclusions.
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Post by commentator on Apr 14, 2011 20:48:40 GMT -5
Archie is correct in reply #2.
The only good reason I know of to have real estate owned by an LLC is when multiple investors are needed to make the deal work.
There is no particularly good reason to have real estate owned by a single member LLC. The notion that an LLC (or closely held corporation) will protect the owner from financial loss for his/her own tortious act is a myth.
There are bad reasons for having real estate owned by entities that are distinct from the entity owner for tax purposes.
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Deleted
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Post by Deleted on Apr 15, 2011 9:49:09 GMT -5
Also, Once you personally guarantee a loan for your LLC you pierce the protection of the LLC and open up your personal assets to law suits. Archie, where did you get that? We're putting a million of property in each LLC. Can't borrow without a person guarantee. If you treat the LLC as a business, I see the LLC as much stronger protection than an umbrella with pages and pages of exclusions. Just my experience. Anything that a company/owner do to commingle the business assets and the owner's personal assets increases the possibility that personal assets can be at risk. This includes commingling money, expenses, personal guarantees, etc. As in all things legal anything can happen in the court room. Keep in mind that I am not in real estate and I do not deal with LLCs too often.
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8 Bit WWBG
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Post by 8 Bit WWBG on Apr 15, 2011 13:29:06 GMT -5
...:::"Other than long established LLCs it will be very difficult to obtain financing. So you will need to co-sign or personally guaranty the real estate loan.":::...
But in theory, if your LLC was old or proven enough that it did NOT need the co-signature of the owner to obtain credit, then it actually could be the way to go?
...:::"Many of us small LLs keep the properties in our own names and buy an umbrella liability insurance policy.":::...
Where is the point that you go from small to large? Is it by dollars? Is it by amount? I mean, if you have 10 properties, should you then form a corporation?
...:::"The only good reason I know of to have real estate owned by an LLC is when multiple investors are needed to make the deal work.":::...
Is this because bank financing is not an issue?
...:::"I see the LLC as much stronger protection than an umbrella with pages and pages of exclusions.":::...
How about several LLCs, owned by an LLC?
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Deleted
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Post by Deleted on Apr 15, 2011 15:27:25 GMT -5
"...:::"Other than long established LLCs it will be very difficult to obtain financing. So you will need to co-sign or personally guaranty the real estate loan.":::...
But in theory, if your LLC was old or proven enough that it did NOT need the co-signature of the owner to obtain credit, then it actually could be the way to go?"
I think so. But it's a little bit of the chicken and the egg. How do you get a company started? Probably by signing loans personally...One you get enough equity and cash flow after several years perhaps you can refi into a commercial loan into the LLC? Chances are you would be trading/selling into something else.
"Where is the point that you go from small to large? Is it by dollars? Is it by amount? I mean, if you have 10 properties, should you then form a corporation?" I think it's by number of properties. FNMA starts making it difficult to have more than 4 loans. We ran into insurance issues once we had more than 4 rentals. It seems like a convergence thing where more than 4 or 5 rentals makes one more a commercial/business outfit than supplementing one's income.
I'll let the other posters answer their own questions.
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8 Bit WWBG
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Post by 8 Bit WWBG on Apr 15, 2011 16:09:29 GMT -5
I just ask because I'm sure it depends on where you see yourself going. Landlords who just own 2 or 3 properties may very well come out ahead and/or be amply protected by large insurance policies. Larger scale landlords who own 20 or 30, and may even venture into commercial would probably want to move all the assets into a commercial entity. Paul has claimed to be "bullet proof" on more than one occasion through some cascading series of LLCs.
If the protection simply isn't there in starting an LLC for one property, then it would certainly make no sense to bother with the trouble and the fees.
...:::"But in theory, if your LLC was old or proven enough that it did NOT need the co-signature of the owner to obtain credit, then it actually could be the way to go?"":::...
Can you start an LLC for a service business that you can do out of thin air? Consulting, graphic/web design, proof reading... and then bring in revenue to the business that way? Then establish credit by applying for a small loan, and build it up that way? I agree you wouldn't be able to start an LLC today and qualify for credit tomorrow.
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2kids10horses
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Post by 2kids10horses on Apr 15, 2011 17:26:30 GMT -5
There are many ways to use LLCs with rental property. Some use them for asset protection, some for tax purposes.
A good structure is to have each rental house to be in it's own LLC. A landlord with multiple properties should form a LLC that is the management company. The management LLC is the one that rents the houses out and collects rent, then dispburses the rent to the owner. All it has is two bank accounts: one to hold deposits and one to collect rent, and disburse it back out.
The benefits of the LLC is the limited liability. If each rental house is in it's own LLC, if a tenant wins a lawsuit, he might win the assets of the LLC, which is the house it's self. He cannot attach the other assets owned by the landlord.
Of course, each home should be insured, and an umbrella liability insurance policy should be maintained.
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Post by tt00 on Apr 16, 2011 22:06:02 GMT -5
From what I have been told it is best to have it under a llc .. Keep different properties under their own llc.
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