This has to be by the far the most asked question on the internet by most newbie investors and for the right reasons. As a newbie investor what holds one back the most is the fear of the risk that comes with your investment.
There are actual people living in your investment!
The truth is there is plenty of advice but it all boils down to personal preference as I have found.
Through this post, I just intend to give my synthesis of the extensive research I did so you can make your own judgment based on your personality and risk tolerance
Disclaimer: This is not legal advice but just my experience
There are 3 options available to you
1) Getting a property in an LLC
- Provides asset protection because if there is a lawsuit, they can only go after the equity in the LLC and not your personal assets.
- LLCs are a good way to separate rental properties. The equity in the LLC should be the main driver for deciding how many rentals to keep in one LLC. Some people recommend one property per LLC, but that is going to be a lot of overhead. For the same reason, I do not recommend starting an LLC with the property name.
- You have to make sure you are following the rules of the LLC, otherwise, the above statement might not hold true.
- Most people do not follow the rules when first starting out like not using an LLC bank account for personal use or not capitalizing the bank account correctly. Look up the concept of “piercing the corporate veil”
- If they know you are the owner of the LLC they can still go after you but if you followed the rules you most likely would be fine in the court.
- In some states, single-member LLC might not provide as much asset protection so check your state laws before spending time, money and brainpower.
- It’s harder to get loans on an LLC and I have found only local banks in the investment area entertained me
- LLC loans will charge a higher interest rate and it’s fixed for only 5 years as opposed to 30 years in the personal mortgage.
- As of the writing of this post in July’21, I am getting a 4.1% rate on my LLC loans.
- Most people start the LLC in the state where the property exists.
- LLCs are a better option if you have partners because you can write out the terms and responsibilities in the operating agreement, which will mitigate conflicts down the line
- Hack: You can create an LLC after your offer is accepted and before you close on the property. You can put offers in your name to start out and when one gets accepted, you can start the LLC on incfile.com and then add an addendum to your sale agreement.
- This prevents you from starting the LLC and not doing anything with it :)
2) Get a property in your personal name
- Most experts recommend this method because it’s easier to start. I always had partners so I wanted an LLC plus I have a low-risk tolerance.
- Lenders will give better rates than LLC loans. Also. easier to get lending.
- You can get up to 10 personal loans given you have a clean financial profile.
- To get more protection, you can get Umbrella insurance. If there is a lawsuit, Umbrella insurance can provide extra coverage.
- You have to ensure that there was no neglect on your part. There might be other caveats so double-check with your insurance on what their process is if someone sues you
3) Getting a property in your own name and then transferring to LLC later.
- Check before doing this - some states have high transfer costs. Example PA will charge 2% (1% for seller and 1 % for buyer)
- Banks have given the loan to you as an individual and when you are transferring, they might raise a concern and call the loan due right away.
- I have heard this never happens but have also heard it happening.
- Some folks try to avoid telling the bank and have backups if the loan is called.
4) Getting a property in your own name and then transferring to LLC later via a trust.
- Look up, St. Germain Act. Apparently, banks can’t call the loan if you transfer to a trust.
- This is a more technical way and you might need a lawyer for it.
- Check out Anderson Advisors or Clint Coons videos if you want to know more.
Hope this helps.