Thinking of buying a rental property

**snafu** · 02-10-2014, 08:52 AM

I realize finances aren't the issue. Sorry, no efficient way to get back story on rental ideas. What kind of rental are you looking at [condo, SFH, duplex, 4plex, 6 plex or]? What is the vacancy rate in your community? What's rental price point do you favor? Do you have access to potential tenant credit info? Do you have experience assessing people based on limited information like you get from a rental application? Do you have the time to act as manager and rental agent Do you have the skill sets needed for basic repairs to electric, plumbing, painting etc ?

**TBH** · 02-10-2014, 02:24 PM

Looking at 3-family houses (a common configuration around here.) I realize I'm new at this, but I do have some people to get advice from. Maybe it was a mistake to ask for advice on here. I know there are some people on here who are landlords, and I was just wondering about whether they had formed LLCs or not.

**riverwed070707** · 02-13-2014, 06:21 AM

Guess our situation is a little different becuase we didn't buy our rental with the intent to be landlords, but we do not have an LLC. We now have 2 streams of rental income - 1 is a SFH that brings in double the mortgage payment on a 15 year mortgage every month, and recently we converted our basement into a 2 bedroom apartment that is renting for 85% of our mortgage payment on our primary home. I feel like we've been extremly lucky but its been a great experience for us. Long-term plan is that when the SFH is paid off, we will purchase another like it and just keep building our portfolio. I hadn't thought about doing an LLC as it becomes more of a business for us. Interested to hear what other responses you get.

**TBH** · 02-13-2014, 08:41 AM

My original plan was to rent out our first house when we bought our second house, but when we were ready to move the timing wasn't right for us. We could have pulled it off financially but it would have left us with too small a cushion, and even though I still wish we'd kept the other house I think it was the best decision at the time.

Thanks for telling me your good experience, Riverwed! People on this board can be very discouraging sometimes. I often hesitate to post questions because I get responses that are basically "I have no idea how to answer the question you actually asked, but let me give you a lot of unsolicited advice about other stuff."

**kork13** · 02-13-2014, 09:24 AM

I'm not a landlord (yet)...but I will be once I get married later this spring. We both own our own homes, so we're going to make her house a rental. At this point, I don't expect that I'll make it an LLC. However, I have definitely considered it. If/when I move out of state & no longer directly manage the house, I expect I will almost assuredly go with an LLC. For what it's worth, a friend who owns 3 or 4 rental properties in at least 2 states (sorry, don't remember the details) sets up individual LLC's for each one.

The biggest benefit of the LLC is that it separates you entirely from the house. Any claim against you cannot (normally) go against any of your assets besides the LLC property itself. That does not apply if you simply "increase your liability insurance". Sure, it'll take a larger event to exceed your increased liability coverage, but consider this (extreme) example.... The house burns down due to an electrical fire from faulty wiring & a renter died -- you could be held liable for hundreds of thousands (or even millions) of dollars in lost future wages...consider a 35-y/o sole wage earner of $80k/yr, that's liability in excess of $1M. An LLC prevents that, and if such a suit were brought against you, you would lose the house, but that's it. You would bankrupt the LLC, and your liability ends there.

The ongoing cost really shouldn't be a deterrent... at least in my state (Oklahoma), it only costs $100 to form the LLC, and $25 annually beyond that (in addition to the state income taxes, but that's going to happen anyway). I can't say with authority, but I don't expect that other states would have anything too outrageously different. Even if the costs were double or triple that, I would still see it as a valuable protection well-worth the cost, and also more cost-effective than a $1M+ umbrella liability policy.

**skip17py** · 02-14-2014, 07:13 AM

I am new to the forum and this is my first post! There are exceptions to the rule, but generally I would recommend forming the LLC. It's cheap and easy to form. Futhermore, it will give you the peace of mind knowing you have some insulation between you and the renters if something terrible were to happen.

**riverwed070707** · 02-14-2014, 08:30 AM

Originally posted by skip17py View Post

I am new to the forum and this is my first post! There are exceptions to the rule, but generally I would recommend forming the LLC. It's cheap and easy to form. Futhermore, it will give you the peace of mind knowing you have some insulation between you and the renters if something terrible were to happen.

What's involved in the process? I know the basics of how to setup an LLC but how does the house become property of the LLC? Do you have to "sell" it to the company? What are the ongoing implications -- quarterly taxes, etc?

**skip17py** · 02-14-2014, 10:07 AM

I would consult an attorney who is licensed to practice in your state. State laws may vary and I don't feel comfortable answering those types of questions. Sorry, probably not the answer you would like.

**Joe Moore** · 02-14-2014, 10:45 AM

You need to look at income and inheritance tax implications as well. For example, with LLC you could leave the income in the company thereby keeping the tax at minimum and invest this money to buy another property later on. However, this would only be an issue if you are in a higher tax bracket.

If you are worried about possible liability claims, just buy higher liabilities insurance. Increasing your property owner liabilities 10 times will not cost you much. Besides many policies come with large liabilities coverage already.

**kork13** · 02-14-2014, 11:31 AM

Originally posted by riverwed070707 View Post

What's involved in the process? I know the basics of how to setup an LLC but how does the house become property of the LLC? Do you have to "sell" it to the company? What are the ongoing implications -- quarterly taxes, etc?

I'll state upfront: speak to a real estate lawyer for specific, authoritative information.

Yes, an LLC is basically a company that owns and manages the house, which you (or multiple individuals) operate as the owner(s). You will, in effect, sign over the deed (and associated mortgage, if applicable) over to the LLC, and officially, you will no longer own the house -- the name on the deed would be "Riverwed Realty, LLC" or whatever. I'm not positive, but I believe you (acting for the LLC) are expected to pay quarterly estimated taxes. You (the LLC) would file a tax return each April as well. Additionally, if ever you sell the home, the LLC would be the seller, not you. However, you would also have the option (at any time) to file with the state to dissolve the LLC if necessary, at which time everything would be signed back over into your name.

One thing to note is that you need to be very careful about your relationship with the LLC. If you "pierce the veil" (treat the house as if it's your own & not the LLC's), the LLC can be ruled by the court (in a lawsuit) as null & void, which would open you up to full liability. To be clear... You ARE allowed to draw an income from the LLC's profits. You ARE allowed to invest your money into the LLC. However, any & all money that belongs to the LLC needs to STAY with the LLC until dispersed as income or spent on the LLC's expenses. If you start paying the house's taxes, insurance, repair bills, etc. out of your personal account, you risk "piercing the veil" and losing the LLC protections. The best recommendation would be to establish a business checking & savings account for the LLC, in the LLC's name. You would use those accounts to take in all rents, pay all taxes, insurance, and other expenses, and disperse your allotted income from those accounts.

Again, talk to a lawyer if you plan to set up an LLC. It's not complicated or burdensome, you just have to understand how you will need to manage the LLC's affairs.

**skip17py** · 02-14-2014, 12:00 PM

Kork13 is correct. Essentially by commingling personal/LLC funds, wrongful conduct, or ignoring legal formalities may allow the court to pierce the corporate veil. A fancy way of saying the court will ignore the fact you had an LLC and hold you personally liable for the debts and obligations of the LLC.

**TBH** · 02-15-2014, 12:39 PM

Thanks for the thoughts, everybody. Yes, I will talk to a lawyer before I make a decision.

The reason I was hesitating is the that according to NOLO there's an annual fee of $460 times the number of owners. Because I'd be buying this property with a partner, that means we'd have an annual fee of nearly $1000 just to keep the LLC going. That's a big bite out of profits.

**TBH** · 05-04-2014, 04:37 PM

In case anyone is interested in what we decided, we did buy a rental property! We closed last month, and we are currently fixing it up with the intention of renting it June 1st.

Here are some numbers:

Sale price: around $82,000
Money needed to fix it up before renting: about $10,000
Mortgage (30 year fixed): around $540 a month, PITI
Expected rent: $1000-1100 a month

We ended up deciding to go with a single family home instead of a multi-family. We decided that partly because the initial investment would be less, and the learning curve should be gentler while we're learning how to be landlords. If we like it and everything goes well, we might consider buying a multi-family next, but I think it will be a while before we can comfortably come up with another down payment.

We also decided not to do it through an LLC this time because it's expensive to maintain an LLC in our state, and because we've got a decent amount of liability insurance already. We were also concerned that it would be hard to get a mortgage and a homeowners insurance policy if we did it in an LLC. If we buy more properties, we'll probably go that route, but for now we're pretty happy just owning the investment house directly.

Fingers crossed that our contractor gets everything done quickly and we find good tenants!

**snafu** · 05-06-2014, 02:14 PM

Congratulations on buying your 1st rental property. It's so exciting to work on a new venture.

Thinking of buying a rental property