There’s a surprising amount of discussion around the question – should I set up an LLC to own my rental properties in?
The short answer is… yes.
But why? And how?
The main reason you may have heard is “asset protection”. I too heard that a lot, but never knew exactly what exactly that meant. How can an LLC protect its assets better?
Here’s the deal – it really doesn’t.
What? So what’s the point?
The goal is to protect your personal assets. Keeping business separate protects your assets.
What you’re trying to do is prevent a whole bunch of loss if someone sues you. If all your rentals are in your personal name, then all of that is fair game come a sueing.
You know how much I love examples, so here’s an example.
If someone gets hurt a rental property that’s in your name, they may try to sue you for damages. They could blame it on not having the right safety features, cracks in the driveway that you didn’t fix, uneven tile in the kitchen, a hot water heater not set right, whatever it may be. In today’s society, it’s easy to sue, and unfortunately damages are frequenly awarded. If you’re penniless, it won’t do them much good to sue you as you don’t have much to take. But if you’re in the real estate business, chances are you have some money. And when a judgement comes against you, they can take it all. And if that rental property is in your name, they can come against you and everything you have – business and personal.
Enter the LLC.
The LLC limits (key word there!) your liability in the ordeal. If an LLC that you own gets sued, they can only sue for whatever’s in the LLC. They are limited to only what’s in the LLC. They can’t come after all your personal assets. That’s the important part. When your properties are in an LLC, they can only sue the LLC – not you, not your other companies, not your wife – just the LLC.
In most states, the cost is pretty reasonable to have an LLC. Unless you ive in California. Then you should really move.
If you own your rentals in an LLC, then it keeps them separate from your personal assets and other businesses.
If you own multiple rentals, then it might be a good idea to even limit the number of rentals you have in an LLC and start looking at multiple LLCs. I’ve heard 4-5 rentals is usually a good number per LLC, or up to $250k, but it all depends on your risk tolerance.
So in order to protect your personal life from your businesses and rentals, get an LLC. Just get one.
This is actually the easy part.
Hire a professional.
No, seriously, this is one worth doing right. An LLC won’t do you much good if it’s not set up right, so find someone who knows what they’re doing and ask for help. It it will cost a little bit, but the peace of mind is worth it.
Who should you hire?
The best place is to find a trustworthy Title company (no, not a title pawn, but a title company like where you’ll be closing) and usually they’re full of good lawyers who can set it up for you. Ask your banker or realtor for a good recommendation of who to close with (the title company) and shoot them an email asking them if they can help you set up an LLC for owning rental properties. If they can’t, they’ll almost always have a good recommendation.
Next week, we’ll get into the actual steps of setting up your real estate business. So no Action Steps today, but get ready for next week! There’s nothing terribly complicated, but there’s a few steps to do.
As a sneak peek, one of those steps is coming up with your business name! So start thinking of what you want to name your new real estate business!