Question for those with rental property

I know we have landlords out there. What do you do with your rental property? Do you keep it(them) in your name, put them in an LLC or put them in a trust? What’s the risk/benefit of each choice?

TIA

I don't have a rental property, but I can't imagine you wouldn't want it held by at least an LLC. I do know that my bosses own the building we work in. They have 2 corporations - Company A is the actual business and Company B owns the building. Company A pays rent to Company B.

In reply to Duke:

This is residential not commercial. Does that make a difference?

I sold mine, but it was in my name. You need to talk to a lawyer. There are advantages and disadvantages for both. They are taxed like a business, but I never found any compelling reason to do a LLC. You do run a personal risk should something happen, but that's why you load up on insurance.

Personally, I found being a landlord to suck. The economy wasn't pulling up prices, and what you made in rent wouldn't cover the mortgage, plus all the crap that failed and/or what people tore up. When my last tenant did $10k in damages with no real way to collect, that was enough.

And no, you cannot always collect it as most of the renters couldn't afford it to begin with. To me, the only real benefit was that the property you were renting was going up in value, but that's been a long time ago that that was true. Unless its one you've picked up cheap, or one you can't sell, I don't see an upside.

I own a house that I've been renting for about 3 years. It's in our own name, no LLC's or trusts. It's simpler for just 1 property, but if I was doing it with multiples, I'd open up an LLC to track expenses and run it as an actual business.

But for just one place, I think it's just a waste. It's easy enough to keep tax/documentation info on, we have full umbrella insurance policies on the place in addition to fire/dwelling as mandated by law, and we don't have to pay the business expenses associated with it.

This is just one house to start with. Looks like just keep it in our name for now.

thx

My mom used to do property management and I've never heard of people setting up LLCs or anything just for renting a house, not even the batE36 M3-crazy expensive ones.

I am not a lawyer or a landlord, but I would think that even 1 rental property in your own name would open you to liability. Suppose a tenant falls and get hurt? If the rental is owned by an LLC, then they can recover exactly the asset value of the LLC itself. But if you own it, they can come after your personal assets as well.

It only costs a couple hundred bucks to create an LLC as far as I know. That sounds like cheap insurance to keep your personal assets out of play.

I can't emphasize enough, I'm neither a lawyer nor a landlord.

Duke wrote: I am not a lawyer or a landlord, but I would think that even 1 rental property in your own name would open you to liability. Suppose a tenant falls and get hurt? If the rental is owned by an LLC, then they can recover exactly the asset value of the LLC itself. But if you own it, they can come after your personal assets as well. It only costs a couple hundred bucks to create an LLC as far as I know. That sounds like cheap insurance to keep your personal assets out of play. I can't emphasize enough, I'm neither a lawyer nor a landlord.

agree with duke. Easier to bankrupt an LLC before yourself.

99.99% of the properties we do assessments on are acquired as an LLC. Also none of these are residences to be used as residences though.

Edited for a speller

I have one house. It's not under a LLC at present. The property currently has a mortgage in my name and transferring ownership to a LLC would cause problems with that. Also, having the property owned by a LLC would require having a business license and require you to pay FICA taxes on any money distributions to the members of the LLC. I would say that having a LLC will depend on your willingness to assume risk and how many assets you have that could be at risk in a lawsuit. Your assets will only come into play if the suit exceeds your liability insurance. I carry a fairly large general liability policy. Hopefully it doesn't get exceeded.

Adrian, Toyman gave a good summary above. An LLC has its own drawbacks from a license and tax perspective. For a single rental house, the droid you're looking for is "umbrella insurance", basically a liability policy that covers you against any type of liability or lawsuit up to a certain amount. This also has the advantage of putting a team of lawyers on your side if you were to get sued, rather than having to hustle and make those contacts after an incident has happened and you may be working against a legal deadline.

When I called for quotes, I found $1-2 million in liability coverage was under $500/year.

spitfirebill wrote: 99.99% of the properties we do assessments on are acquired as an LLC. Also none of these are residences to be sued as residences though.

Its LLC or BIG Umbrella. For me the tax benefits of holding them myself and the disbursements of profits made it a easy choice to go personal hold with the Umbrella. I think ours is 2.5 million for something silly like 600 a year.

The house is in our name - although it was our previous residence, the attorney said not to worry about changing ownership when we refinanced - but we do run all the financials through our small business(tax write-off).

An LLC is not a guarantee to protect you from liability. It can also pose a problem for your lenders as they aren't interested in foreclosing against a corporate owned property with no one on the hook for the deficiency. I suppose you could guaranty the loans personally to smooth that over. Its the same game either way though, presuming you are well insured. The best assurance is simply good insurance, and you aren't liable for every slip and fall on the premises resulting in a break or a sprain either, but you should consult an attorney who really knows the law in your state. I'm a landlord, started 11 years ago in a different economical world. Makes more sense to keep renting now than to sell. That may or may not change, but as the years go by the debt against the property shrinks. I've never had a serious problem tenant until, coincidentally, right now, but that should be solved before the holidays. There is huge demand in my area for exactly what I am renting, single family homes with garages and fences in a decent enough neighborhood near amenities and with at least a slight veneer of "hip" or "cool" to the area.

Another thing you need to look into are the tax consequences of selling it. If you haven't lived in the house for 3 years, I'm pretty sure you have to pay capitol gains on any profit realized from the sale. That can include transferring ownership to a LLC that you own.

Thanks guys, looks like lots of pros and cons for LLC or keeping it in our name. There is no mortgage to worry about and this has never been, nor ever foreseeable will be our residence. We bought it as a rental, first renter is our daughter who is pregnant and needs to get out of a dodgy area of Detroit (I am not anti-Detroit and there are some great areas in the city, but they are full and expensive, she was not in a good area). But in 2-5 years I expect her to move on to other things and we want this as a long term investment.

I think the general sentiment is the same. Sure, an LLC limits liability to a certain extent, but it's not anything that a large liability umbrella policy cannot overcome. Like WearyMicrobe said, we carry a $4M liability umbrella policy that covers not only the rental property, but our own personal properties and other liability guarantees, and it costs us <$60/month. For an LLC, you need to still carry insurance, pay for your company's registration expenses, and the insurance policy only covers the rental property.

Again, for multiple properties it's definitely worth it. For a single house though, it's simply not.

I've been a landlord for one property for ten years. I use schedule E for taxes. I use https://www.smart-landlord.net/ to screen my potential tenants. I charge tenants for the service. I have an older house that we keep it very good condition and charge a rent that is at the low end of the market. This means tenants get a deal and are more apt to care for the property. Have not had any issues.