LLC Strategy for Rental Property Protection

 

LLC Strategy for Rental Property Asset ProtectionThroughout the Real Estate community, there are many different discussions on how to protect your personal assets using LLCs.  WELP!  After several months of study and many questions asked, I’ve learned how to do it where it makes sense for me.  This is a strategy that I use and does not take away from any others.

I’ve opted to create an LLC. for each one of my rental properties.  I’ve heard people say “oh… that’s a lot of paperwork” or “that doesn’t really protect your assets”.  Yeah… yeah… once I break down what I do, it makes sense.

The Start:

First, create an LLC.  Let’s call it My Holdings Co. LLC.  This particular LLC is going to be your main company.  Set it up to have the following:

  • EIN Number
  • Bank Account(s)
  • Address (Other than yours… like a UPS Mailbox Service)
  • DUNS Number
  • Credit (Home Depot Credit, Bank CC, AMEX, etc.)

This LLCs responsibility is to do nothing more than collect money, pay out money and pay all filing fees and taxes.  It should have VERY limited liability as in no one can come after (sue) this company for any legit reason.  It will effectively be a “Holdings Company”.

The Process:

You find a property to purchase, put it under contract and start to work on financing (unless it’s an all-cash purchase).  WOOHOOOO!!

Financing:

You’ll probably hear “you can’t get financing for your company because your company is too new” or “you need to be a Guarantor of the loan…”.  Your rates will be higher as you will most likely end up with a business loan.  That’s cool if you’re good with the cash flow,    but if you don’t mind taking a small risk you can still protect your assets.  You personally will be responsible for the “loan”.

SO! we’ve got our property identified and put it under contract.  Assuming (I know… I know) you have pretty good credit and want to go for a standard conventional loan.  Get with a lender that will do the following:

  • Accept your credit score, the amount requested and give you a loan
  • Allow you to “Quit Claim” or do a “Limited Warranty Deed” at closing to an LLC.

Now the 2nd bullet is the one!  I use BB&T as they were cool about it.  I’m sure there are others that will do it.

OK!  Here we go!  While you’re going through all of your contingencies, have your Holdings LLC. start an LLC to hold the property.  Let’s call it “My Rental, LLC.”.  This company will only have the following:

  • Address (use the same as the Holdings LLC to make it easier or some other address)
  • EIN Number (optional)
  • Bank Account (optional)

As you can see it doesn’t have much.  It doesn’t need all of the other stuff.  It has 1 JOB TO DO! …hold this asset.

Time to Close:

Now we are closing.  At closing, you will do a “Limited Warranty Deed” to “My Rental, LLC”.  The lawyer will first put the property in your name then file the LWD.  It will show as gifted to “My Rental, LLC.” from you officially.  SWEET!

At this point here is where you stand:

  • My Holdings Co. LLC
    • My Rental, LLC (owns the property)
  • You
    • Are responsible for the Loan (because you wanted the lesser rate) for “My Rental, LLCs” new asset (rental property)

Wait… what have I done!?!  I’m glad you asked!

The Holdings company collects ALL rents.  It pays for all property management, repairs, utilities, LLC fees, etc.  It will also be the one with all the credit being built and THE ONLY ONE filing taxes.  Since “My Rental, LLC” only has 1 JOB and nothing else, its tax liabilities will pass through to “My Holdings Co. LLC”.

Bottom Up Protection:

The rental property is officially owned by “My Rental, LLC” so if something happens and someone sues the owner of the property, they can only sue “My Rental, LLC” to collect.  They won’t be able to reach the holding company or any other companies it owns or YOU (most important).  In this scenario, you are still liable for the loan, but the Holdings company pays the loan from rents soooo… yeah nothing lost.

Future:

Let’s say you follow this method a few times.  The Holdings Company has been creating other companies to hold assets and using its funds and/or credit to fix, rehab, pay loans, etc. The company will be building credit and a ledger.  Eventually, the Holdings company will be able to stand on its own and purchase properties w/o having to use your credit or funds at all.

Conclusion:

There are many things I left out.  This is a high-level account of how this strategy works.  For me, it got me on the road to having a real business that has assets that I get to benefit from.  I file my personal taxes and the business taxes for my holdings company.  Yes, it’s more “work” but I found it to be worth it.  Example… if I ever wanted to hand over some property to a family member, I can either add them on the LLC or just sign it over to them altogether.  No need to go through all the buy/sell real estate stuff.  It’s an asset!

I hope this helps someone out there.  I’m not a lawyer or accountant.  This is just something that works for me.

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