It’s time for another real estate edition of Ask Paula!
Our first question comes from Heather:
Heather is ready to buy her first rental property. She wants to acquire about one house per year, following a buy-and-hold strategy.
What’s the best way to structure this? Should she put her properties into an LLC? Hold them in her own name? Something else?
Caren asks:
I’ve come across several real estate investing clubs, or memberships, in which the organization pulls together a list of various contractors and property managers. Is this a great resource, or something to be wary of?
Salome from Cincinnati asks:
My husband and I are renting out an unused room in our house on Airbnb. We’re interested in venturing into buying rental properties later. Do you recommend that we set up an LLC?
That’s all for this episode. Enjoy!
P.S. – Have a question you want answered? Leave it here!
P.P.S. Need software to manage your rental properties? Collect applications, screen tenants, and collect rent online with Cozy.co/Paula.
Resources Mentioned:
Super Frugal Duo
Hi Paula,
Just to give you some feedback – Yes! You do make sense, and we are following along 🙂
We actually just bought our first rental property, and finished converting our former primary residence into our second rental property. We decided it was a good time to meet with a lawyer, and we posed to him the same question as Heather.
Just to add, you’re absolutely right that it’s all about mitigating risk, but I thought the way our lawyer framed the LLC option was interesting. An LLC can protect you from “outside in” risk – for example, if you are personally sued, and held liable for damages for something unrelated to your property, the LLC protects your property – and it can protect you from “inside out” risk, like a tenant falling down some stairs, injuring themselves, and suing for damages out of your personal savings. I loved how you pointed out other risk management strategies, but each one seemed to only address either “outside in” or “inside out” risk, whereas the LLC can cover both, or add that extra layer of protection on top of the other excellent recommendations.
To add another layer to the decision – our lawyer recommended thinking about how to separate different risks into LLC “silos”. For example, if you own some older, pre-1978 houses, as well as some newer homes, you might consider putting the older homes in one LLC, to protect from possible damages due to lead paint, and put the remaining houses into a separate LLC. It’s more paperwork and fees, but then the houses that don’t have lead paint can’t be part of damages arising from the houses that do.
One last thought – the financing and due-on-sale clause. You’re right that it’s rarely invoked, but we’re now officially in a rising rate environment (however slowly that may be), and it’s entirely possible that banks, looking for some way to earn more money, might look at the mortgages sitting on their balance with 3-4% interest rates, when the prevailing rate might be 5%+, and they might start invoking the “due on sale” clause, to force landlords to essentially refinance at a higher rate. It’s not happening yet that I know of, but it’s the sort of thing that might tilt the decision of whether or not to form an LLC one way or the other.
Thanks for your insights!