At one point in time, I had a landlord who was very wealthy. Property assets in the $10m+ range and he rented us a home in his name with contact info as his home address. It always boggled my mind why he didn’t set up an LLC with a PO box. The LLC would have protected his assets and the PO box to some degree his privacy/safety.
For as wealthy as he was, he was super cheap. Always bought the lowest end appliance and half-assed repairs. My guess is he didn’t want to pay the $1k for the LLC tax and PO box.
Well, at least for myself, I am just a mom and pop owner. I managed to own a few properties here in the Bay Area through goal setting, hard work and a touch of luck. I, as the IRS guidelines like to say, am an active participant in the management of my properties. So, it is no surprise that the landlord you are referring to is “hands on.” A lot of us are. Frankly, I follow the belief that a management company will not do as good of a job as I would, so why pay them to do a half-assed job? You also have to understand that this landlord you are referring to may have gotten those properties early on and they only have now appreciated to that degree. And let’s be frank, rich people don’t get that way necessarily by spending all of their money.
I am not advising a management company. I have no problem with him doing the work on his own.
But to protect his sizable personal assets from lawsuits, he would have benefited from running his rentals as an LLC business and not under his name. This would mean that only his rental property and income would be at risk if he lost a lawsuit.
Unless your house is fully paid off, getting loans as an LLC entity can be tricky. That’d more or less limit the landlord to get commercial loans, which is more expensive than vanilla Fannie-backed mortgages.
Blackstone actually requires borrowers to form LLC’s before they will lend out money. I don’t remember what their rates are, most likely not in the 4-5% range.
If you haven’t read “The Millionaire Next Door” you might want to. It explains why frugal people end up as millionaires and why people who splurge look rich, but are often poor.
Reminds me of my mother a little bit. My parents are the kind of people that live frugally, buy used, and don’t believe that the government will be there to help you in retirement, so they saved like mad. Yet, one time my mom was visiting and offered to take us all out for dinner (burgers). She was asking the guy “How much does cheese cost?” And the guy just looked at her like she had two heads and said “We make it the way you want it lady.” She was trying to save 75 cents!
I hadn’t thought about an LLC for real estate, but I totally hear you on that. Definitely would want liability insurance. I’ve even seen landlords require it of their renters (we discussed reasons for that on the old forums).
Would forming an LLC and transferring properties into it readjust the tax basis though?
Good question. Not sure. Perhaps that is why he left it in his name. He owned the home outright so mortgage issues wouldn’t have applied.
My current landlord has an LLC but she recently bought the property w/ cash and owns number of rentals. Also, our realtor does flips and she always has them as LLCs.
Sounds like insurance w/ maybe a PO box would be the easiest way to protect assets and identity (somewhat). Though if I had sizable net worth, I’d definitely at least look into the LLC option with an accountant and attorney. Maybe if it is a single member LLC you could avoid the property tax issues some how?
LLC in California needs to pay tax based on revenue. And after the profit flows into the owner’s account she will pay the usual income tax. So having an LLC will incur additional fee. There is also more paperwork involved like keeping minutes and stuff.
California LLC does not provide a lot of shield over owner identity. You will need to incorporate in Nevada or Delaware. Then there is the question of do you have one LLC per property? Or just lump all rentals into one. Lots of hair.
I guess if you are big and have lots of properties it makes sense to go LLC route. But for most of us, especially if we still have traditional mortgages on the houses, just buying umbrella coverage makes better sense. That and do everything by the book.