Real Estate Law
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Thanks for your question and good evening.If you are going to do a mortgage here and then a second line of credit on the property then you need to check to see if there is a due on sale clause.A due on sale clause would prohibit you from transferring the property from your names to an LLC.A due on sale clause transfer might cause the lender to accelerate the note.If you had a situation where you owned the rental outright then it would not be an issue to transfer it to an LLC for protection of the asset.
You would also need to purchase this as a rental property mortgage to then be able to rent it.This is important because a normal residential mortgage may have additional limitations requiring you to reside there.You also need landlord policy for proper insurance coverage against damage, etc.
It will be owned outright. What protection or benefits would be provided by placing it under an LLC?
Then it would give you personal protection.They could sue the LLC but they would not be able to get at any assets then held under your personal name such as your homestead.If you combine such an LLC with proper landlord policy as well it limits any potential liability as best you can.If you were to acquire another rental property in the future you would set up another LLC for that property.Again it compartmentalizes and limits your risks.
This is certainly possible here if you have clear title you would just set up the LLC and then do a quitclaim from the both of you into the LLC.
If we had insurance on the property, what are the circumstances under which someone could come after us personally?
Here is sample form for doing so.
You may want to have lawyer set up the LLC and then prepare the Warranty Deed.
They really couldn't come after you personally because the LLC owns the property.So if someone gets hurt they have to sue the LLC.
And the landlord policy insurer has to pay claims and defend you up to the policy limits for say a personal injury to a renter or third party.
It is also common to require renters to have rental coverage as this may also provide coverage in a third party guest situation as well.
Reference to using an LLC for a rental.
Understood, but if we chose to keep the property or properties under our names jointly rather than creating an LLC, under what would be circumstances we may we be sued personally, and have liability beyond what the insurance would cover?
If say a guest here of renter or even renter is injured say slip and fall or any kind of accidental injury.Again the policy would protect you for legal fees and payment up to the policy limits.That usually covers you up to some kind of serious injury or death.It would cover say a small slip and fall.And there may be a deductible from you as well.
While these claims happen large ones are generally pretty rare.
Usually we are tlaking say aslip and fall and a broken bone or something similar.
And again the insurance would just pay the claim if there is liability and there would not be a law suit.
An LLC can offer you personal protection from liability and also your any other real estate you might own personally.
It has become pretty popular for that reason.
Thanks for letting me help you and provide you the information you asked for.Good luck with the rental.
If we own the property or properties outright than there would be no risks of defaulting on loans or reasons for a bank to pursue us financially but are there any financial or tax benefits to an LLC vs. not?
Well there are going to be some costs to operate an LLC.There are going to be some legal fees and the state gets fee for incorporaton.And usually there is going to be a corporate account, etc.You will likely need a CPA or accountant at least the first year.Usually once you have done one return you can pretty much gather your receipts, etc knowing what is needed.And of course keeping good records.But a CPA or tax preparer when you do the purchase can help you know what to save and get you organized.
You then get the advantage of protection for the LLC.If you did it as two individuals lower initial costs here but no LLC protection.
Also if you were to have a note then you would not fool with an LLC until it is paid off.
You may offset not having an LLC here with higher landlord insurance coverage.
Many folks buy one and pay it off over time and then convert to an LLC.If money is a problem you just take your chances personally with landlord coverage.
Thanks for the follow up.