Own Rental Real Estate? You Need an LLC to Protect Yourself
Anyone who owns rental real estate in his or her individual name is taking a tremendous risk. Suppose your tenant, or one of the tenant's guests, gets hurt on your property and sues the owner of the property. That's you! And any judgment against you can be satisfied from other property you own, such as bank accounts, investments, and other real estate, even your home. While liability insurance is a good idea, it alone should not be relied upon for protection.
That's why I advise all of my clients who own rental real estate to form an Limited Liability Company (LLC) and transfer ownership of the property to the LLC. Assuming the LLC is managed properly, this technique will shelter all of your other assets in the event of lawsuit involving the property.
For maximum protection, each rental property should be owned by a separate LLC. For persons with more than 3 or 4 properties, it often makes sense to consider a Series LLC. A Series LLC is basically one LLC with several sub LLCs, which can reduce filing fees and administrative costs.
At present, Series LLCs cannot be formed under North Carolina law, but it is possible to have an LLC established in another state own property in North Carolina.
It is possible to establish an LLC without the benefit of legal counsel, but I strongly advise against it. All of the proper formalities must be followed in order for an LLC to function properly and provide the full protection available by law.
Hello,
Can the property be owned by one LLC, one property per LLC, but the lease agreement on each of those properties be with another LLC which will reduce the number of bank accounts required. Will this scenario remove any of the liability benefits of the property owning LLCs?
RESPONSE: I would not recommend this, as not respecting each of the formalities involved with the operation of an LLC could weaken the asset protection that the LLCs provide.
I am purchasing a rental home in NC and live in VA. I would like to form an LLC as you recommended but have a few questions. Do I mererly perform a quitclaim deed ? Do I need to change the homeowners insurance to be owned by the LLC ? Will the mortgage company allow me to change the name on the mortgage or do I not need to worry about this ?
RESPONSE: It is important that the LLC be properly established and funded. I recommend that you hire a North Carolina lawyer to assist you.
What about foreigners investing in US Real Estate?
What taxes will they have to pay on their profits and where?
Is it better to have a business account for the LLC or can the rents be wired straight to their personal account?
RESPONSE: Income taxes must be paid on a federal level and in the state in which the property is located. I always recommend a separate account for an LLC.