Q: For what it’s worth, I think you need to revisit your advice in your recent column on LLCs and real estate investing.
I own two residential rental properties, and the first piece of advice I got years ago from our accountant and attorney was to set up a limited liability company (LLC) for each property. Their advice was excellent and applies today, as well as into the foreseeable future.
An LLC protects landlords from forfeiture of any personal wealth in the event they are sued by tenants for any situation for which the landlords may be at fault. The LLC caps the amount an owner can be held liable for the market value of the property itself and nothing beyond that. It is legal protection.
If I decide to personally rewire a building’s circuit box and not hire an electrician, and a tenant suffers injury as a result of this action, the tenant will be financially compensated through the insurance policies of the building or lawsuits against the LLC or both. But not from me, personally. Owners’ personal property and/or personal wealth is prohibited by law.
That being said, your advice exposes both the landlord and, by extension, his offspring to potential loss of personal wealth, as their personal wealth is not protected from lawsuits by tenants.
Additionally, each of my properties is held in trust for our survivors. LLCs are the official owners of the properties. The trusts guarantee the transfer of ownership of these buildings according to instructions that come into play upon our death. My son is both a Trustee (Trust Deed) and Registered Agent (LLC).
Please reconsider. The instructions given to us are sound.
A: We do not dispute that the advice given to you is sound and that most real estate investors follow the advice of your accountant and lawyer. In fact, most of Sam’s major real estate investor clients also manage their holdings this way.
However, we stand by our view that not all small real estate investors need to use an LLC to hold and own their properties, as they may not have the means to overcome some of the disadvantages of the LLC. use of an LLC, which are more easily overcome by those with larger portfolios.
As we mentioned in our previous columns, a significant disadvantage of owning properties in an LLC is that you may not find a lender willing to finance the properties while the property is in an LLC. You also may not be able to get the lowest interest rates with the lowest fees. Some of these loan programs will carry somewhat lower interest rates than those offered to real estate investors who hold properties in an LLC.
The second disadvantage is that some small real estate investors will believe that the legal protections they have under the LLC are sufficient and they may not have enough insurance coverage for different types of insurable events.
Let’s say someone is injured in an investment property and you only have $500,000 in liability coverage. If you are sued and lose, you can lose your building. Given the choice between spending money on the costs of an LLC and other annual costs of owning and accounting for an LLC, a small investor who only has one or two properties could find it cheaper or onerous to pay for increased insurance coverages, which to them might be worth more than the protection offered by the LLC.
We don’t dispute that the gold standard of real estate investing may include good insurance coverages and ownership of the property in the LLC, but everything costs money and sometimes people make different choices. .
Finally, we think you are wrong in your assumption that you can make this electrical improvement to the property and not end up being sued. When you hire an electrician to do the job, and they do it wrong and someone gets hurt, both the electrician and the building owner will be sued. We suspect the same will happen when you do electrical work. The injured person will sue you as the person who did the work and also sue the LLC. Once the dust settles, you may find that you and the LLC lose, and you may have to pay.
When small real estate investors are closely involved in the day-to-day operations, repairs, maintenance and management of a rental property, they expose themselves to personal liability for the actions they take in the activities they engage in. in the property. We doubt that investors will be able to protect themselves from liability due to poor execution, poorly cleared sidewalks and driveways, or other decisions where the investor might increase their personal liability for their actions.
Don’t get me wrong, LLCs are great. Many real estate investors use LLCs, but they also use management companies and third parties to do things for them. The LLC should protect its owner from personal liability for ownership activities related to the LLC’s functions of owning real estate from a passive perspective.
We always encourage real estate investors to consider using an LLC. But that advice goes hand in hand with a much longer conversation about the costs of owning and insuring real estate in an LLC, what to do with estate planning, and a discussion of the things an investor can do with a property that may result in personal liability. .
Thank you for your letter.
Contact Ilyce Glink and Samuel J. Tamkin through their website, BestMoneyMoves.com.