This article is in response to a comment on my last blog article.
I don‘t have my properties in an Limited Liability Company (LLC).
The issue is that unless you own your rental properties outright (that is, you still have a mortgage on it), you must get the consent of your lender to transfer the title from your name into an LLC without triggering the "due on sale" clause in your mortgage. A “due on sale” clause in a mortgage states that upon the sale or transfer of interest in the real estate the lender has the option of calling the loan due. If they called the loan, you would have to pay back the loan in full.
So, in general, LLCs are not an option for people like me who have mortgages on their rental properties.
For rental properties, I recommend a three track approach to protect yourself from lawsuits.
1.) The first layer of protection should be an insurance policy that protects your assets if someone sues you. If someone trips on a rug in one of your rental properties, and decides to try and hold you liable, your insurance company should defend you in court. If they don’t, you sue the insurance company. I have the standard $300,000 protection on each of my rental houses. Some people keep a $1 million umbrella policy. You will have to decide how much protection you need.
2. Second, provide a safe living environment for my tenants. I make sure everything works properly (toilets, ovens, coolers, etc.) and I remove hazards as quickly as I can (low hanging branches, electrical short circuits, etc.). If I get a call from a tenant for a legitimate repair I try to respond as quickly as possible. Usually that means sending my handyman over to make the repair.
3. Third, keep a low profile and take precautions when doing business with the public. You should have tenants mail monthly rental checks to a post office box instead of to your home residence. Have your phone number unlisted and use a pay-as-you-go cell phone. Because you own real estate, some people may view you as wealthy target, so look for ways to lower profile your profile.
I take the advice of J.J. Luna in his book How to Be Invisible when he says, “do not, as long as you live, ever again allow your real name to be coupled with your home address.”
Get Your Windshield Wipers Fixed Before it Rains
As a landlord, there are times when you have to make difficult decisions. Once I had to call the cops to remove a former tenant from one of my rental houses. (Don’t ask, it‘s a long story.)
Had my personal information been commonly knowledge, the tenant could have tried to track me down to even the score. I didn’t have to worry about it since he never had that info, and it would take a lot of digging to find it. They may look for me, buy I’m not going to make it easy for them to find me.
Of course, that example is the exception. Most tenants are reasonable people. But, for the infrequent bad apple, we should have our defensive obstacles already in position before we need them.
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4 comments:
In our state we need to disclose our address. Both for property managers and owners. So hiding out isn't as easy.
Good point. It's a good idea to check to see the requirements for each individual state.
I have some of my properties in an LLC, and I have one 4-plex in my name. It was easier to find financing (or refinancing) for the one in my name, but all the properties in the LLC have mortgages as well.
Each member of the LLC did had to sign a personal guarantee at the bank for each of the mortgages in the LLC, but we haven't had any real issues other than that.
I can see where the bank may have a problem with transferring title to an LLC after the property was already in an individuals name.
Jared,
Thanks for that comment. It sounds like the best way to hold a property as an LLC is at the point of purchase.
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