Several clients have asked about owning investment Real Estate (usually a rental property) in a Limited Liability Company (“LLC”). Usually, the main reason for clients are interested in placing property in a LLC is to provide additional liability to the owner. To understand how this additional protection is provided, assume that you have purchased a residential property that you intend to rent out to tenants. There are always risks associated with being a landlord, one of the worst being that a tenant loses their life while living at the property. (Look at the number of children that drown in swimming pools in the Phoenix area each year, some in residential rentals.) Or what if someone breaks into the property injuring your tenants, and you are sued for failing to have provided adequate locks on the front doors or windows. If you have insurance, (usually a Landlord’s policy on the rental and your own Homeowner’s policy), your insurance should cover most of the costs associated with defending such a claim and paying any damages. However, there always is the chance that your policy may be insufficient to cover a large claim, particularly if a sympathetic jury were to award a claimant millions of dollars in damages.
If for some reason your insurance did not adequately insure you (every policy contains exceptions and exclusions of coverage) or if you had a judgment not covered by insurance (such as a contractor’s claim or an excessive Homeowner Association arrearage and fines), the amount you may owe on your “investment” may far exceed the equity you have in the property. When you consider how many properties in Arizona today, including a majority of investment properties, have no equity, you may consider abandoning or short-selling your property. Inevitably, you will want to write off your investment and have no further liability for it. However, if the property is held in your name personally, debts associated with the property are your personal responsibility. Some of our clients have abandoned their rental properties letting the bank take them back via a Trustee’s sale, but in some cases the banks drag their feet, and literally take years before taking the property back. Since the investor/property owner left the property, they have not paid HOA dues and have not maintained the property as required by the covenants of the HOA, with the result they are hit with hundreds and in some cases thousands of dollars in fines and fees. If the property were owned in a Limited Liability Company, the investor would not have personal liability for the debt and he would not have the fear that one bad investment could result in him losing all of his assets.
There are many other reasons to consider placing rental property in an LLC, especially if there are multiple owners of the property. Before you decide whether it makes sense for you to establish an LLC you should contact both an attorney and your accountant. Also, before transferring property that you have a lien against into an LLC, you may want to check with your Lender to see if they have any objections. Many Deeds of Trust and mortgages contain provisions that allow a Lender to demand payment upon the transfer of a property into an LLC.
Contact one of our attorneys today to see if it makes sense to put your property into an LLC. We can even prepare the deed for you!
