Should I put my rental property / investment in an LLC?
Most investors with more than 1 property hold their real estate holdings in one or more LLCs. While these professionals handle their operations in this manner, it may not be the best way for you to hold this investment.
There are a number of costs and logistics to think about when setting up and running a LLC. We like to start with the WHY. If the answer is to protect personal assets from liability, we then ask how you plan to manage and operate the LLC and the property. If you are a single member LLC and manage the property yourself, there is a high likelihood that when something goes wrong you will be personally sued along with your LLC.
It's also likely that you will lose in that litigation if you failed to operate the LLC as a separate and distinct entity, failed to maintain the books and records separately, commingled personal and LLC funds, and, more importantly, used your own time and effort to make repairs and manage the property.
The purpose of owning the property in an LLC is to protect the LLC owners from personal liability. But you must think about the possible ramifications if that owner personally oversees repairs or other work on the property and later someone is hurt as a result of that work. In our litigious society, you’d expect the plaintiff’s attorney to sue the LLC, the contractor that did the work and the person who hired the contractor and oversaw the work.
In summary, we prefer small property owners buy better liability insurance, with a higher limit, to protect them (and their assets) in case of an accident at the property. Along the way, your son would save the cost of creating the LLC, the annual fee for the LLC to the state in which it is organized, and accounting fees to file the annual tax returns for the LLC.
If you decide to proceed with an LLC we highly recommend hiring a professional management company.
For more information on this issue, we recommend you talk to an attorney.