You may want to use an LLC to buy rental properties, it may be more cost effective to own in your own name with good insurance in your name.
Q: I recently purchased a rental property in Illinois. The title is held jointly by my wife and me. We got an investment mortgage for 80 percent of the value of the property. I have set up an LLC and would now like to transfer title to the property into the LLC. My research suggests that the easiest way to do this is via a quit claim deed however I also see that I could avoid losing my current title insurance by using a warranty deed.
Can you let me know what you would recommend?
A: The purpose of a limited liability company (LLC) is to protect the assets of the owners of the real estate from potential liabilities arising from that property. That is the main benefit of an LLC. An LLC also allows you to hold yourself out to the world as an owner of a property that is held by a company. For some owners of investment properties, it makes them feel better to say that they are the manager of an LLC or the owner of an LLC when dealing with their tenants.
However, for many owners of real estate, an LLC may not serve the purpose that they want. And, there is a lot of paperwork that comes along with having an LLC, including filing the tax returns for the LLC, filing the annual forms with the state in which the LLC is organized, paying the annual fee to the state, keeping a separate bank account and keeping all arrangements separate. For some, this is a lot of extra work that may be more of a burden than a benefit.
In case of an accident, a good litigator will take the time to see if the owner of the LLC handled its affairs properly. If the owner didn’t handle the LLC properly, the attorney can work to pierce the company veil and attempt to go after the assets of the individual.
Also, when it comes to owning residential property in an LLC, you will frequently find that residential lenders will not lend to the LLC but will require the property to be in the individual owner’s name. In some states, transferring title to and from one party to another can be quite expensive and time consuming.
In your case, you should determine what your objectives are in transferring the property to the LLC. Figure out what benefits you will get from owning the property in the LLC and then determine what your costs will be to have the property in the LLC. If your only issue is your personal liability due to an accident that could occur at the property, you might just want to get yourself a more comprehensive insurance policy that covers not only the property but also has an umbrella coverage that will cover that property and other properties you own. You might also consider increasing the limits of your coverage on your insurance policies.
When you review all of the benefits and costs, you can then make a better decision as to whether you can or want to transfer title from your name into the LLC.
Finally, in some states when you purchase a property you obtain a title insurance policy that covers you for any loss or damage you may sustain in case the property turns out to not be yours but claimed by someone else. Among other title issues, the title insurance policy will give you some assurance that you own the property free and clear of other people’s claims and rights. When you sell the property, that title insurance does not transfer to your buyer. Given your scenario, your transfer from your name to an LLC may be considered a sale and the LLC would not be protected under your title insurance policy.
If you as a seller transfer title in some states using a quit claim deed, the buyer gets title to the property but does not get any rights to sue the seller in case there are any title defects. However, if you transfer title using a warranty deed, the buyer has the right to sue you for title defects. And once you are sued, you can tender that defense to the title insurance company that insured you when you owned the property. It’s a small distinction but it gets around the issue of having to obtain a new title insurance policy when you transfer title from your name to the LLC.
Under newer title insurance policies, certain transfers will continue to be covered under the original title insurance policy. One of those transfers would be a transfer to a living trust or from one family member to another. But generally when you transfer the property to an LLC, the original title insurance policy may not cover the LLC unless you have the title insurance company issue an endorsement to the original policy or issue a new policy.
As far as recommending what you should do, you’ll need to decide that for yourself once you have gathered all the information to make an informed decision. For some, the choice is easy and they go the route of creating an LLC because they plan to invest in many properties and will create a little real estate empire. For others that will only own one or two properties, they decide to hold title in their names and make sure they have great insurance.
For more information talk to an attorney that handles issues in real estate law.