Why Even Small Investors Might Still Want to Consider an LLC
Summary
This article strongly recommends that short-term rental hosts, even those with a single property, form an LLC to protect their personal assets from potential lawsuits. It explains the risks of not having an LLC and offers guidance on setting one up, including potential pitfalls like triggering the "Due on Sale" clause if you already have a mortgage.
Key Insights
- •If you go through a divorce, if your real estate property is in your own personal name, it’s considered your personal property and can become part of the divorce settlement.
- •Buying rental property in your personal name exposes you to lawsuits, tenant claims, and debt collection.
Action Items
- ✓Form an LLC before closing and signing the deeds on the rental property.Effort: mediumImpact: high
Tools & Resources
- →LegalZoom: Get in touch with us at LegalZoom . We can help with everything from timing the formation of your LLC to paperwork and any individual complexities of your real estate business.
Common Mistakes
- ⚠Incorporating multiple properties into one LLC is a mistake from a legal standpoint, as all properties are on the line if a lawsuit happens.
- ⚠Forming an LLC after closing on a property technically triggers what’s called the “Due on Sale” clause, where the mortgage lender can demand full loan repayment due on the transfer of ownership.
- ⚠Not keeping personal and business finances separate (piercing the corporate veil) negates any protection offered by the LLC.
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