LLs, do you use a lawyer for your lease?

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Submitted by Jack on May 11, 2012 - 3:55pm

For you LLs out there, do you use a lawyer to compose your rental leases, or at least the initial lease--anyone you would recommend? Or do you use NOLO or other similar low-cost alternative?

Also, do you own your property in an LLC or under your own name? I've read about the benefits of owning under a LLC, just curious how many LLs actually do.

Thanks for the feedback.

Submitted by HLS on May 11, 2012 - 4:04pm.

Standard leases were written by lawyers to protect the landlord. State/local laws can control what is legal/allowed for a tenant, regardless of what the lease says. Most tenants dont know their rights.

LLC's are in many cases a waste of money, but a personal choice.
There is something called 'piercing the corporate veil' which will not give you the protection that you seek or think that you have.

1. Get legal advice about an LLC
2. Use a good industry standard preprinted lease or pay a lawyer to make it even more complicated.

Submitted by SD Realtor on May 11, 2012 - 4:36pm.

The benefits of owning a property in an LLC are two-fold. The first and primary reason is liability protection. The second is for financial reasons. As an individual you are subject to limitations on rental losses. However if you start a business and then form an LLC you will have tax advantages. However this is much more work and will cost alot more money as well.

Also as you acquire properties you have the age old question of an LLC per property which is much better liability wise, and of course much more money out of pocket. Having several rentals but packing them all into a single LLC whittles away the liability protection.

Another alternative is to pump up the insurance coverage as much as possible.

The state you own the property in will dictate what sort of information should be in the lease. In California I use the lease produced by CAR. I don't use an attorney to draw up my leases.

Submitted by EconProf on May 13, 2012 - 7:00am.

Isn't there an annual cost to have an LLC in CA? And what is the initial set-up cost?

Submitted by flu on May 13, 2012 - 8:20am.

EconProf wrote:
Isn't there an annual cost to have an LLC in CA? And what is the initial set-up cost?

I think it's like $800 or so. But there are other fees

Submitted by EconProf on May 13, 2012 - 8:42am.

$800 is what I thought too.
I just set one up in AZ for an AZ property--was well under $200, but can't remember specifically.

Submitted by SD Realtor on May 13, 2012 - 9:36am.

The annual cost for an S Corp is 800. It may be 800 for an LLC but I do not know since I have never had an LLC.

Submitted by earlyretirement on May 13, 2012 - 5:10pm.

Yes, I set up an LLC when buying my primary residence. There are other reasons besides liability protection. Other reasons can be tax reasons as well if you have citizenship or residency in other countries. Some countries tax you on your worldwide assets in your name. So setting up an LLC is a good idea in this situation so you're not subject to personal asset taxes in other countries.

Also, a more basic and simple good old fashioned reason to buy under an LLC is good old fashioned privacy reasons. Buying under a Delaware LLC, there isn't really any way anyone can figure out who owns the property doing public checks. Delaware doesn't release this information like other states.

I hired a lawyer to set up a Delaware LLC. After a lot of research, Delaware seemed to be the best choice as it offered the best privacy and lowest annual fees.

After you set up the LLC, you have annual fees to Delaware of only $250 a year. You also have to have a registered agent to receive correspondence. I set up with a lawyer in Delaware to be mine for another $100 a year. So I pay $350 a year in fees to maintain the Delaware LLC.

You do have to be careful not to pierce the corporate veil for liability reasons but if you're careful you won't have problems. You have to make sure you are paying yourself and transferring into your personal account to the bank account you established for the LLC for rent each month.

The negative thing is banks don't want to seem to touch dealing with financing a property under the name of an LLC.

If I start buying rental properties in San Diego, I'd definitely set up a separate LLC for each property.

They might be a "waste of money" if you aren't using the LLC effectively however, it's a valuable tool and essential if you structure it properly and maintain it properly. You will find much of the wealthy and affluent utilizing Delaware LLC's for not only real estate but Yachts, airplanes, etc.

Just doing a public search of some of my neighbors and 2 others also set up LLCs to purchase their primary residence. (They aren't renting them out..they live in them for their primary residence).

Yes, the others are correct. The annual fee to California if you set up a California LLC is $800 a year to the Franchise Tax office. I have a separate California LLC set up and I pay $800 per year.

Also, something worth mentioning is that there was a LOT of misinformation from insurance companies when I went to insure it. Some companies were just out and out thieves about the fees. Some greatly differed insuring it. Some told me it wasn't possible or their company didn't insure an LLC. Other times I called two different agents with the same insurance company located a few miles apart and got quotes that were hundreds and hundreds of dollars different for the same exact policy.

The way to go about it is getting insurance under the name of the LLC. And then getting a separate policy with the same insurance company for all the contents and insurance, etc. Basically a renters policy. Not many companies had experience setting it up for the SAME cost as getting an individual policy in your name. But I did find one that was great. It just took some due diligence.

SD Realtor made an excellent point about pumping up the coverage amount. In addition to what I posted above I also always recommend if you have significant assets to get an Umbrella insurance policy as well. Most people don't realize how beneficial Umbrella policies are. Umbrella policies paid for O.J. Simpson's defense as well as Bill Clinton's legal defense during the Monica Lewinsky scandal. My point being Umbrella policies can cover you for quite a bit of situations. Well worth it and they are very affordable.

Submitted by flu on May 13, 2012 - 9:57am.

EconProf wrote:
$800 is what I thought too.
I just set one up in AZ for an AZ property--was well under $200, but can't remember specifically.

Yes, but you see if you plan on doing business in CA (IE renting out to tenants), it doesn't matter....You'll end up needing to pay to do business in CA anyway...

But I guess if it's for your primary residence, that's a different story...Not sure what that means from getting a mortgage. But then if you buy out your primary outright, then that's not an issue...

Submitted by earlyretirement on May 13, 2012 - 10:05am.

flu wrote:
EconProf wrote:
$800 is what I thought too.
I just set one up in AZ for an AZ property--was well under $200, but can't remember specifically.

Yes, but you see if you plan on doing business in CA (IE renting out to tenants), it doesn't matter....You'll end up needing to pay to do business in CA anyway...

But I guess if it's for your primary residence, that's a different story...Not sure what that means from getting a mortgage. But then if you buy out your primary outright, then that's not an issue...

Flu,

That's exactly correct. If you set up the LLC with the intent and purpose to rent it out to others and not use it as a primary residence then you also have to register the out of State LLC in California and pay the $800 a year to California.

But when I called them to ask about this fee if the sole purpose was to set up a Delaware LLC to live in it they asked me to send the Articles of Incorporation and they said no I didn't have to pay the $800 annual fee to California if I was living in the house and not renting it out.

Although they were quick to point out if at ANY point for any reason if I rent out the house or derive any income from it I'd have to pay the $800 annual fee to California.

I still do end up transferring from myself to myself (LLC bank account) the rent each month but I guess that's not considering "doing business" to California. The Articles of Incorporation were very clear that no business was being done and I was using it as my sole primary residence.

Submitted by flu on May 13, 2012 - 10:51am.

earlyretirement wrote:
flu wrote:
EconProf wrote:
$800 is what I thought too.
I just set one up in AZ for an AZ property--was well under $200, but can't remember specifically.

Yes, but you see if you plan on doing business in CA (IE renting out to tenants), it doesn't matter....You'll end up needing to pay to do business in CA anyway...

But I guess if it's for your primary residence, that's a different story...Not sure what that means from getting a mortgage. But then if you buy out your primary outright, then that's not an issue...

Flu,

That's exactly correct. If you set up the LLC with the intent and purpose to rent it out to others and not use it as a primary residence then you also have to register the out of State LLC in California and pay the $800 a year to California.

But when I called them to ask about this fee if the sole purpose was to set up a Delaware LLC to live in it they asked me to send the Articles of Incorporation and they said no I didn't have to pay the $800 annual fee to California if I was living in the house and not renting it out.

Although they were quick to point out if at ANY point for any reason if I rent out the house or derive any income from it I'd have to pay the $800 annual fee to California.

I still do end up transferring from myself to myself (LLC bank account) the rent each month but I guess that's not considering "doing business" to California. The Articles of Incorporation were very clear that no business was being done and I was using it as my sole primary residence.

Just curious... Do you have a mortgage on your primary? If so, how did you get it?

Submitted by earlyretirement on May 13, 2012 - 5:04pm.

flu wrote:

Just curious... Do you have a mortgage on your primary? If so, how did you get it?

No, that's what I meant above about the banks. It was just about impossible to get financing or a mortgage on the house buying directly with an LLC. There might be a way to do it but I couldn't figure out an easy way to do it.

My FICO score is 817 and I have no debt at all and still couldn't seem to find a bank to write a mortgage buying with an out of state Delaware LLC for a property located in San Diego.

No, I didn't end up with a mortgage on the property. I paid cash for the house. Even if there was an easy way to do it, I would have still gone the cash route. I ended up negotiating a great deal on the house that we wanted because I went in with an all cash offer and let them know I could close quickly. This was on a non-distressed/traditional sale. I totally don't regret that decision.

It's also important to add that since I was going in with a cash offer and could close quickly, I also negotiated with my realtor to kick back 1% of the buyer side realtor's commission she got. So the escrow company withheld that and the day after closing I got a $10,000 refund wire back into my bank account further reducing the price of the property.

I doubt all of these things would have happened if I didn't go in with the all cash offer.

Submitted by flu on May 14, 2012 - 11:08am.

earlyretirement wrote:
flu wrote:

Just curious... Do you have a mortgage on your primary? If so, how did you get it?

No, that's what I meant above about the banks. It was just about impossible to get financing or a mortgage on the house buying directly with an LLC. There might be a way to do it but I couldn't figure out an easy way to do it.

My FICO score is 817 and I have no debt at all and still couldn't seem to find a bank to write a mortgage buying with an out of state Delaware LLC for a property located in San Diego.

No, I didn't end up with a mortgage on the property. I paid cash for the house. Even if there was an easy way to do it, I would have still gone the cash route. I ended up negotiating a great deal on the house that we wanted because I went in with an all cash offer and let them know I could close quickly. This was on a non-distressed/traditional sale. I totally don't regret that decision.

It's also important to add that since I was going in with a cash offer and could close quickly, I also negotiated with my realtor to kick back 1% of the buyer side realtor's commission she got. So the escrow company withheld that and the day after closing I got a $10,000 refund wire back into my bank account further reducing the price of the property.

I doubt all of these things would have happened if I didn't go in with the all cash offer.

Ok good to know. I didn't think it would be possible for a primary to be in an LLC if there was a mortgage.

Submitted by NotCranky on May 14, 2012 - 12:19pm.

SD Realtor wrote:

The state you own the property in will dictate what sort of information should be in the lease. In California I use the lease produced by CAR. I don't use an attorney to draw up my leases.

Last I checked anyone can buy these at the SDAR office. They are nice duplicate forms. Maybe your real estate agent would comp some to you? This is what I use. There is plenty of legal expertise behind them.

The "Rights and Responsibilities" book from Nolo is worth getting. It comes with a CD containing lots of good forms for other aspects of the property management.

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