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Posted: 10 Jun 2013 05:33 AM PDT
Here's an email I recently received from a reader:
My wife and I own 2 rental properties. Both homes were our primary residences before we were married and we have mortgages on both properties. She lived in a one bedroom condo in a popular, very walkable neighborhood and when we married in 2010, she moved in to my home which is a 3BR 2BA home in a first ring suburb. We immediately rented her condo and despite being unable to cash flow the property, it has gone well and we are very likely underwater on this property so I suspect renting it out is far preferable to selling right now. This year, we moved into a new home to raise our family in an outer suburb and we've rented out the previous home. This is cash flow positive by quite a bit and we're doing very well with it so far. When I bought this home 8 years ago, it had always been my intention to rent it when I left though I didn't anticipate living there 8 years.
I viewed our relative risk on the condo as limited. There are immediate neighbors and an association and the type of tenants have been young professionals or graduate students. I view the risk on the home as much greater as my applicants tended to have poor credit and were walking a bit of a tightrope financially. In addition, this is a single family home so they have more privacy if they were into nefarious doings (We did do a relatively thorough background check to avoid such a circumstance).
In the past, I'd looked at forming an LLC to protect my personal assets in the event something went wrong in this process. At the time, we were only renting the condo and the biggest risk I really saw was our inability to cover the mortgage if we had a long vacancy. We never went down that path because the mortgage was in my wife's name and we could come up with no scenario where a bank would let us transfer the debt to an LLC because the only reason we'd want to do that would be risk of default. Furthermore, our assets were somewhat limited so we didn't take the discussion further. Since we now have a second property, greater risk IMHO, and more personal assets, I would like to reconsider this.
I've spoken to a financial advisor and he suggested creating the LLC, leasing our properties to the LLC and then creating all of the leases with our tenants through the LLC so that if we have issues with tenants or face a lawsuit, only the LLC would be at risk.
My question is this: Have any of you done this? Is this reasonable or is there a better way? Does this even alleviate my concerns from a legal standpoint (obviously I'm not avoiding the default risk, but that is far less of a concern these days than when we were first married)? Lastly, would I need to have something drawn up by a lawyer or can I find a lease between myself and the LLC for free on the web?
What's your advice for him?
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