Best Option for Holding Mutli-Family Property That I Will Occupy

**bdlproperties** · 05-12-2012, 05:00 AM

My question involves real estate located in the State of: IL

I am planning to purchase a small multi-family (2-4 units) property and need advice on how to title/hold the property.

My situation:
Planned purchase would be out of state but in a location (IL) that I visit often.
Could pay cash for property but would not if there was a reason not to. Price range 250K-300K.
Intention is to live in one unit while visiting, renting out the other unit(s).
In a few years will probably live in unit fully time while looking for single family home in area. Would then move out and rent all units.
Have formed an LLC with intention of having LLC own all or part of the property to avoid personal liability/protect personal assets.
Have not taken an action yet. Trying to understand options and consequence before moving ahead.

Questions:
What would be the best way to title/hold the property? My thoughts on my options would be a.) LLC own entire property and I would be a tenant. Believe LLC would have to charge me going rental rate. This is doable but not preferred. If that was the case I would probably not pay cash but would take out a mortgage. Could LLC charge me below market rate of say $50 a month? or b.) have LLC own (I buy and sell to LLC) portion to be rented. Not sure how to divide property..50/50?, rentable square footage plus half of common areas? Is there another better option? I do want to require security deposits, etc that I understand I would not be required to do under owner-occupied laws.

Thank you in advance for your thoughtful input

**SChinFChin** · 05-12-2012, 05:55 AM

I owned a number of 2-4's, and I've been landlording for 30 years, and owned rental condos out of state, and I've owned them personally, after looking into using LLC's. Here's why:

- I managed them personally, even though I pay tenants to take out garbage, and clean the sidewalks. People coming after me would sue both the LLC, and me personally, so the LLC is not going to shield me. I bought a business from a couple, they had the business in an S Corp., and both the S Corp, and they were sued peronally, for gross negligience, when something went wrong.

- Instead of an LLC, I carry more than adequate insurance instead, and make sure I have the right ones. For a mere thousand to two thousand a year, for less than six properties, I get $3MM coverage. I can skip commercial GL liability umbrella that would run me over $5,000/year in premiums for less coverage, I carry several million dollars of coverage for myself personally, covering the rentals, and autos.

- This is not to say I have problems doing extra tax returns as I owned a business organized in an LLC, then an S Corp. for my consultant business, and a C Corp property managment company to manage my rentals, and flow tax benefits through them. I did not use the C Corp to hold my properties, or shield me from liability.

- If I organize another LLC to hold properties, or several of them to hold each property, in NY State, I would pay LLC fees of over $500 annually for each, and because I owned the place with my wife, she is on the LLC, I wind up doing a 1065 partnership return with K1's for my 1040. I use a CPA to do most of my business and personal taxes, and a 1065 return runs me another $500 at least on top of my LLC fees. As I said earlier, a mere $2,000 would buy me a few million in GL insurance coverage, so why throw it all away in state LLC fees, and CPA fees. Yes, I have used Turbo tax to do my taxes, but in my case, if I owned a few small business, and rentals, I would need a CPA anyway, if only to confirm my finances if I ever need to obtain bank loans. Banks like to see proof of income, assets etc., and would take statements of my CPA over stuff that I make up myself on Turbo Tax anyday. This is not to mention when I used Turbo tax, and when I used their local and state editions, I ran into a problem with NY State taxes because they did not indicate I had to have minimum assets on my balance sheet and was hit with a $1,000 fine, but later waived, after I had my CPA review the taxes, and redid the returns.

Bottomline is, I own a number of 2 to 4's, and I found no need to use LLC's, but I found it more useful to pay my insurance and my CPA instead.