Why I don't use LLCs for my Airbnb short term rentals.

Summary

The video discusses whether you should buy Airbnb or VRBO properties under an LLC. It explores the pros and cons of using an LLC, such as limited liability and potential anonymity, but also highlights the difficulties of financing, higher insurance costs, and added maintenance. The host emphasizes that LLCs don't offer specific tax advantages compared to sole proprietorships and suggests liability insurance as an alternative for protection. Ultimately, LLCs may be useful for partnerships with non-family members or for wealthier investors, but aren't necessary for everyone.

Takeaways

• 🏠 Starting an LLC for Airbnb properties is often debated, with many people thinking they need one, but it's not always necessary.
• 📉 Limited liability protection is the main benefit of having an LLC, but it doesn't fully absolve you of personal liability.
• 💼 Single-member LLCs can be easily 'pierced,' making it less effective in providing legal protection.
• 💰 Financing properties in an LLC is much harder because banks prefer dealing with established entities with credit history.
• 💵 Commercial loans for LLCs often require higher down payments, higher interest rates, and shorter terms compared to personal loans.
• 🏢 Maintaining an LLC can be costly and time-consuming with fees, filings, and operational requirements.
• 🛡️ Liability insurance may offer better protection for property owners than setting up an LLC, especially for small-scale investors.
• 👨‍👩‍👧‍👦 The speaker prefers to invest with family for trust reasons, only considering LLCs for partnerships with non-family members.
• 📊 LLCs don't provide specific tax advantages over sole proprietorships unless elected to be taxed as an S-corp or C-corp.
• ⚠️ Transferring properties to an LLC after purchase can trigger due-on-sale clauses, forcing refinancing and higher rates.

Q & A

What is the primary reason people consider putting their Airbnb or VRBO properties in an LLC?

The main reason is to limit liability, as an LLC provides some protection by separating personal assets from business assets, reducing the risk of personal liability if legal action is taken.

Does an LLC provide complete protection from personal liability?

No, an LLC limits liability but does not completely absolve personal responsibility. For example, if you personally perform a task, like building stairs, you could still be held personally liable even if the property is in an LLC.

Can courts 'pierce the corporate veil' for single-member LLCs?

Yes, single-member LLCs can be vulnerable to having their corporate protection 'pierced' if the court views the LLC as a shell created solely to avoid personal liability. This can expose the owner to personal lawsuits.

What are the main disadvantages of financing a property under an LLC?

Financing a property under an LLC is much more difficult because banks prefer lending to individuals with credit history, not new LLCs. LLC loans often require personal guarantees and come with higher interest rates and down payments.

Is it more expensive to insure a property under an LLC?

Yes, insuring a property under an LLC is typically more expensive because it usually requires a commercial insurance policy, which is costlier than personal policies.

Are there additional costs involved in maintaining an LLC?

Yes, maintaining an LLC requires paying filing fees, annual reports, and possibly legal or accounting services, adding to the overall cost of operating the business.

What is a 'due on sale' clause, and why is it a concern when transferring a property to an LLC?

A 'due on sale' clause allows a lender to demand full repayment of a mortgage if the property ownership is transferred. Transferring a property to an LLC could trigger this clause, forcing the owner to refinance at potentially higher interest rates.

Do LLCs offer any tax advantages over owning properties personally?

No, LLCs do not offer tax advantages over sole proprietorships. LLCs are pass-through entities, meaning profits and expenses pass through to the owner's personal tax return, just like sole proprietorships.

When does the speaker suggest using an LLC for property ownership?

The speaker recommends using an LLC when entering into partnerships with non-family members, as it helps clearly define ownership and responsibilities. Additionally, wealthy individuals or those not using financing might consider an LLC for its added legal protection.

What is the speaker's alternative to using an LLC for liability protection?

The speaker prefers using liability insurance instead of an LLC for liability protection. This includes property insurance with liability coverage, Airbnb's liability insurance, and a personal umbrella policy.