Should I create an LLC for my Indiana rental home  

Hey, guys. Mike Taylor, broker owner of Red door Property Management. Today I want to talk to you about one of the questions that we get most often here at Red Door is, should I create an LLC for my rental property? Well, before I answer that, let me just do a quick little disclaimer. I am not an attorney. This is not legal advice. Call your legal counsel to discuss this. This is just a property manager's point of view and an investor's point of view. I own several rental homes, so this is just what I have picked up along the way. But do not mistake it for legal advice. 

So why would you create an LLC? Well, the main  reason that anybody creates an LLC to put a rental property in is to limit their liability, right? That's LLC limited liability corporation. So, it limits your personal liability in the rental home. So, God forbid something terrible happens at the home if the resident in there goes to sue. They would sue the LLC and you would not be able to be named personally because you have created that barrier, the corporate veil that they can't pierce. So, you are not personally liable. So worst case scenario is they would the damages would be contained to the home itself or whatever the entity owns. That's why people create it. However, there are certain things to consider when deciding if you do want to create this LLC or not. 

So, number one is there are setup costs. You have to set this thing up. And so, you can either hire an attorney to do that, that's probably somewhere between $500 and $700, something like that. You can definitely do it yourself. It's definitely the easier option, less expensive, that I think just the filing fees in Indiana, $80, $100, something like that. So that's consideration number one. Set up fees. Are you going to do it yourself? You're going to pay an attorney. 

Number two is maintenance costs. There are maintenance costs associated with this. You have to renew your LLC. That gets every two years in the state of Indiana. Again, you can either have an attorney do that, they can be your agent and do it for you, or you can do it yourself. But it's just one more thing that you've got to remember. You have to renew it every year. Otherwise, it expires. So just a second thing to think about. 

The third thing to think about is that you have to be very careful the way that you handle your money from this to make sure that you have a separate bank account for your LLC. You can't just set up an LLC and then have money just go into your personal account. You can, but then that opens you up for potentially personal liability because you got to keep everything separate. If it's a separate LLC and that's the reason that you're doing it, you have to keep everything separate. So that would be a separate bank account, you're going to need an Ein number, all of that stuff. So, it just complicates things a little bit. 

But just something else to consider is that, the other thing is that depending on how you set up the LLC, you may or may not have to file taxes on that. And so just another cost consideration. If you have to file taxes on an LLC again, you can either do it yourself or you could pay a CPA to do it. It's probably going to cost you between 300 and $500per year to have those taxes filed on your behalf. Another option that you might think about is with all of these costs adding up, the set-up costs, the maintenance costs, the cost to file taxes, 400, $600, you might want to think about potentially, instead of doing an LLC is looking at an umbrella policy. So, you can get a ton, $600 a year will get you a ton of insurance. So that might be another option to do it. You really just have to consider what your situation is like. If you're a high-net-worth person, I would say it's probably worth it to limit your liability. That way if somebody comes after you, they're not getting your earnings, your other net worth, things like that. So, it just depends on your personal situation. 

And then the last thing to consider is when you set up an LLC is that it is typically very hard to get a loan if you intend to put the home in an LLC. So that leaves you in a bit of a tough situation where you can get a loan, but you're going to typically pay a higher interest rate. Or the other option that a lot of people dodo is they will close in their name personally and then do a quick claim deed over to the LLC. Now if the lender finds out about that, they're not going to be super thrilled with that. So that's another risk that you got to consider. It's not just, hey, yes, this makes sense for every single person every single time. It depends on your situation. It depends on how much other net worth you have, how many other homes you have, things like that. 

So, there's a lot of variables that go into it. But one of the considerations would be upping your insurance, getting an umbrella policy, things like that to protect you as well. So, you don't always just have to do the LLC. So certain things to consider when you are thinking about setting up an LLC for your Indianapolis rental home.