Calculating the ROI for you rental property


By BayArea   Follow   Sat, 1 Dec 2012, 1:12pm   4,175 views   49 comments
In Oakland CA 94618   Watch (1)   Share   Quote   Permalink   Like   Dislike  

Hi folks,

There are several different ways to approach the ROI for an investment property. Many look at the capitalization rate which is the (yearly rental income after expenses) / (total value of the property). However, for a small scale investor like myself who isn't purchasing all in cash, it's more interesting to identify ROI based on the equity or amount I'm investing up front, therefore capitalization rate loses some of it's meaning to me. I don't care what the return is when compared to the purchase price since I didn't put up the full purchase price to acquire the property.

If I am to look at the ROI of my investment property after 1 year, I need to take into account the total amount I've invested in that year (down payment, mortgage payment for the year and all associated expenses for that year) and compare it to the effective rental income. I.e. divide the effective rental income by everything I have invested during that year. Isn't that my true ROI (ignoring any appreciation or depreciation of the property)?

I'm wondering if any of you are willing to share your spreadsheet analysis on how you calculate ROI and why you use the method that you do. I have attached mine. But again, this uses capitalization rates and net returns based on the purchase price.

I'm more interested in the ROI based on the amount invested upfront. In other words:

(Net Cash Flow from rent) / (down payment + finance payment + all expenses)

And lastly for the long time investors, what ROI meets your criteria for pulling the trigger on a property?

https://docs.google.com/spreadsheet/ccc?key=0AqeJiYMCktN-dC0zcFppdFYxVnd0cWFVTlJnZ0RkMmc#gid=0

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  1. BayArea


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    10   5:41pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    @robertoaribas @REpro @SFace , that's helpful and thanks for sharing. Might you know why pretty much every RE ROI example out there is pre-income tax analysis? If you make $24K gross rent for example, why do most people calculate ROI when >30% of that gross rental income is going to get wiped due to income tax?

    And yes, there are lots of tax deductions but they won't come close to the amount noted above, right? That's one detail nobody seems to talk about. Why?

    Patrick says

    If you are borrowing money to make an investment, that's using leverage.

    Thanks Patrick. I understand leverage, but what I was getting at is that I'm not leveraging myself any further than anyone else who is financing their rental. Dangerous, sure. Anyone got a better alternative investment idea for my savings, lol?

    Patrick says

    As Warren Buffet says: the only ways that rich people get poor are "liquor and leverage".

    Touche. But the only way middle class stays middle class is by taking no risks, as Mr. @Iwog once told me :-)

    taxee says

    Just a little counter party risk living in your depreciating asset with a pit bull and a gun. Let's hear it for the rentier class.

    That will definitely get interesting... For you guys with rentals, what's your experience been in terms of being selective about your tenants? Are there any discrimination laws out there when it comes to who I rent my home out to?

    stanpownall says

    I expect the California market to decline further over the next five or more years as companies and people leave Califiornia.

    If that happens that will be a first...

    https://www.google.com/publicdata/explore?ds=kf7tgg1uo9ude_&met_y=population&idim=state:06000&dl=en&hl=en&q=california%20population

    Somehow that weather and the coastal views have always kept people stretching themselves to be here.

  2. BayArea


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    11   6:15pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Interesting. What is the max depreciation rate/amount that may be used in CA, anyone know?

  3. RentingForHalfTheCost


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    12   6:23pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    robertoaribas says

    If you bought a cheap home that you could afford,

    As if these people existed. Get real.

    I went by a highly congested area of the bay area freeway system today in rush hour. For 55 cents you can use your fast-track to jump in the commuter lane and save yourself about 10 minutes of bumper to bumper. As I was cruising 60mph past stopped cars of all kinds (BMW, Lexus, Porche, Mercedes) it was a good reflection of what is happening. Everyone is so leveraged to get into that 1m+ home that 0.55/day is valuable to them. This can not end well folks. Stay tuned and get prepared.

  4. David Losh


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    13   7:08pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Let me interject a little something that kind of got mentioned, but glossed over.

    Will the property hold value?

    You may be getting a great return on a property that is less than desirable. Some investors buy these with an LLC and when the going gets tough the property, or properties, go back to the bank.

    That is something we experienced in 2008, 2009.

    So, are you buying some one else's problem, and hoping to make it work?

    Do you have an exit strategy?

    When you sell, if you sell, or if you have to sell, will the value be there?

  5. David Losh


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    14   7:28pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    E-man says

    make money when I buy

    To buy what you can sell that day for a profit which includes all fees, coming in, and getting out, used to be my rule, but that has changed.

    That is exactly the problem today, is what can you sell without taking a loss?

    If your return on investment is only tracking the 2% appreciation figures, you're kind of screwed.

  6. RentingForHalfTheCost


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    15   8:21pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    robertoaribas says

    yes, you cannot discriminate based on family status, age, religion, race, color, country of origin or sex.

    Just don't rent to a gay caucasian divorced 50 yr old male that preaches Scientology. His movies suck. Outside, of that do what Roberto does. Focus on the possibility of rent payment. ;)

  7. REpro


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    16   9:16pm Mon 3 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike  

    BayArea says

    Interesting. What is the max depreciation rate/amount that may be used in CA, anyone know?

    Depreciation is calculated on improvement value not land value, which in CA can be substantial. Example: You purchased house for $300K, land value is $120K. You will depreciate yearly $180K/27.5=$6,545, straight for 27.5 years.
    Land lording is a business so most states also keep tax hand open. E.g. in CA you will pay min. $800/y to state and $150/y to San Jose city, regardless if you make a dime of profit or not.

  8. BayArea


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    17   9:36pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    RentingForHalfTheCost says

    I went by a highly congested area of the bay area freeway system today in rush hour. For 55 cents you can use your fast-track to jump in the commuter lane and save yourself about 10 minutes of bumper to bumper. As I was cruising 60mph past stopped cars of all kinds (BMW, Lexus, Porche, Mercedes) it was a good reflection of what is happening. Everyone is so leveraged to get into that 1m+ home that 0.55/day is valuable to them. This can not end well folks. Stay tuned and get prepared.

    Perhaps. Or maybe it's because they don't know about the program. I certainly didn't until I read your post above. With $4.50/gal gasoline, I don't think those luxury car owners are as set on saving that $0.55 as you seem to think.

    SFace says

    From my perspective, you rent to who you want, just never say it.

    That's what I was getting at. Although the laws may exist, who is going to prove that I didn't rent out my property to someone because they were black and not because of another reason like I didn't like their credit score or their reference wasn't convincing enough.

    David Losh says

    Will the property hold value?

    So, are you buying some one else's problem, and hoping to make it work?

    Do you have an exit strategy?

    When you sell, if you sell, or if you have to sell, will the value be there?

    I guess this comes down to whether you believe the market has hit bottom or still has a ways to fall. Most reasonable people at this point believe we are not far off from the bottom, and perhaps even have seen in in certain areas. The usual perma-bears will disagree I'm sure.

    If the rent is conservatively 2x or more of my mortgage payment + prop tax, then I'm all for it, regardless of whether or not I believe that there is an appreciation upside in terms of equity around the corner. If I am cash flow positive, my risk is minimized.

    Exit strategy? If I'm cash flow positive, an exit strategy isn't as critical for me.

  9. REpro


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    18   9:36pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    BayArea says

    Somehow that weather and the coastal views have always kept people stretching themselves to be here.

    ...and just before Jan.1 they should start practice: “bread is meat”, “less is more”.
    No wonder why big investment firms focus investment on the smallest and cheapest houses.

  10. REpro


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    19   9:47pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    My rental criteria are written on an application, period.

  11. BayArea


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    20   9:48pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Roberto, when the smoke clears I'm as fair as you are and just trying to get some perspective on the topic. Nothing more, nothing less.

  12. BayArea


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    21   10:03pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    good point as vacancy can absolutely obliterate gains.

  13. REpro


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    22   10:25pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Only three states out of 50 are true champ in population growth: CA, TX & FL, where TX & FL have no state tax.
    https://www.google.com/publicdata/explore?ds=kf7tgg1uo9ude_&met_y=population&idim=state:06000&dl=en&hl=en&q=california%20population#!ctype=l&strail=false&bcs=d&nselm=h&met_y=population&scale_y=lin&ind_y=false&rdim=country&idim=state:06000:48000:12000&ifdim=country&hl=en_US&dl=en&ind=false

  14. REpro


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    23   11:00pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    SFace says

    Partnership and sole proprietor does not have the tax since it is not separate legal entity

    As long as schedule C appear in your income tax return, you are in busines. Business pay taxes.

  15. RentingForHalfTheCost


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    24   7:37am Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    robertoaribas says

    ok, fair enough. You know, you rent to a family with small kids, they move in, the kid makes friends in the school... you could have just got yourself 5 or more years of no vacancy! worth the gamble of some spills in the house, in my opinion!

    As long as you are not favoring the family with small kids. That would be discrimination against the rest of the applicants. ;)

    You find me someone who truely doesn't discriminate, and I'll show you an appreciating house.

  16. David Losh


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    25   8:11am Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    BayArea says

    If I am cash flow positive, my risk is minimized.

    There is a lot here in this thread that is kind of alternative universe. Small rental investors have several problems today that were low risk before 2006.

    Number one rents are too damn high, and number two is that property prices have stabalized. Stabalized is very different than hitting bottom.

    Property prices are propped up by massive government interference. We all know that, but ignore it. That's not perma bear talk, it's a fact, and you really have no idea where property prices will go now that the President has been re-elected, or that Congress has other things to do.

    Just because you have cash flow doesn't mean you are making money. Real Estate is an over all package.

  17. David Losh


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    26   8:12am Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    E-man says

    set up a LLC

    People set up LLCs so they can walk away from the property if they need to. You saw a ton on that in 2008.

  18. David Losh


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    27   9:28am Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    robertoaribas says

    rents are too high.

    I don't see where inflation happened, or will happen. I see massive speculation in commodities due to these historically low interest rates, and increase in corporate profits, and massive cash reserves, but I don't see inflation.

    As a matter of fact I would say, even with China moving ahead as a trading partner, that the United States is a very safe haven for money. We have a stable government, low taxes, and are very business oriented.

    Where would you want your money?

    What I would say is that investing in corporations may be a safer bet than housing units. I think housing is being over run by huge corporations that have plans for each community.

    robertoaribas says

    that is propped up?

    Yes, that is propped up. In a true foreclosure market properties sell for cheap. It depends on the property, and depends on the location, but no, I don't call $80K in Phoenix cheap.

    robertoaribas says

    Actually, cash flow means you are making money

    No it doesn't. You can cash flow all day long, and lose money.

    robertoaribas says

    People set up LLC's to limit their liability

    Like with the mortgage. Your renter is an insurance issue, and you are pointing out correctly an LLC does very little good for the majority of people.

    Sorry, Washington is a non recourse State.

  19. BayArea


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    28   3:25pm Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    David Losh says

    Property prices are propped up by massive government interference. We all know that, but ignore it.

    Do you know who just got re-elected? Mr. Artificial Prop himself. Sure, prices are being propped up to some degree, but that's not changing anytime soon. So what's the other thing that can have a heavy handed influence on prices? Interest rates. I can't see those budging much either.

    I'm not sure I stand to gain much by waiting around for artificial props to subside, our accounting laws to change forcing banks to unload foreclosures right away or realize loses immediately, or for interest rates to rise...

  20. David Losh


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    29   4:00pm Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    BayArea says

    Do you know who just got re-elected?

    President Barrack Obama just got re-elected, and he is the one that saved our economy by borrowing massive amounts of money.

    Well, I think the long term strategy is to get the Republicans out of the House, and have a super majority that can fix a lot that went wrong.

    One of the things that went wrong was banks having control of the housing market.

    The shift is, with our government buying up Mortgage Backed Securities at the rate of $40 Billion per month, soon to be $80 Billion per month, control of the housing market transferring to the government.

    You don't like it? You say you would rather have banks dictate the terms of the housing market?

    Well, get used to it.

    Corporations will play nice, money will be made, and housing will go back to that sleepy little payment you make each month for a place to keep your crap.

  21. RentingForHalfTheCost


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    30   4:10pm Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    robertoaribas says

    6 more years like that, and i'll have precisely $0 of my own money out there, and still own the properties... care to explain the big risk of that to me?

    The risk of not getting 6 more years like that. ;) 1 year of a gov't that doesn't buy its own bonds to pay itself and your properties lose 25% and you have a hell of a tenant retention problem. Add to it, your properties tax bill keeps coming, as well as maintenance. There is always risk, the trick is to manage it. From your writings, I think you have managed yours well, but that doesn't mean you are not worried. I know many bay area owners/investors that were not so smart.

  22. Mobi


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    31   6:16am Wed 5 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    David Losh says

    The shift is, with our government buying up Mortgage Backed Securities at the rate of $40 Billion per month, soon to be $80 Billion per month, control of the housing market transferring to the government.

    The entity who buys the $40 billion MBS per month is called Fed, which is a semi-government BANK. Don't you know their committee are mostly made of bankers? At this point, the interests of the federal government and the big banks are so interwined so I won't bother to seperate them.

  23. David Losh


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    32   8:33am Wed 5 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Mobi says

    the interests of the federal government and the big banks

    Yeah, banks have relied on governments globally to continue those profits. We all borrow money. Our government is borrowing money to buy Mortgage Backed Securities.

    Who's in charge now?

    Banks have run rough shod over the global economy for thirty years, and from my point of view they cashed out in 2008.

    I look at Barrack Obama as a smart guy. He could have crashed the economy, blamed the Republicans and put us into default. He didn't. He borrowed, and every body was happy to play along. Barrack Obama has propped up the entire banking system ever since, but it means nothing to what is coming.

    Consumer debt is neck, and neck with our federal deficit. Consumer spending makes the world go around. There is no China without consumer spending. Europe is trashed, Russia is suffering, and those emerging markets are getting hip to the fact they will never be able to repay what they have borrowed.

    What's a banker to do?

    The bank will play ball with whatever hair brain idea Obama comes up with next. I think that housing will languish as other things take a bigger role in our economic future. People will get a chance to pay off debt, and banks will agree with that as a survival mechanism.

  24. Mobi


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    33   9:13am Wed 5 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    robertoaribas says

    you don't know what you are talking about... People set up LLC's to limit their liability, say a tenant gets hurt and sues them, the tenant is renting from the LLC, and could only attach the one property. (unless they pierce the corporate veil, which is much more common than the llc gurus talk about)

    Very interesting comment here. Obviously, landlords try to set up LLCs to limit the liability. But let's say you have a house under a LLC and you still go into the house to do repairs YOURSELF. If something happens and the tenant takes the legal action, can you really shield yourself through the LLC?

  25. Mobi


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    34   9:18am Wed 5 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    David Losh says

    The bank will play ball with whatever hair brain idea Obama comes up with next. I think that housing will languish as other things take a bigger role in our economic future. People will get a chance to pay off debt, and banks will agree with that as a survival mechanism.

    I kinda agree with you. They still work with each other now but time will come when government wants to take full control and use some unorthodoxical methods to "solve" the problem (before it melts down) and banks will have to go with that. But I am not as optimistic as you that they will make the "right" choice. I guess we will find out.

  26. FortWayne


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    35   9:04am Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Just be careful with your depreciation deductions, they do have to be legitimate.

  27. FortWayne


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    36   9:06am Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Mobi says

    Very interesting comment here. Obviously, landlords try to set up LLCs to limit the liability. But let's say you have a house under a LLC and you still go into the house to do repairs YOURSELF. If something happens and the tenant takes the legal action, can you really shield yourself through the LLC?

    It will not protect you from a lawsuit. Having an LLC does not give a person free reign to do as they please. Members of any Limited Liability type of enterprise are still held responsible for their own actions, especially the owners/directors of an LLC since they are responsible for all the debt of the venture even in case of bankruptcy.

    The limited liability part here is only if you are a small shareholder, your liability is only what you put into the company. For example Roberto creates an LLC, and you come in as a minority partner and invest 5,000 into it... you'll only be liable up to 5,000 if the LLC screws up. If you do something bad on your own, that limit no longer applies.

  28. Mobi


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    37   10:20am Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    FortWayne says

    It will not protect you from a lawsuit. Having an LLC does not give a person free reign to do as they please. Members of any Limited Liability type of enterprise are still held responsible for their own actions, especially the owners/directors of an LLC since they are responsible for all the debt of the venture even in case of bankruptcy.

    Very good points. If I were to own several LLCs and one of them screws up, would the liability spreads through other LLCs?

  29. Mobi


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    38   10:24am Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    E-man says

    Anyways, people keep setting up LLC for the wrong reason. The attorneys, state and CPAs get to make money while the people don't get any protection.

    I am thinking about setting up LLCs but these are exactly the things I am afraid. Where can I find good/objective advides besides CPAs/attorneys?

  30. FortWayne


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    39   10:48am Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Mobi says

    FortWayne says

    It will not protect you from a lawsuit. Having an LLC does not give a person free reign to do as they please. Members of any Limited Liability type of enterprise are still held responsible for their own actions, especially the owners/directors of an LLC since they are responsible for all the debt of the venture even in case of bankruptcy.

    Very good points. If I were to own several LLCs and one of them screws up, would the liability spreads through other LLCs?

    No. But if you are personally liable for something, LLC's don't matter. It is still you that will be liable, not the LLC.

  31. FortWayne


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    40   10:53am Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Mobi says

    I am thinking about setting up LLCs but these are exactly the things I am afraid. Where can I find good/objective advides besides CPAs/attorneys?

    Talk to a CPA, you have to have a good reason for an LLC. A good CPA should explain to you the advantages and the costs of an LLC. Usually just to rent out a house an LLC is a waste of money.

  32. David Losh


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    41   6:38pm Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    For God sakes, builders set up LLCs, as do investor groups. In theory there is cash flow, and assets to cover losses.

    In 2008 everything stopped, and hundreds, if not thousands of LLCs defaulted.

    If you have onesy twosy kind of thing going on, it's not worth it.

  33. David Losh


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    42   7:37am Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    E-man says

    If no, then why bother.

    Exactly.

    However some investor groups get together with a hair brain idea, or two, that they want to seperate out from the family home.

  34. Mobi


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    43   7:55am Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    FortWayne says

    No. But if you are personally liable for something, LLC's don't matter. It is still you that will be liable, not the LLC.

    I understand that. But, say, I distribute my assets under my LLCs and keep very little to myself. If one of them screws up and I am personally liable, the worst case is to file for bankcrupcy (personally.) In that case, will they be able to touch my other LLCs?

  35. Mobi


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    44   8:00am Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    E-man says

    LLC = Asset Protection.
    Do you have assets to protect?
    If no, then why bother.

    A few rentals...

    Anyway, some messages above say for a LLC owner, if something happens, you are still PERSONALLY liable to it. If that's true, I don't see the asset protection function.

  36. FortWayne


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    45   8:40am Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Mobi says

    FortWayne says

    No. But if you are personally liable for something, LLC's don't matter. It is still you that will be liable, not the LLC.

    I understand that. But, say, I distribute my assets under my LLCs and keep very little to myself. If one of them screws up and I am personally liable, the worst case is to file for bankcrupcy (personally.) In that case, will they be able to touch my other LLCs?

    If an LLC screws up you are only liable for your share in that LLC, and not a penny more. Your assets outside of an LLC are protected in this case. Unless you are an LLC owner, in which case you are held to a higher standard with personal guarantees. For example, you put $500 into E-man's LLC. If his LLC gets sued, you can only lose those $500 in the LLC. Your personal assets (house, car, dog, whatever) cannot be touched.

    If you personally screw up it doesn't matter where you put your assets, you own them they can come after it, any share in any LLC, any stocks, any property, any tangible assets. For example you walk into your rental and physically assault your renter, it is your liability not the LLC and they can come after anything you own anywhere.

  37. Mobi


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    46   9:15am Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    FortWayne says

    If an LLC screws up you are only liable for your share in that LLC, and not a penny more. Your assets outside of an LLC are protected in this case. Unless you are an LLC owner, in which case you are held to a higher standard with personal guarantees. For example, you put $500 into E-man's LLC. If his LLC gets sued, you can only lose those $500 in the LLC. Your personal assets (house, car, dog, whatever) cannot be touched.

    Fort, thanks for your explanation. But what do you mean by "a higher standard with personal guarantees" for an LLC owner? Say, I, as a LLC owner, hire a agent/employee to take care of the rental under the LLC and he/she screws up. What is the owner's liability in this case? Is it limited in the LLC or to my personal assets?

  38. FortWayne


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    47   9:51am Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Mostly limited to an LLC if that employee acted on behalf of an LLC, or to that employee only if they acted on their own accord.

    Your other assets are only at risk if you personally were responsible, or provided personal guarantees. Very often when contracts are written, directors of an LLC are required to provide personal guarantees in case of default. To simplify, as long as you don't break the law, and they can't prove bad intent, they can't come after your assets. So you should be fine.

  39. CDon


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    48   1:47pm Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    FortWayne says

    Very interesting comment here. Obviously, landlords try to set up LLCs to limit the liability. But let's say you have a house under a LLC and you still go into the house to do repairs YOURSELF. If something happens and the tenant takes the legal action, can you really shield yourself through the LLC?
    It will not protect you from a lawsuit. Having an LLC does not give a person free reign to do as they please. Members of any Limited Liability type of enterprise are still held responsible for their own actions, especially the owners/directors of an LLC since they are responsible for all the debt of the venture even in case of bankruptcy.
    The limited liability part here is only if you are a small shareholder, your liability is only what you put into the company. For example Roberto creates an LLC, and you come in as a minority partner and invest 5,000 into it... you'll only be liable up to 5,000 if the LLC screws up. If you do something bad on your own, that limit no longer applies.

    OK while this is generally correct, I think some clarification is needed here.

    1. With regard to liability, it does not matter if you are a minority partner or a majority partner (it does in limited partnerships [LPs], but not limited liability companies (LLCs).

    2. In terms of liability, the question (generally) is who performed the act. If Fort Wayne the individual breaches a contract, Fort Wayne the individual can be held responsible. If Fort Wayne, operating in his capacity as a Manager or Managing Member/Partner of an LLC, breaches a contract he personally did not commit the act, but his LLC did. As such, Fort Wayne has has no personal liability but he could lose his cash/equity in the LLC.

    3. As an example of #2. Say WAYNE LLC has 100K in assets, and Fort Wayne the individual has 500K in assets. If fort wayne is sued personally, his 500K is at risk, and his 100K interest in the LLC is at risk. HOWEVER, if Wayne LLC is sued for something its managing member, fort wayne did, the 100K in assets held by WAYNE LLC is at risk. However, the 500K in assets held by Fort Wayne the individual, is usually NOT at risk.

    4. Also important is the suit one based on contract, or one based on tort. Say WAYNE LLC owns a house with leaky plumbing, causing bystanders to slip and fall. In this case, the bystander very well may have a case against Fort Wayne individually (although this is not a hard and fast rule, there are many shades of gray here). However, if WAYNE LLC enters into a contract and then breaches that contract, only WAYNE LLC can be held responsible, NOT Fort Wayne the individual.

    5. As an aside, there are a number of reasons to put a rental house in the name of the LLC, including ease in transferability & possible legal avoidance of transfer & recordation taxes.

    6. Generally for high wealth individuals (or those who hope to be high wealth) I always advise LLCs or some other entity to provide a corporate veil of protection. Insurance does generally protect you in case of tort (i.e. slip & fall) but often does NOT protect you from contract claims.

    7. If they are building an a little empire, I also (depending upon what their accountant says) advise multiple stand alone LLCs (one for each house) such that anything that happens to the one, cannot put the others at risk. Oftentimes too, if large enough, I have a holding company which owns the shares of the subsidiary LLCs. i.e. Fort Wayne owns 100% of WAYNE LLC, which owns 100% of WAYNE 2 LLC, and 50% of WAYNE & LOSH LLC.

    Confusing? It can be. Thats the problem with making alot of money. Suddenly you are spending so much time working with accountants & lawyers to protect it that it hardly seems worth it :)

  40. David Losh


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    49   10:10am Sat 8 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    CDon says

    I think some clarification is needed here.

    There should be a disclaimer in there that each person should check with an accountant, or attorney, rather than rely on advice from a blog.

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