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Calculating the ROI for you rental property

By BayArea   Follow   Sat, 1 Dec 2012, 1:12pm   3,786 views   73 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 Follow Befriend (3) 50 threads 368 comments Oakland, CA

   34   10:03pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike   good point as vacancy can absolutely obliterate gains.

2. REpro Follow Befriend (1) 22 threads 469 comments San Jose, CA

   35   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

3. SFace Follow Befriend (2) 61 threads 1,301 comments Premium

   36   10:40pm Mon 3 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike   Protected   robertoaribas says ou might care to spend some time using google, and looking up fair housing prosecutions. You could be asked to provide the credit apps, references etc, and if it turned out you rented to a worse applicant, based on race, the FEDs will destroy you and any realtor you work with. It is safer to have WRITTEN rental criteria, and to apply them fairly. e.g. credit score, income requirements, no evictions, no serious drug convictions, etc. I respectfully disagree, Nothing can be implied. You cannot lose a case of law based on subjective evidence. Why would a mom and pop have a formal criteria? Turning down someone is not illegal. The only way you can lose is if you talk. That's why it is called being baited, some legal nut or expert is recording the phone or documenting the email. Just say thank you for your interest and that's it.

4. SFace Follow Befriend (2) 61 threads 1,301 comments Premium

   37   10:55pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   REpro says 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. All entities are taxed and $800 is the minimum. An entity is usually LLC, or S-Corp. A Partnership and sole proprietor does not have the tax since it is not separate legal entity. An LLC has a fee based on revenue. If you make money, who cares about the minimum. Form an S-Corp or LLC for separate legal entity protection.

5. REpro Follow Befriend (1) 22 threads 469 comments San Jose, CA

   38   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.

6. SFace Follow Befriend (2) 61 threads 1,301 comments Premium

   39   11:37pm Mon 3 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   REpro says As long as schedule C appear in your income tax return, you are in busines. Business pay taxes WTF, of course you pay tax, if there are income, it flows to the 1040. and technically, it is schedule E. But a non-entity does not have the $800 minimum. A business that is run as a sole proprietorship is not an entity. Doesn't matter it is on schedule C.

7. E-man Follow Befriend (31) 34 threads 2,545 comments San Jose, CA Premium

   40   12:32am Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   REpro says 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. We've always filed our rental income on Schedule E. Never had to pay $800/year to the state and $150/year to the City of San Jose for business license. However, I pay $800/year for a $2M umbrella insurance. Unless you're worth a boatload of money or operate on a much bigger scale, a LLC never makes any sense to me. Instead of paying $800/year to the state for each rental property, I'd rather use that money to buy me a $5M to $10M umbrella insurance. For a LLC to work properly and to protect your other assets, you must operate in a completely hands off manner. It just seems a little impractical for small time landlords. Too many people set up a LLC to protect their assets. Ironically, they don't have much assets to protect. YMMV. :)

8. RentingForHalfTheCost Follow Befriend (8) 38 threads 2,006 comments Pleasanton, CA Premium

   41   7:37am Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   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.

9. David Losh Follow Befriend (2) 8 threads 1,126 comments Seattle, WA David Losh's website Premium

   42   8:11am Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   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.

10. David Losh Follow Befriend (2) 8 threads 1,126 comments Seattle, WA David Losh's website Premium

    43   8:12am Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   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.

11. robertoaribas Follow Befriend (23) 55 threads 3,790 comments Scottsdale, AZ robertoaribas's website

    44   8:41am Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike (1)   David Losh says Number one rents are too damn high really? odd thing on this site, is the number of people predicting terrible inflation AND that prices for homes, rents are too high. take your pick, you can't have both!David Losh says Property prices are propped up by massive government interference. IWOG was buying single family homes at something like 200K in the bay area, I bought several for 80K in phoenix... that is propped up? out of curiousity, what price would indicate non propped up, and what would indicate a low price? David Losh says Just because you have cash flow doesn't mean you are making money. Actually, cash flow means you are making money... that is exactly what it means! In fact, on the properties I've now owned nearly two years, I have received back 25% of my investment, even factoring in repairs and vacancy... 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? David Losh says People set up LLCs so they can walk away from the property if they need to. You saw a ton on that in 2008. 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) Your mortgage stays in your name, so it makes diddly difference if you walk away. your credit is still trashed, and if it is a recourse loan, the bank can still pursue you for the loss.

12. David Losh Follow Befriend (2) 8 threads 1,126 comments Seattle, WA David Losh's website Premium

    45   9:28am Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   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.

13. BayArea Follow Befriend (3) 50 threads 368 comments Oakland, CA

    46   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...

14. David Losh Follow Befriend (2) 8 threads 1,126 comments Seattle, WA David Losh's website Premium

    47   4:00pm Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   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.

15. RentingForHalfTheCost Follow Befriend (8) 38 threads 2,006 comments Pleasanton, CA Premium

    48   4:10pm Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   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.

16. Mobi Follow Befriend 1 threads 241 comments

    49   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.

17. David Losh Follow Befriend (2) 8 threads 1,126 comments Seattle, WA David Losh's website Premium

    50   8:33am Wed 5 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   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.

18. Mobi Follow Befriend 1 threads 241 comments

    51   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?

19. Mobi Follow Befriend 1 threads 241 comments

    52   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.

20. E-man Follow Befriend (31) 34 threads 2,545 comments San Jose, CA Premium

    53   7:50pm Wed 5 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   David Losh says 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. I guess Roberto addressed this point above. Non-recourse is only good if you don't do cash-out refinance. Also, no lender will come after you if you ain't worth crap. People deed their rental property to a LLC without knowing that the lender can call the loan due. Lenders typically do not lend to a LLC without an established track record. 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.

21. FortWayne Follow Befriend (13) 102 threads 3,763 comments

    54   9:04am Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike   Just be careful with your depreciation deductions, they do have to be legitimate.

22. FortWayne Follow Befriend (13) 102 threads 3,763 comments

    55   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.

23. Mobi Follow Befriend 1 threads 241 comments

    56   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?

24. Mobi Follow Befriend 1 threads 241 comments

    57   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?

25. FortWayne Follow Befriend (13) 102 threads 3,763 comments

    58   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.

26. FortWayne Follow Befriend (13) 102 threads 3,763 comments

    59   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.

27. SFace Follow Befriend (2) 61 threads 1,301 comments Premium

    60   10:53am Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   Of course LLC's are great. How else do you think Robert Kiyosaki, LLC gets sued, lose the judgement, file bankrupcy and still retain every penny of his 80M net worth? LLC is an entity even if is a single member LLC. It's like duplicating yourself so if crap happens, it's the entity not me. You just need to complete a one page application with the CA secretary of state (or equal) and pay few hundred $$

28. E-man Follow Befriend (31) 34 threads 2,545 comments San Jose, CA Premium

    61   6:24pm Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   Mobi says 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? Biggerpockets.com. Sign up, post your questions about setting up a LLC, its benefits and pitfalls.

29. E-man Follow Befriend (31) 34 threads 2,545 comments San Jose, CA Premium

    62   6:33pm Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   SFace says Of course LLC's are great. How else do you think Robert Kiyosaki, LLC gets sued, lose the judgement, file bankrupcy and still retain every penny of his 80M net worth? LLC is an entity even if is a single member LLC. It's like duplicating yourself so if crap happens, it's the entity not me. You just need to complete a one page application with the CA secretary of state (or equal) and pay few hundred $$ Well, it makes sense to set up a LLC if you have a decent networth. Setting up a LLC for each rental making $500 to $1,000/month, and there's only $50k to $100k equity in each property doesn't make too much business sense. An umbrella is a much easier route in my opinion. I was typing more stuff, but realized that it's you so deleted it. Basically, I'm preaching to the wrong guy. :)

30. David Losh Follow Befriend (2) 8 threads 1,126 comments Seattle, WA David Losh's website Premium

    63   6:38pm Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   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.

31. E-man Follow Befriend (31) 34 threads 2,545 comments San Jose, CA Premium

    64   6:51pm Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   David Losh says 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. LLC is for asset protection. Why set up a LLC when don't have much to protect? It's a big difference between a LLC for a rental property and for builders/developers. You're comparing apples to oranges. LLC = Asset Protection. Do you have assets to protect? If no, then why bother.

32. David Losh Follow Befriend (2) 8 threads 1,126 comments Seattle, WA David Losh's website Premium

    65   7:37am Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   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.

33. Mobi Follow Befriend 1 threads 241 comments

    66   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?

34. Mobi Follow Befriend 1 threads 241 comments

    67   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.

35. FortWayne Follow Befriend (13) 102 threads 3,763 comments

    68   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.

36. Mobi Follow Befriend 1 threads 241 comments

    69   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?

37. FortWayne Follow Befriend (13) 102 threads 3,763 comments

    70   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.

38. CDon Follow Befriend (1) 217 comments

    71   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 :)

39. SFace Follow Befriend (2) 61 threads 1,301 comments Premium

    72   2:00pm Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   The above is perfert. When it comes down to it, nothing wrong with cloning yourself. If your clone makes money, you take it from your clone because you control it. When there are bullets coming, you let the clone stand in front. It will hurt, but you rather be the clone, not you. Once you make more money, make more clones to make more money and more protection. LLC's are the simplest entity form. You don't need board minutes, article's of incorporation and a lot of formality to establish existance. S-Corps does. It's basically a few hundred bucks and in the case of CA, $800 minimum annually. Net of tax, it's $500. Entity in a nutshell. lol LLP must have at least one general partner. Limited partner's are not liable personally from the action's of the LLP.

40. David Losh Follow Befriend (2) 8 threads 1,126 comments Seattle, WA David Losh's website Premium

    73   10:10am Sat 8 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   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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