As a Real Estate Investor, when is the best time to start an LLC?

Question

For somebody who is looking for their first property, I am thinking about starting an LLC to reduce my liability. Should I look at starting an LLC immediately, or would it be better to wait?

Ryan Lesley · Answer

Hey @Davin Manfredi,

I have heard arguments on both sides but a few things I would point out for you to keep in mind is:

- How long does the process take in your state? (some states you can go online and do it pretty much instantly, where others take weeks)

- Understanding the restrictions if you are trying to close in the LLC's name

- if liability is your main concern, not naming the LLC in a way that makes it easily tracked back to you. (if you're planning on doing this with several properties, consult a business attorney or someone well versed in structuring to maximize anonymity and asset protection,  i.e holding company for the individual LLC's)

Most important thing to keep in mind is if you are going to be utilizing the LLC(s) for liability, speak with someone who really understands how to structure these because not setting them up properly can be, in some cases, no different than not having set one up at all.

Hope that helps and best of luck 🤝🍀

Andrew Bosco · Answer

Personally, I like to have an LLC for every property. It's overkill, but keeps everything tight.

Luis Alvarez · Answer

Hi @Davin Manfredi I'm a bit late to this thread, but wanted to provide my point of view from a legal (estate planning/asset protection) background.  Here's what I have in place, and why:

Once I have a property under contract, I go to setup the LLC.  This must include the State registration, pulling an EIN (optional, but to create a truly separate entity, should be done), put together an Operating Agreement (even if you are the sole member, because again, this is part of business formalities necessary to show in a court that you're intention was to make the LLC separate from you personally); and yes, you should open a separate business bank account for the LLC (because comingling funds in an account under your personal name is the easiest way for a suing attorney to collapse the LLC).  And yes, having the ability to create my LLC and draft my own documents in a snap is really helpful and I understand that sometimes is difficult for other investors.  I transfer the properties into the LLC once closed, and before everyone throws hands up regarding the "due on sale clause", yes, this is often found in every modern day mortgage, but also, there are ways around this, especially when the purpose of the transfer is to entities for the sake of estate planning/asset protection.

To @Matthew Kwan's point, there is also an added layer of the "holdings" entity, which I personally have implemented, but this may or may not be appropriate for you...it just depends on other circumstances.

As for insurance, you also will want landlord insurance, as well as an umbrella insurance in place.  But remember, insurance does not protect you from liability...it pays the damages once you've already been found liable.  An LLC also does not make the property immune from liability...it limits it to the assets within that same LLC. This is something I think is misunderstood throughout the real estate investor world.  Generally, an umbrella policy covers any excess damages that haven't already been paid by your underlying policies, but those policies need to pay in the first place, and then the umbrella kicks in.  I have insurances (landlord and umbrella) in place for my properties, but I know how insurance companies stay profitable (by only paying claims that they absolutely must pay).  Keep in mind that these policies are drafted by sophisticated attorneys and drafters and typically have precise language and exclusions.

Short answer to your question:  set up the LLC once you have the property under contract and don't expect anything to cause it to fall out. I hope this helps. Feel free to message me if you have any further questions.

Matthew Kwan · Answer

If your properties are pure for investments, I would suggest as soon as possible so that you can have legal shield protection to protect your personal name. I also heard something regarding "Holdings LLC" where only 3 states (Idaho, Nevada, New Jersey) that you can link your LLC into those states where it's harder to trace/pursue towards your personal name. Please fact check and hope this help to spark some ideas.

@Albert Bui @Carlos Valencia

Debbie James · Answer

I agree with @Martin M. You can also get an additional umbrella policy. They are not expensive and definitely worth having.

Jake S. · Answer

Can always wait until you have a property lined up and ready to close on. But if you are planning on acquiring properties this year (in your home state), you could just open one now to save on time.

Jim Wellington · Answer

Opening an LLC is generally pretty easy and inexpensive. I would probably just go ahead and do it now.

Mark Munson · Answer

Hi @Davin Manfredi

I would do it immediately. I would also create an Operating Agreement and file for your EIN too. Ideally, you would open up an LLC bank account too, but that isn't as necessary as the other things. You want to be ready to act, so having the LLC ready to go won't slow you down with financing or making offers.

Account Closed · Answer

Honestly, I wouldn't do it until I already had some customers. Getting customers is the hardest part. Don't waste your time on the legal stuff. When you actually get money coming in then do it. Best of luck!

Tommy Parker · Answer

It's an easy process so I'd get it now.

As a Real Estate Investor, when is the best time to start an LLC?

Most Popular Reply