12 properties and no company yet! What would you do?

Question

I often hear people discouraging newbies from spending too much time on entity structure, business cards and websites. That makes sense. Actually do a few deals and then worry about the "secondary" pieces. That is the basic philosophy I followed...

But now I have 12 properties and am acquiring about 1 per month and I have no entity! All the properties are either held in my name or together with my wife. They are generally worth about $50,000 a piece and rent for about $800 per month. Most of them have mortgages with a regional bank or private lender for around 75% LTV. I think it is about time I figure out what type of entity to form.

I have heard advice that each property goes into an LLC, but that seems like an administrative nightmare. I have heard every 5 million dollars of real estate should go into its own LLC, but that seems like too much risk all in one basket. One attorney was encouraging me to look at a series LLC, but those seem unproven.

I am sure many of you have walked through this process as you moved from a newbie to a serious investor. Any insight would be a appreciated.

Mike

Bryan O. · Answer

@Michael W.Colorado does not have a series LLC, but it's $50 to create an entity and $10 to feed it each year. You don't get much better than that.I believe that an umbrella policy is basic protection step 1. The next steps go into the entities. You then have to weigh protection vs headache. If you are okay with keeping books on multiple entities, maintaining completely separate accounts each, and ensuring no funds cross any of those lines, then go with an LLC per company. Otherwise, don't. I think you should use 1 LLC at a minimum, but then again you won't get nice 30yr fixed loans anymore...It's all about your own threshold on risk vs reward. Higher cash flow and no risk on interest rates, but exposed personally. Or higher interest, not fixed, shorter amortization, but less exposure... To the introspection chamber!!!

Steve Vaughan · Answer

I don't put houses in LLCs. I see the argument of having a target on your back as you grow in assets, so to me I guess it would have to be a personal decision for that reason, not the slip and fall sue thing I've never seen happen but everyone's afraid of. Have $500k liability ins and an umbrella policy if you like. Best value in the business, IMO.I place my 5+ unit apt buildings in LLCs and open new ones every $2MM. Maybe that would be a better number than every $5MM for you Michael Wentzel? No matter how many little houses I have,I know they will never mix well financing and insuring-wise with an entity. Search - "I can no longer insure my house because of LLC" or "Lender calling my loan due because of LLC." "I quit claimed my house to an LLC, now I can't,,," I would check with both my lender and insurance carrier before I made a move l'll regret based on (?). I'm not a lawyer, but I know they try and protect from worst-case scenarios. Be sure and ask them the PROBABILITY of whatever scary scenario they bring up actually having happened. Cheers!

Linda Weygant · Answer

HI Michael WentzelI'm a CPA licensed in Colorado. If you have some specific questions regarding your rentals and LLCs, I'd be happy to help you out if I can. I'll send you a PM with my phone number.

Jean G. · Answer

Michael WentzelJust curious, in which market are you finding these $50k properties that rent for $800?To answer your question: I personally use a Nevada Series LLC but you are correct that they are less proven. The advantage though is that I can spin up a new Serie in minutes by signing a new operating agreement (we don't require Secretary of State registration for each Serie in NV) and my costs are greatly reduced versus having regular LLCs for each property.Jean

Paul Timmins · Answer

Michael WentzelYou might reach out to Amanda Han she is a real estate CPA and active on BP. You need a solid entity structure and tax strategies now.Paul

Steve L. · Answer

I would ask your regional bank if they are happy to lend to entities.My CPA recommended an amount of equity per entity versus the value of the property.Now that I have 6+ entities I am trying to simplify my life and not starting any more.

Michael S. Helton · Answer

Michael Wentzel suggested. Basically, once you setup the first LLC, the rest in the series share much of the administration so they are cheaper and quicker to create and operate. There are only a few states which have them, so you will have to check Colorado or create them in Nevada or Wyoming and operate as a foreign entity.Although Series LLC's are still a grey area to some, the Nevada courts have upheld their security in separating the assets from the owners and from the different LLC's within a series.But I am not a lawyer, so speak to your attorney for further information.

Cameron Skinner · Answer

IRS allows you to treat a single member LLC as a "disregarded entity" meaning you can treat it just like your personal properties for accounting and tax reporting and still have a layor of asset protection. In reguards to asset protection I group my properties according to equity not value. Attourneys can only go after equity, and it has to be a lot of equity like 50 or 60k because even if they get a judgement they still have to foreclose and pay off the mortgage. Foreclosing is expensive and while they are foreclosing on you, your obviously not making any mortgage, property tax payments ect which will reduce equity even more. The big reason for LLC is personal asset protection. For example, true story one tenants dog bites another, complex is owned by one of my LLCs with big mortgage, she files suite on my LLC, finds out in deposition only about 50k in equity and my insurance doesn't cover dog bites and I don't carry liability insurance and they drop the case. She could not sue me personally and go after my personal assets because the LLC owns the property not me. Also in reverse if I run over someone in my car they can take my personal assets but can't touch my complex or bank accounts owned by my LLC. They can get a "charging order" againts my ownership interest in the LLC since I own the interest in the LLC but those are really hard to collect, as they can only take what you pull out of the LLC. So, of course, no one ever pulls any money out but the LLC ends up owning a boat, two jet skis, and a really nice car. It can also create tax issues for the individual holding the charging order. So realistically you want some properties owned by you and others owned in different entities. Good luck!

Michael Wentzel · Answer

@Bryan OttesonYou win the prize for easy and applicable advice. I talked with my insurance guy today and should have an umbrella policy in place in a week or two.Beyond that I probably need to follow the advice of @Paul Timmins and @Jerry W. and find a CPA to give some insight. My hope is to have my company structure strategy figured out and in place in the next few months.Mike

Michael Wentzel · Answer

@Jean G.I am investing in Pueblo, Colorado. I almost always under $45,000 for purchase and renovations for housing that rent for $750 to $800.I like the ease of a series LLC, but being in Colorado and needing to run everything through Nevada sounds a bit complicated. I'm not full-time in investing, so I am still looking for simple if possible.Mike