Is an LLC a good idea?

Question

I am thinking of forming an LLC. My sister and I are trying to get into REI. We want to do small rentals (multifamily homes) and flipping as well. We are in upsate New York. I am hoping an LLC will help with loans. My credit is 649 and hers is poor. Apparently I have a high DTI ratio due to having a care loan and a home loan that are pretty new. We have found two deals we are looking into and want to get started but have yet to secure financing for deals. Will an LLC help with that? Is there another type of business we should form such as a corporation, etc? I know where I want to go with this business but getting my foot in the door is proving difficult.

Steve Vaughan · Answer

The premise of establishing an LLC for a partnership is sound, but I don't see any benefit for appearing 'legit' to a lender. Years of established entity credit won't hurt, but like @Cal C.I've had one for over 10 years also and still sign personally for the commercial assets (only) I acquire with it.I would just add that I don't have multiple business purposes inside the same entity. I would not do both B&H and flipping/rehabbing inside the same entity. Different tax implications and probably different elections how you want to be taxed. Not an attorney or tax person. Just what I have done.By the way - cars eat wealth. I haven't met one successful RE investor or wealth-builder saddled with car payments. My coin on that. Happy holidays!

Cal C. · Answer

For you a LLC is a waste of money. Until you have a considerable amount of properties and equity in those properties a LLC is not needed. If you are wanting it for asset protection reasons an umbrella insurance policy would likely be much better and cheaper. For credit purposes, it will take a while (years at least) to pay enough bills out of your LLC to not have to have a personal guarantee on loans. I've had an llc for ten years and lenders don't even bother checking the LLC's credit history they only want mine.

Matthew Kreitzer · Answer

I'm going to disagree with the above poster in terms of whether an umbrella policy will adequately protect you from the claims of judgment creditors. Typically, the overages coverage may be not be enough to cover the typical personal injury claim. Many excess policies do not come with any more than a million in overage protection. In today's economy, a strong personal injury claim can easily exceed the average amount of coverage from policy holders. Not only that, but you risk the policy not covering specific types of personal injury cases.From the perspective of an attorney, you should talk with an attorney in your local area, namely New York (where the costs of damages are extremely high) to discuss LLCs v. Insurance.

Kenneth Jones · Answer

Thinking about an LLC to increase your ability to qualify for a loan is probably pointless, as others have said. The Brand New LLC has no credit record, so is not a good credit risk. No record might be worse than one with a few dirty spots on it, for at least the banker can see some history of performance, even it it's not fantastic. Anyway, go to your browser and look up nolo.com They have much to offer in legal topic areas like this. But then go to your local public library and Borrow the NOLO book(s) you want to read. Anthony Mancuso has written several helpful texts. Forming an LLC is easy, but it's not a cure-all.

John C S. · Answer

@Ryon Koehler I was thinking more for tax purposes not just asset protection.

Ryan Koehler · Answer

John S. Bump to the top. I have the same question regarding LLCs and FHA lending.

Justin R. · Answer

TBH, I'm a little non-organized on this particular point. Prior to this year, my holds were all 2-4 units with attractive long-term Fannie financing held personally with a single lender. Properties here are very high priced, so my long-term success depends on maintaining those terms. As much as I'd love to have everything in entity(ies), I perceive there to be more business risk in doing so than legal risk in not doing so.So, shorter term stuff and new long-term holds are going in an entity. If I eventually find legal counsel with experience in this space who can help me organize otherwise, I'm all for it.

John C S. · Answer

Hi all can someone help me out with a question. If I bought a4 unit as an FHA loan would I be able to form an LLC for that property immediately after purchase.

Steve Vaughan · Answer

@Justin R.- yes, I have seen the same with local banks that have more than 2 brain cells, but only with commercial (5+ unit) apts. They prefer title be held in an LLC. I think HMLs (which I haven't used) also prefer to lend to an entity, even with single-families. I don't put my little houses in entities. Do you put all RE (residential and commercial) into LLCs?

Justin R. · Answer

Agreed with the others, though there are some state specific issues with LLCs so it's hard for me to feel really confident saying one thing or another. FWIW, it has been my experience that both private lenders and commercial banks have much preferred (and once REQUiRED) that the loan be made to my company rather than to me personally. From their perspective, it makes the paper trail clear that it's a non-owner loan. Steve Vaughan Have you seen the same?