Rental Property Investor · WY · Member since 2016 · 87 posts · 51 votes
Today, I went into contract on my first deal for a buy and hold property (with intent for BRRR). I'm so stoked.
Going forward, I'll be picking up more buy and hold properties to add to my list. Here's my question: What is the most efficient and effective way to set up my business entity to own this property and those going forward?
Does it make sense to have one entity that owns each property?
Should there be one entity that owns separate LLCs for each individual property?
Should each property have its own bank account?
Am I missing something else?
I may be getting ahead of myself, but I'd rather not double back on my efforts if someone else has already cracked this nut.
You may want to limit the amount of value - or equity - in each LLC to losing one does not take a disproportionate amount of your holdings.
You'll want your entity(-ies) to be owned by other entities, NOT by human persons. This affords the best isolation and asset protections ("Control everything, own nothing"), but still requires full insurance for maximum protection.
One way of doing that is to have a revocable trust with you as the beneficiary. Form an S-Corp as an operating company owned by the trust. The Trust and the S-Corp then form a multi-member LLC "holding company" which is also part owner of the S-Corp. When you achieve income, you can then pay yourself from the S-Corp using the 1:2 salary / dividend split to minimize your self-employment tax liability while still showing an income to prospective lenders for personal credit.
Additional LLCs are likewise are part owned by the S-Corp and your trust so tey multi-member protection.
Remember to insure all of your entities and all or your holdings.
You may want to limit the amount of value - or equity - in each LLC to losing one does not take a disproportionate amount of your holdings.
You'll want your entity(-ies) to be owned by other entities, NOT by human persons. This affords the best isolation and asset protections ("Control everything, own nothing"), but still requires full insurance for maximum protection.
One way of doing that is to have a revocable trust with you as the beneficiary. Form an S-Corp as an operating company owned by the trust. The Trust and the S-Corp then form a multi-member LLC "holding company" which is also part owner of the S-Corp. When you achieve income, you can then pay yourself from the S-Corp using the 1:2 salary / dividend split to minimize your self-employment tax liability while still showing an income to prospective lenders for personal credit.
Additional LLCs are likewise are part owned by the S-Corp and your trust so tey multi-member protection.
Remember to insure all of your entities and all or your holdings.
Definitely set yourself up by having your entities own other entities as @David Dachtera has mentioned.
Personally, every new project gets its own LLC if it's a buy and hold property. I want all of my assets separate from one another if something were to go south from a liability perspective. Generally, on flips you can re-use the business if you've made some money and just want to roll the money forward into another flip. But every rental property should be in its own LLC/S-corp/C-corp if you're planning to buy-and-hold for a long period of time.
To your bank account question - yes, absolutely. Each property should have two bank accounts, in my opinion. It should have an operating account and a deposit account. The operating account should be to receive rents, pay expenses, and have a debit card attached for quick spending items. The deposit account should hold your security deposits, pet deposits, utility deposits, etc.
Rental Property Investor · WY · Member since 2016 · 87 posts · 51 votes
9y
Thank you, David Dachtera and James Triano. My family currently has a Living Trust holding our assets.
Would you recommend adding these new entities to this Trust? Or should I start another with my investment properties? Is that even possible?
VP of Acquisitions and Sales · Columbus, OH · Member since 2016 · 40 posts · 25 votes
9y
Everyones strategies are different and require different structuring.
I personally use and have been taught by Mark Kohler and he is a Genius when it comes to tax and legal and the best way to set things up. One of my favorite books that was very eye opening and helpful is
The Tax and Legal Playbook: Game-Changing Solutions to Your Small-Business Questions by Mark Kohler. Here is a link to Amazon Tax and Legal Playbook on Amazon
This book and some of the many things I have learned from Mark have put me light years ahead in the real estate investing game.
Everyones strategies are different and require different structuring.
I personally use and have been taught by Mark Kohler and he is a Genius when it comes to tax and legal and the best way to set things up. One of my favorite books that was very eye opening and helpful is
The Tax and Legal Playbook: Game-Changing Solutions to Your Small-Business Questions by Mark Kohler. Here is a link to Amazon Tax and Legal Playbook on Amazon
This book and some of the many things I have learned from Mark have put me light years ahead in the real estate investing game.
Hope this helps.
Cheers!
Steven Steffel
I'm a Mark Kohler guy, too! I'm on the Rowe / Tierney team in Downers Grove, IL.
Great you meet another part of the Rowe/Tierney framily.
I love all those guys. I got to hang out with Rowe and Tierney in Utah and Chicago and sat in on Marks 2 day weekend event on Tax and Legal in person. Great guys.
Chicago, IL · Member since 2016 · 165 posts · 49 votes
9y
S- corps have passive income restrictions. I would recommend an LLC and then form series of LLCs under your main LLC. Illinois is a state which allows it. This is the best option for buy and hold and the least expensive route then setting up individual LLC for each property
For flips the -Scorp will be your best alternarive.
Rental Property Investor · WY · Member since 2016 · 87 posts · 51 votes
9y
Thanks @Dorothy Wulf I just got off a call with my accountant and she recommended the same thing for me.
She mentioned that, from a tax standpoint, if I don't have partners on the properties that I pick up, I could essentially hold them personally. From a liability mitigation standpoint, it's best to have an LLC with sub-LLCs for protection.
I receive a significant amount of income from my 'real job,' so having the LLC(s) for my passive income sounds like a solid plan for me, personally.
Do you have any recommendations on how I should set up bank accounts? I.e., one bank account per property? One per LLC? Etc?
Chicago, IL · Member since 2016 · 165 posts · 49 votes
9y
Hi James,
Great to hear that your accountant gave you the same advice.
Have you created a name for your LLC? Is your lawyer setting up your LLC or are you doing it yourself. If you are doing it yourself you will need to go to www.cyberdriveillinois.com and irs.gov to get the LLC set up. Through www.cyberdriveillinois.com it will ask you if you want to set up an LLC with an LLC series.
As for banks, I would pick a local bank, not Chase, Wells Fargo, etc. I used to work for Chase and don't recommend it for businesses because building a business requires establishing relationships, and where better else then a local bank or smaller bank. I recommend First American Bank or Byline Bank. You will have a separate account for every tax id that you establish, but I would focus on the main one right now for your first investment.
Great to hear that your accountant gave you the same advice.
Have you created a name for your LLC? Is your lawyer setting up your LLC or are you doing it yourself. If you are doing it yourself you will need to go to www.cyberdriveillinois.com and irs.gov to get the LLC set up. Through www.cyberdriveillinois.com it will ask you if you want to set up an LLC with an LLC series.
As for banks, I would pick a local bank, not Chase, Wells Fargo, etc. I used to work for Chase and don't recommend it for businesses because building a business requires establishing relationships, and where better else then a local bank or smaller bank. I recommend First American Bank or Byline Bank. You will have a separate account for every tax id that you establish, but I would focus on the main one right now for your first investment.
With respect to due on sale clause is llc with series llc more beneficial vs a trust or s Corp as mentioned?
Chicago, IL · Member since 2016 · 165 posts · 49 votes
9y
Lenders don't favor S Corps for buy and hold. An LLC will protect your personal assets so that is favorable. A trust is welcomed by lenders. A trust is the the most expensive.
Rental Property Investor · WY · Member since 2016 · 87 posts · 51 votes
9y
@Dorothy Wulf I already have a Family Living Trust for my current 'personal' assets. Would you recommend putting my new LLC into this trust or should I start a new trust just for business assets?