How do I set up my real estate company ?

Question

Hello everyone, I have been asking this question before but I felt that I didn't get a good answer.

So, I'm wondering how you guys have your buisness setup for Real Estate.

Goal: Buy multifamily buildings and keep going.

So, I will set up a LLC for each and every deal that I will do, but in what way?

Do you guys create a LLC for every property that you are buying, and take the cashflow from them directly into your pocket and take the tax consequences that they bring?

Or do you have a Mother Company where the cashflow from your properties is flowing and take the cashflow out from the mother company instead thru dividends ?

Or how do you have your company set up ?

Best Regards, Rikard Lorén

Rikard Lorén · Answer

Jonathan Twombly, thank you so much for your opinion.I do get the limitation for protection with having each and everyone in 1 LLC each, that's my plan.These "personal expenses" would be work expenses or is it not seen as a work expense? it's to envole the business after all...Allright, I don't know if it works exactly the same here in sweden but I guess it's a bigger % chance that it is the same.Okay, let us assume I go forward with this plan, for each deal I create a new LLC that is alone only for the property and not linked to anything else.Do i get another LLC that I can channel the cashflow to ? *Driving car around for properties/meetings, office etc ?what I mean is: In Tom Wheelwrights book "Tax-Free Wealth", he wrote about being a super tax-payer and for example make your expenses a business one. Example: The purpose of the meal must  must be business, this means you have to have a conversation with your dining partner before, during or after the meal or traveling away from home on business.If you are a investor, what kind of business do you have to write off business meals when talking to partners about business to increase the wealth of the business? Or do I go on business meals private and write it off private and not writing it off from my business ? Don't I get a business as a investor ? Do I only create LLCs for real estate deals ?

Is it his CPA firm that he's talking about in his case ?Feel free to enlighten me!

Jonathan Twombly · Answer

@Rikard Lorén  The tax consequences are not dependent on the entity you set up.  They are dependent on whether or not you are considered a "real estate professional."  You should check with your CPA to see if you fall into the definition, but if you are doing real estate investment for more than 500 hours a year, you are considered a real estate professional and will be taxed at regular income tax rates.  (This is my non-professional advice - I'm not a CPA - but I just had a long discussion with my CPA the other day to prepare for a blog piece on taxes I am about to write.)  If you are doing it less than that, it's considered passive income.

It's slightly different if you are using investor money and take a "carried interest" in the deal, which will be taxed at passive investor income tax rates.

The reason to have LLCs is not for tax reasons.  It is to limit your liability to the investment and protect your personal assets. (People are often confused about this point because they hear, often from some guru, that the reason to have an LLC is to run personal expenses through it and save on taxes.  This is terrible advice, because running personal expenses through the LLC is precisely the kind of conduct that courts look for when deciding whether to disregard the LLC - which, normally speaking, is a very unusual thing to do.)

The reason that professional investors put each deal into a separate LLC is because they not only want to protect their personal assets that are outside the LLC, but they want to protect their different properties FROM EACH OTHER.

If most of your wealth is tied up in properties, and the properties are all under the same LLC, you might as well not have an LLC.  Because the assets inside the LLC - which are reachable by any creditor of any property under the LLC - will far exceed your assets outside the LLC.  Why on earth would you leave your properties exposed to each other?  You could spend a lifetime building a real estate portfolio and lose it all because you have left your assets vulnerable to each other.

Just think:  one bad property manager at one of your properties does something that results in a huge liability for you.  If that property is alone inside it's own LLC, your potential liability is limited to that property.  The worst that can happen is you lose that property, and you are done.

If all your properties are under the same LLC, then in this situation if the value of the property in question is not enough to satisfy the judgment, then the court will go to the next property, and then the next one, and so on until the judgment is satisfied.  The only way to prevent this is to have each property in its each LLC, run the LLC properly (no commingling of personal expenses), and keep the LLC adequately capitalize and adequately insured.

Just to emphasize the point - EVERYTHING inside an LLC is reachable by any creditor of ANYTHING ELSE under the LLC.

Rikard Lorén · Answer

Alright, thanks for your opinion Alex Deacon !

Alex Deacon · Answer

@Rikard Lorén I dont set up and LLC for every property unless its a huge property. Its overkill IMO. Seek out the advice and hire a good attorney. As far as taking the cash flow thats your call. What are you going to do with the cash flow. Spend it or reinvest it. Regardless positive cash flow will be taxed by the IRS. Again you need to seek advice of a professional. Seek out and hire a good CPA. Before I make any significant decisions I consult with my team. I suggest you start building a good team and then moving forward.