I am fairly new to RE investing and was thinking about pros and cons of setting up a LLC for out of state purchases. Firstly does setting up LLC really make sense or having a liability insurance serves fairly the same purpose? Secondly, can you create a single umbrella LLC for purchasing rental RE in 2 or more states or you need to have separate LLC for each state?
This is a topic that gets debated a lot at BiggerPockets and I'm sure you'll get many replies on both sides of the issue. My first question is why you only want to set up an LLC for out of state purchases. The liability to you is basically the same regardless of the property's location. You can hold rental real estate in any state in an LLC from any state. The states that are used most often because they are perceived to have better asset protection are Wyoming and Nevada. You're in an unfortunate situation as a California resident because California's own LLCs offer poor protection, and California slaps heavy taxes on LLCs from other states. A few years ago I think the taxes were around $800 annually per LLC. Many people recommend holding each rental property in a separate LLC, but in your case it's probably not worth it to do that due to the tax burden in California. You can put a few properties in each LLC or just rely on insurance. Some people shun LLCs completely because they are expensive, complicated, and haven't been thoroughly tested in court. I'm sure you'll receive many opinions about this. I think, if you have significant assets to protect, you should spend a couple hundred bucks and get advice from a good real estate attorney. If you're just starting and don't have extensive assets to protect, I'd get enough insurance to cover what you do have and revisit this down the road.
This is a topic that gets debated a lot at BiggerPockets and I'm sure you'll get many replies on both sides of the issue. My first question is why you only want to set up an LLC for out of state purchases. The liability to you is basically the same regardless of the property's location. You can hold rental real estate in any state in an LLC from any state. The states that are used most often because they are perceived to have better asset protection are Wyoming and Nevada. You're in an unfortunate situation as a California resident because California's own LLCs offer poor protection, and California slaps heavy taxes on LLCs from other states. A few years ago I think the taxes were around $800 annually per LLC. Many people recommend holding each rental property in a separate LLC, but in your case it's probably not worth it to do that due to the tax burden in California. You can put a few properties in each LLC or just rely on insurance. Some people shun LLCs completely because they are expensive, complicated, and haven't been thoroughly tested in court. I'm sure you'll receive many opinions about this. I think, if you have significant assets to protect, you should spend a couple hundred bucks and get advice from a good real estate attorney. If you're just starting and don't have extensive assets to protect, I'd get enough insurance to cover what you do have and revisit this down the road.
People always say seek out a legal expert, etc., etc., and I also think it's a good idea, but I'll try to give you some hints based on my experience and research. Insurance and entities such as LLCs are two different layers of defenses. If your insurance doesn't come through for you, you have the protection of the entity you set up to fall back on. If you do things properly, the LLC's business is the LLC's business and you can't be held personally liable if, say, a tenant slips and falls on the property. As your net worth increases it becomes more critical to have that kind of protection, as you have more to lose and are frankly a more attractive target for people who might try to sue you, frivolously or not. Personally I think you should have at least $300k in liability coverage, and consider getting umbrella coverage on top of that.
Mike,
I'm also new to BP. We've had a property locally for 20 years and have learned a lot about the landlord side. We've screened and researched tenants for years. Due to the expense of the Chicago area, San Francisco, East Coast, etc., it seems very, very hard to make the numbers work. Yet with our experience with tenants, screening can be totally inaccurate. Our best tenants have been the least financially attractive.
My question is two fold. I am quite scared of investing out of state because of the risks. How did you get started? We are five years from retirement, love real estate, and want to expand? How do we mitigate the risks?
Sorry Lalit. I'm not sure how to contact people directly yet, particularly those with a lot of experience.
@John Kraakevik, Mike may be able to answer better than me, but here is my take to your questions. First you need to decide what the risk is you are afraid of. Are we talking liability from being sued or risk of losing all your money to a bad turnkey company who sold you property for double what it is worth in a war zone, or the danger of a few bad tenants and not getting rent money for a year or two? There are different ways to approach it. My first concern is retirement being only 5 years away. For me real estate is a get rich slow business. I really ramped my investing up 3 years ago and I am only a few years away from 60. My thought was I would put everything on 15 year notes to pay them off fast and have cash flow from rentals out of what I used to pay for mortgage payments. As I get closer to retirement I have started using longer mortgages so I have higher cash flow. Since I have significant equity building quickly I am looking at investing in real estate investment trusts of doing some kind of hard money lending some of the better known flippers. The return is much higher than investing in buy and hold, less work, but more risk.
If you want buy and hold investing out of town or your state you will have to learn a new market. There are some really good turn key investment companies, but to be honest the really good ones have a much lower profit ratio because they buy safer, nicer properties, and stay out of war zones. You really cannot expect to jump in and have a 20% return on out of state investing no matter all the hype you hear from those selling investments on here.
Maybe you want to try your hand on doing an air BnB rental to see if your cash flow can be bumped up. There are a lot of options, but they will depend on your specific situation. Either way good luck.
Here's a ton of information in regards to your question...both in the article and in the comments-
https://www.biggerpockets.com/renewsblog/2013/08/1...
I decided not to go the LLC route on my out-of-state properties. For the reasons in the article.
Thanks Jerry.
My first concern is being only 5 years away as well. Right now I would be looking at acquisitions for cash flow. This is a business I want to continue into retirement. The reason I have considered out of state (never on my radar) has strictly been lower purchase prices and higher growth areas.
Wherever you are buying property is the jurisdiction you are legally doing business in. You should be forming your LLC their... or registering your home state LLC as a Foreign LLC there... however, domestic LLCs are usually easier to manage. Re: LLC vs liability insurance, my answer is both. If the state where the property is located does not have good charging order protection you could form a parent LLC in Wyoming and then it owns the Domestic LLC (or LLCs) formed in the state where the property is located.
@John Kraakevik, Mike may be able to answer better than me, but here is my take to your questions. First you need to decide what the risk is you are afraid of. Are we talking liability from being sued or risk of losing all your money to a bad turnkey company who sold you property for double what it is worth in a war zone, or the danger of a few bad tenants and not getting rent money for a year or two? There are different ways to approach it. My first concern is retirement being only 5 years away. For me real estate is a get rich slow business. I really ramped my investing up 3 years ago and I am only a few years away from 60. My thought was I would put everything on 15 year notes to pay them off fast and have cash flow from rentals out of what I used to pay for mortgage payments. As I get closer to retirement I have started using longer mortgages so I have higher cash flow. Since I have significant equity building quickly I am looking at investing in real estate investment trusts of doing some kind of hard money lending some of the better known flippers. The return is much higher than investing in buy and hold, less work, but more risk.
If you want buy and hold investing out of town or your state you will have to learn a new market. There are some really good turn key investment companies, but to be honest the really good ones have a much lower profit ratio because they buy safer, nicer properties, and stay out of war zones. You really cannot expect to jump in and have a 20% return on out of state investing no matter all the hype you hear from those selling investments on here.
Maybe you want to try your hand on doing an air BnB rental to see if your cash flow can be bumped up. There are a lot of options, but they will depend on your specific situation. Either way good luck.
Awesome Insight!!