Holding company, and LLC vs Incorporated

[Cade Schacher]

Hello all!,

I am brand new to real estate investing and eager to get started but first want to make sure my business is set up correctly not just for one deal, but will be prepared for growth and if necessary protection. I know first every one will say to consult with a CPA and an Attorney first and I completely agree, and for sure will before taking any action, I would like to hear how some current investors have established their businesses, and any feedback is always appreciated.

Now being a new eager investor, I may have a wide eye approach but I do like to aim high. My long term dream plan is to start with multi-family rental properties, as that grows I would like to help cut costs by maybe starting my own property management company, also do syndicated deals, set up a real estate brokerage, really just in general ways that I can keep expanding is I grow into multiple areas and different businesses the real estate has to offer. 

So first I have heard investors talk about how they first set up a holding company, so then they can have different llc's for different type properties, syndicated deals, out of state properties, management company, etc. Has anyone gone this route, if so do you feel you had more flexibility to expand your business in different directions, or had more flexibility. Also I have heard there may be some tax benefits if their is a loss in one of the llc's under the holding company.

Second, Is I would like to see if anyone has any feedback on LLc vs Incorporated. From everything I have read I see lots of benefits for both and this just maybe a question that a Attorney will be able to answer based on my specific needs.  But setting up LLc's seem to have an advantaged to help keep only certain people in the day to day and management of the business and keeps private investors who are funding only out of the business operations.

Im sure this could e a record for longest question posted but I would love to hear how others are succeeding and how they have set up similar business models with how and why that works for them. Thanks in advance everyone!

[Mike S.]

One of the standard setup is to have each property in its own single member LLC in the state of the property.

The property LLCs are then owned by a holding LLC in WY or NV to benefit from their good charging order protection.

In addition, you would use a C corp as management corporation to take salary (if needed to show steady income for future loan approval), retierement, medical and other fringe benefit. You will also use it to deduct most of your business expenses.

This standard template may be modified to accomodate some specificities, like states where a series LLC may be less expensive than having a different LLC for each.

Also you can add a layer of Land Trust for each property for anonymity and to give some due on sale close protection.

A lot of people here will tell you that you don't need any LLC or entity structures and that you can do with only a liability insurance. I disagree as to me they are both needed, but I understand that for some it may not be necessary due to their threat level.

Also using entities will create additional costs (creation, maintenance fee) and additional administrative burden to keep its protection veil intact (multiple bank accounts, paperwork trail, tax reporting). It may also create additional issues for obtaining loan as most conventional lender won't accept to mortgage a property held in an LLC. Commercial loans are more expensive.

At the end of the day, I believe that it is the duty of all investors to understand the pro and cons of all these different setups and to make an informed cost/benefit choice about what will make they sleep better at night.