Best option out of Corporation/LLC/Inc. ?

Question

I am looking at beginning my Real Estate investing journey in approximately 3 months (can’t start now due to a military PCS coming up) and I want to make sure I have all the proper groundwork laid so I can hit the ground running.

I am wondering what the proper business plan is if I am planning on doing this long term. Is it best to run things as a Corporation, an LLC, or is there another option that a newbie like me doesn’t even know of?

Any and all advice would be greatly appreciated, and best of luck on all of your own journeys.

Tanvir Sattar · Answer

@Geoffrey Bissen  It is always best practice to put each property in an LLC. This protects you from someone coming after your assets by separating them and it gives you the benefit of pass-through taxation.

Here is a quick read that lays out the pros and cons of forming an LLC:

https://www.biggerpockets.com/blog/real-estate-llc-not-best-option

Geoffrey Bissen · Answer

@Tanvir Sattar Perfect, thank you for the advice.

Cal Dunagan · Answer

@Geoffrey Bissen

David and Tanvir have some good advice here. I found a few good articles regarding pass-through entities (LLCs, C Corps, etc.) and real estate investment. First, this is a decent primer on the different pass-through entities and which ones are best for RE investing. This article goes over the different types of LLCs and how they might be helpful for different investing situations. If you're looking at the LLC, definitely consider a series LLC. This is a good article about the difference between a Traditional LLC and Series LLC. Let me know if this helps.

Best of luck!

Basit Siddiqi · Answer

@Geoffrey BissenIt is NOT always best practice to hold each property in an LLC.This is something you should discuss talking with an attorney/insurance agent with and formulate a gameplan based on your risk tolerance, risk exposure, net worth, etc.Holding a property for someone who has 25 properties would be overkill in compliance costs.1) Costs to form each LLC2) Annual Costs to keep each LLC active3) Bank fees for each LLC(which they may have if the bank requires a minimum balance)4) Bookkeeping fees if required for each separate LLC5) Registered agent fees for each LLCetc, etc etcMaybe the right exposure is 2, 3, 4 or 5 properties per LLC.Maybe you should get proper insurance and have one LLCor maybe you have one LLC that has a maximum value of $500,000 and have it insured up to that amount.

David M. · Answer

@Geoffrey Bissen

Talk to a few qualified professionals...

It’s up to you how you want to proceed.  There are many discussion threads on bp on whether to use a LLC.  I’ve been posting to a bunch of them if you want to search my history.

First, it’s not advisable to hold real estate long term in a C Corp.

In short...

Most people get “turned off” with holding Title in an entity, such as a LLC, because then you need commercial financing because the entity doesn’t qualify for conforming residential loans.  Many people have taken the property and mortgage personally the quit claim deed to the LLC.  That’s just leads to more problems in my layman’s opinion.  To protect/maintain the corporate veil, you need to avoid co-mingling and  using the LLC as your “alter-ego” (that is he legal term)...  Plus, you can’t really get a straight answer here since it’s governed by the State laws and case history where the LLC is formed.

As one accountant here on bp put it, you can have 100 rentals personally owned, 100 rentals and 100 LLC, or 100 rentals and one LLC.  It really depends.  And there really are people with lots of rentals in their personal name

Remember, the LLC doesn’t provide any tax advantages unless you are investing with a non-spousal partner.  It’s for the asset protection/partitioning.  You’ll still need to buy the same insurance and maybe umbrella policy.  In reality, it really doesn’t save you much.

In holding rentals personally, use landlord insurance, umbrella insurance policy (which come pretty cheap $1M to $5M liability coverage in $1M increments usually), and keep the unit in good repair/condition.

There is a bunch on this topic.  Go through my older posts...  or, if you want to chat (save my thumbs), send me a direct message and we can chat and I’ll give you some background for both avenues so you can ask informed questions to the professionals.

Good luck.

Best option out of Corporation/LLC/Inc. ?

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