First Time Property - Forming an LLC

[Charlene Stovin]

Hi all, have another one

I was in the process of registering an LLC for my investment properties; I don't have cash, and financing I have heard for an LLC will be much more difficult than if I were to put the property in my name. Since this is my first, I don't really have much of a choice. I have the funds for the down payment - but not to pay cash or more than the 20% down

Is it unwise to get the loan in my name, have renters pay rent and all other business to the LLC? Will that still limit my liability?
For someone's very first property - are there other considerations other than forming an LLC that would still somewhat protect me?

[Joe Splitrock]

Originally posted by @Mackay Oakey:

Thanks @Joe Splitrock for the detailed response. This is a question I've been stuck on for quite some time too. Since the goal is eventually to pass liability onto the LLC and away from the individual can you have the LLC pay you back with its cash reserves/collected rents over time so that the asset eventually belongs to the LLC instead of you? I assume there would be taxes involved with having the LLC buy a property from the individual?

I hope these further questions make some sort of sense. I'm still a newcomer to the RE investing world!

Generally speaking an LLC has nothing to do with taxes. It is a disregarded entity which means for tax purposes it is the same as the owner. That assumes single owner or married couple.

You don't really need to have the LLC buy the asset. You have the LLC hold the asset and pay the loan. Once it is paid off, it is owned by the LLC. Understand that an increase in LLC value is just an increase in owners equity. When you transfer a property to an LLC, you are transferring your equity into the LLC. Let's say the down payment was $20K. You as an individual have now transferred $20K value into an LLC. If you are the single member, you own that $20K value. As you pay down the loan, your owners equity in the LLC increases.

You can buy a property in your personal name, using conventional financing and transfer the property into an LLC. Several years ago this was not allowed, but now underwriting rules have changed. They do have a couple caveats, such as the majority owner of the LLC needs to be the same as the person holding the loan. The transfer involves only ownership of the property. The loan will stay in your personal name. You collect rents through the LLC and pay your personal mortgage from the LLC. It has no effect on taxes, because you are considered the same for tax purposes.

This doesn't necessarily stop someone from suing you personally. They could try to argue in court that you are inseparable from the LLC and that the LLC is only a shell. This is why having an LLC is not enough. You also need to be careful to run the LLC as a separate business. That means business accounts and no use of personal credit cards in the business. If you do use personal credit cards, submit reimbursement requests in writing to the business. The business needs operating rules, regular meetings and policies. If members don't follow policies, they can be held liable separately from the LLC. If members break the law, they can be held liable separately from the LLC.

Sorry that is a very condensed explanation. It can be done, but starting out it may not be worth all the extra effort.