LLC when investing In Real Estate??

Question

Can somebody explain LLC's and How I should structure it. I've done some research and was told you can do that and then put it into a holding company and then put it into a Trust? Or maybe a corporation? I'm all over the place. I would appreciate it if someone could straighten all these out for me and explain each one and how I should go about structuring the whole thing. Thank you!!  Also is there an annual fee to have one?

Nathan Gesner · Answer

Matt, I'm going to give a more detailed answer for your LLC question. First, I want to ask if you even own any property? I looked at your profile and you're asking a lot of varied questions that seem to indicate you're trying to build knowledge about general investing. My suggestion is that you read a few books to get a basic understanding of some key concepts. I'll start with some suggestions for that, followed by my LLC advice.

1. Start with BiggerPockets Ultimate Beginners Guide (free). It will familiarize you with the basic terminology and benefits. Then you can read a more in-depth book like The Book On Rental Property Investing by Brandon Turner or The Unofficial Guide to Real Estate Investing by Spencer Strauss.

2. Get your finances in order. Get rid of debt, build a budget, and save. The idea that you can build wealth without putting any money into it is a recipe for disaster and the sales pitch of gurus trying to steal your money. A wise investor will not try to get rich quick with shortcuts. If you can't keep control of your personal finances, you are highly unlikely to succeed in real estate investing. Check out my personal favorite, Set For Life by Scott Trench , or The Total Money Makeover by Dave Ramsey.

3. As you read these books, watch the BiggerPockets podcasts. This will clarify and reinforce what you are reading. You can hear real-world examples of how others have built their investment portfolio and (hopefully) learn to avoid their mistakes.

4. Now you need to figure out how to find deals and pay for them. Again, the BiggerPockets store has some books for this or you can learn by watching podcasts, reading blogs, and interacting on the forum. There is a handy search bar in the upper right that makes it easy to find previous discussions, blogs, podcasts, and other resources. BiggerPockets also has a calculator you can use to analyze deals and I highly recommend you start this as soon as possible, even if you are not ready to buy. If you consistently analyze properties, it will be much easier to recognize a good deal when it shows up. Find Brandon's videos on YouTube for the "four square" method of analyzing homes and practice. It doesn't take long to learn how to spot a good deal.

5. Study the market. You can learn to do this on your own or get a rockstar REALTOR to lead the way. I highly recommend a well-qualified REALTOR that works with investors and knows how to best help you.

6. Jump in! Far too many get stuck in the "paralysis by analysis" stage, thinking they just don't know enough to get started. The truth is, you could read 100 books and still not know enough because certain things need to be learned through trial-and-error. You don't need to know everything to get started; you just need a foundation to build on and the rest will come through experience and then refining your education.

You can build a basic understanding of investing in 3-6 months. How long it takes to be financially ready is different for everyone. Once you're ready, create a goal (e.g. "I will buy at least one single-family home, duplex, triplex, or fourplex before the end of 2019") and then do it. Real estate investing is a pretty forgiving world and the average person can still make money even with some pretty big mistakes.

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.

If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.

Tim Johnson · Answer

Hi @Matt Sora, yes your question is a bit all over the place. What you are asking for is actually not reasonable for an individual on this forum to provide (explaining LLCs, holding companies, trusts, and corporate entities). But how about if you start with a good book like this one: "How To Use Limited Liability Companies & Limited Partnerships" by Garrett Sutton....or one of several others out there.  That will get your thoughts organized so that you can ask specific questions that will solve your individual issues.

River Sava · Answer

You do not need an LLC for rentals, however, it can be easier depending on what you are looking to do. I see this a lot, and would love to discuss it further!

Chris Seveney · Answer

@Matt Sora

If you are buying real estate you don’t need to start with a LLC just get a good umbrella insurance policy

John Mocker · Answer

Dan,

What Liability you need will depend on the project and your role in the project:

1. Buy & Hold:  You are the owner of the property.  You will need the Liability coverage in your Homeowners (if owner occupied) or Dwelling Fire policy (if only tenant occupied).  Other things to consider are Personal Injury coverage (Libel, Slander, Wrongful Eviction, Invasion of privacy).  Some companies offer it as an endorsement to the policy.  If you cant get it through the policy you may want to look to a commercial insurance agent to see if you can purchase it sepparately.

2. Flip:

- You are the GC:  you need commercial Liability Insurance for Bodily Injury & Property Damage.

You may have that coverage if you have a Contractors Liability policy or may be able to add

it to your Builders Risk policy (for the building under construction/renovation)

- You hire a GC:  Have them add you as an additional insured on their policy but also get coverage

on your own to cover you as the owner.  If it is in your personal name you may be able to

extend coverage from your Homeowners.

If you are acting as a Realtor or Property Manager you may need to get Professional Liability (also called E&O or Errors & Omissions) as well as General Liability.

Becca F. · Answer

I purchased a $1 million umbrella insurance policy beyond the rental dwelling/homeowner's insurance policy to cover 2 SFH rentals. I could increase it to $2 million but I don't think that's necessary at this point.

Matthew Wolk · Answer

If you want to close in an LLC, you can do so using a NON QM lender.  You cannot close a conventional loan in an LLC.  You would need to close the loan in your personal name and then quitclaim it into an LLC.  I have done this multiple times.  You do not need an LLC to close investment properties, you can just close it in your personal name or a trust or however you would like.

Nathan Gesner · Answer

A homeowner insurance policy usually has $300,000 in liability coverage (property damage or personal injury). On a rehab/flip you may want more because it's a construction site. Once the property is occupied, the minimum should be all you need because it's enough to cover accidental injuries. The only time I've seen an owner successfully sued for more than insurance would cover? When the Landlord is a slumlord that clearly ignores dangerous situations over a long period of time.

Dan Panea · Answer

I am starting in real estate, as an rehab/flip/investor. When you said $300K insurance policy, did you mean personal insurance policy covering business mal practice? I just want to know what the jargon to use when I reach an insurance company.

Thank you!

Curtis Mears · Answer

@Matt Sora

Not sure the the answer as the question is all over the place. But, you do not need to form an LLC to own rentals. The LLC provides a measure of protection against lawsuits. But it also means having more bank accts and paying some fees to govt. What you really need to ask is, do I need to protect my personal assets from my business? If you have limited personal assets, may but need LLC. As for the questions of trusts, not sure why you would need this. You may want to talk to  a professional to protect yourself.

LLC when investing In Real Estate??

Most Popular Reply