Should I create an LLC to start purchasing properties?

Question

Hello investors,

Should I create an LLC to start buying properties with? Specifically, the plan is to buy single family and small multifamily homes to rent out.

What are the tax benefits of buying these properties under an LLC? Would you suggest operating under one to start out? Thank you!

Bill B. · Answer

There won’t be any tax advantages to having the llc vs in your name, just extra costs. You’re trying to protect your assets from a problem at the the property. The problem with this thinking is what kind of problem can occur at the property that isn’t your fault? If it’s your fault, or even the fault of the PM this you hired, you’re going to be personally sued anyway and the llc won’t help. You are 10x more likely to do something personally (car accidents come to mind) than yoru property is. Then the llc doesn’t help.  Just get an umbrella policy.  It doesn’t matter if you have 5 x $500k properties. That’s not $2.5 million. It’s only the $100k x 5 you put a downpayments. Until you are worth well over a couple million dollars insurance is more useful, easier, and cheaper. LLCs used to be propulsr for hiding your he property owner. That MIGHT slow someone down for half an hour, IF they aren’t a lawyer out to sue you, in which case it won’t take that long.

Nathan Gesner · Answer

No. This is what all the YouTube gurus and amateurs preach, but it's completely unnecessary. It's like building an indoor basketball court to train in . . . before you've ever learned to dribble a ball or played a pickup game to see if you even like basketball.

Don't focus on acting like an experienced investor when you are not. Focus on what's really important: analyzing deals, actually buying a deal, and managing that deal so you don't lose your shirt. Rinse and repeat. When you have $1 million in equity, then it may be appropriate to consider setting up an LLC.

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.

Dominic Pizzi · Answer

If you talk to a RE Accountant they will give you both options, invest under your own personal name or invest under a LLC. My personal opinion is that it is extremely smart to create an LLC (or different LLCs for each property). The benefits of it from a legal standpoint is that it gives you an extra layer of protection when it comes to a lawsuit. The tax benefits include no double taxation on your rental property, and you have the opportunity to write off more business expenses through an LLC than through your personal name. I hope this helps!

Steve Vaughan · Answer

Small residential rentals and no unrelated partners = no LLC for me.

Bob Stevens · Answer

BUY some 1st, then worry about taxes, You can always transfer the deed

John Morgan · Answer

@Mary Kenney

Buy the first 10 in your name. You’ll get a much better interest rate. There’s no tax advantage having an LLC. And almost any attorney can pierce your veil so don’t think having an LLC will be bullet proof. After you max out the first 10 in your personal name, then go with DSCR and commercial loans in your LLC.

Eliott Elias · Answer

Your record keeping will be a lot cleaner. Get with a CPA early in your career.

Edward Zachary Samperio · Answer

Hello!

Creating an LLC can provide certain benefits for real estate investors, but it ultimately depends on your specific situation and goals. Here are a few things to consider:

• Liability protection: An LLC can offer liability protection, meaning your personal assets would be separate from the assets of the LLC. This can be beneficial if you're concerned about being personally liable for any damages or legal issues related to your rental properties.
• Tax benefits: There may be some tax benefits to operating under an LLC, such as the ability to deduct certain business expenses. However, you should consult with a tax professional to understand the specific tax implications of operating under an LLC.
• Costs: There are costs associated with creating and maintaining an LLC, such as filing fees and annual fees. You should consider whether the benefits outweigh the costs for your situation.

Ultimately, whether or not to operate under an LLC is a personal decision that depends on your specific situation and goals. I would suggest consulting with a real estate attorney and/or a tax professional to help you make an informed decision.

Best of luck with your real estate investing journey!

Should I create an LLC to start purchasing properties?

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