Should I get an LLC for my first property?

Question

Hello everyone.

I am brand new to real estate and I have heard about the benefits of LLCs but was wondering if they are necessary when starting out. If an LLC is unnecessary at the start, what other options are there? I was also thinking of getting a separate bank account for real estate only but if I scale would I get a separate bank account for each property or just have one all encompassing account? Any advice would be super helpful.

Thank you!

Jacob St. Martin · Answer

Hello Alec, you definitely do not need an LLC for your first property. You in fact do not need any legal structure. The exception is if you are investing with a partner you should have either an LLC or a joint venture agreement. You definitely do need a separate bank account. Many states require that security deposits be held in an account that is only for holding security deposits. You should have a checking account as well to collect rent and pay for expenses. In the beginning I think it makes sense to have a bank account for each property but as you start to scale you develop more sophisticated business structures where it makes more sense to have fewer bank accounts that are more all encompassing

Nathan Gesner · Answer

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.

Jeremiah Rowe · Answer

Hi Alex!

While not necessary, if your goal is to expand and grow a substantial portfolio I personally WOULD do so in an llc. It's just an added layer of protection in case something goes wrong with a tenant. And it's fairly inexpensive in PA; my last one that I filed for was I think $200.

Best of luck! Do you have a specific property in mind?

Alec Jacobs · Answer

@Jacob St. Martin

Thank you for clearing that up!

Mike Klarman · Answer

I say open it, you will need it.  These Hard Money loans require it because they are business to business loans, not business to person.  Business to Business allows them to shed lots of the red tape that goes with getting a mortgage.

So, I see lots of different types of structures for Real Estate.  Some open a new LLC with each house, some have an LLC in every state they work in.  Some have a parent LLC that owns other LLCs which holds the houses.

You should have a RE account.  You do not need an account for every house, but every LLC should have its own account so you can keep track of where the money is coming in from.

Richard Loniewski · Answer

If your planning on using hard money, most lenders will only lend to an entity.

Trent Dues · Answer

Purchasing in an LLC may limit you to lender options, and can also lead to higher interest rates on purchases. But, at the same time, it will allow you to access private and hard money lenders if your goal is to fix and flip, then sell at a profit, vs taking out a traditional loan.

Jason Marino · Answer

Hi Alec,

There are some good considerations set out above. I think that the decision will ultimately come down to your level of risk aversion and your plans for scaling in the future. If your risk tolerance is low, and you plan on acquiring more properties, a limited liability vehicle will probably An asset protection structure is nice to have in order to provide you with more anonymity in ownership as well as a back up to insurance, if or when a policy denies coverage or cannot cover the entire claim.

Bob Stevens · Answer

Do you have a deal? If not get one 1st, it only takes 10 min to open an LLC, So many work backroads,

All the best

Dave Spooner · Answer

I wouldn't for the first property. If you do plan on expanding really soon then I would start thinking of getting one.

Should I get an LLC for my first property?

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