New to BiggerPockets

[Pradeep Velugubantla]

Hi there,

I'm new to BiggerPockets and real estate investing.

As I start searching for investment houses, I am considering registering an LLC (I'm not quite sure if that's the right.

Do you know which state would be better to register an LLC?

Thanks in advance!

Pradeep

[Simon Ashbaugh]

Hey Pradeep, welcome to BiggerPockets! If asset protection is a top priority and you're serious about investing, choosing an LLC is a good option. But if you're unsure or just starting out, wait until after buying your first property. You can always form an LLC later if you decide to continue investing. Adding your first property to an existing LLC is simpler than forming a new LLC and transferring ownership later.

[Trent Dues]

What are your goals with investing? Buying under an LLC shifts the type of loans you would be eligible for, and likely rules you out of considering a house hack or using an FHA/VA loan, but opens up different funding options if you have the capital for a larger down payment. The LLC only offers certain protections to you; a lot of investors instead choose to invest in an umbrella insurance policy instead of buying in the LLC.

Also, keep in mind, if you are targeting property in Pennsylvania, while the switch down the line to re-deed from personal name to the LLC is quick and easy, it is not cheap. You will pay transfer taxes based off of the properties calculated assessed value, and if the property is in Philly city limits as your post location suggests, you're looking at a payment of 4.278% of that value being paid at close. An example is deeding a property valued at $100k from your name to your LLC or vise versa, you're now writing a check for $4,278.00 just to cover the tax payment to record the new deed, not including the recording fee and any fees collected by the title company or attorney representative who facilitates the transfer.

[Pradeep Velugubantla]

Thank you so much, Simon and Trent!  This is extremely helpful.

If I choose to establish an LLC, would it matter which state it is from? Do you know what things I should consider?

[Simon Ashbaugh]

Quote from @Pradeep Velugubantla:

Thank you so much, Simon and Trent!  This is extremely helpful.

If I choose to establish an LLC, would it matter which state it is from? Do you know what things I should consider?

You're welcome! If the properties you're buying are all in one state, forming your LLC in that state makes sense for convenience and cost. There's no need to deal with 'foreign' LLC hoops elsewhere. However, if you're leaning towards owning properties across different states, I'd recommend choosing a state known for being investor-friendly. Think Wyoming, Nevada, Texas, or Florida, their laws and taxes tend to be kinder to real estate investors. I would advise consulting a lawyer or tax professional specializing in real estate LLCs for this.

[Stuart Udis]

It is wise to purchase your real estate in an LLC but no need to over complicate the process. There's a lot of chatter on these forums about pros and cons to forming LLC's in specific states citing greater protection and privacy but it's not entirely accurate and certainly unnecessary. I see you are based in Philadelphia. If you intend on purchasing real estate in Philadelphia or elsewhere in PA, file a certificate of organization in PA. More importantly than merely creating an LLC is the documentation and how you operate your business. That's more critical to the protections than merely filing the certificate of organization.

[Chris Pelc]

Hey @Pradeep Velugubantla

Welcome to BP and the REI world.

It really depends on your goals and what you're looking to achieve. I think the first question you should focus on, is what your intended investment strategy will be. The answer to that question will likely help in the decision of taking title with an LLC. As others have said, if you are looking to house hack, an LLC will not be best suited for you as you will likely want to go with FHA financing. In all cases you will need the certificate of organization, an operating agreement of the entity, and obviously an EIN. Forming an LLC prior to taking title to a property doesn't take a lot of time. A lot of the investors i work with either put their properties in an existing LLC, or form new entities. In some cases, they will take title in their personal name for better financing solutions.

[Wale Lawal]

@Pradeep Velugubantla

Many considerations, such as your preferences, investment goals, and unique circumstances, will determine which state is best for you to establish an LLC in order to engage in real estate. To assist you in making a well-informed choice, think about these points:

1. Where You Live: It's usual practice to register an LLC in the state in which you call home. You're typically subject to by the rules and laws of that state, but it streamlines the administrative procedure.
2. Location of the Property: Setting up an LLC in the state where you intend to invest may have certain benefits. For ease and consistency, several investors would rather register their LLC in the same state as their investment properties.
3. Asset Protection: Take into account the degree of asset protection offered by state legislation. LLC members are more protected in some states than in others. Protection of one's assets is essential, particularly when investing in real estate, where there may be inherent hazards.
4. Tax Implications: Find out what taxes may be involved in registering your LLC in different states. While some states may have more business-friendly tax systems, others may not have any income tax at all.
5. Requirements for Registered Agents: Recognise each state's criteria for registered agents. The individual or organisation in charge of accepting legal papers on behalf of the LLC is known as the registered agent. Certain states have rules governing who is eligible to act as a registered agent.
6. Legal Advice: Consult with legal and tax professionals to get advice tailored to your specific situation. They can provide guidance on the legal and tax implications of choosing a particular state for your LLC.

Good luck!

[Sean O'Keefe]

@Pradeep Velugubantl there is a debate among real estate investors whether or not you need an LLC. CPA and Lawyers will always tell you to get one (and contrary to popular rumors this has nothing to do with getting more $ for filing fees). Not owning your rentals through an LLC exposes you to more risk, even if you have an insurance policy on rentals.

However, as a new investor, you may encounter some challenges and opportunities leveraging the LLC. Here are a few below:

• Generally, buying through your personal name can reduce the interest rate - commercial rates on LLC mortgages are usually higher but you can research this
• Most LLCs on incorporation don’t have any credit so it may be difficult to find. a lender
• If you own the property in your personal name you are exposing yourself to more risk and will want to transfer the property into LLC as soon as you can
• If you own property in your personal name and transfer to LLC the lender may not allow or can call the entire loan

LLC or personal ownership you need insurance.

If you search the forums for this topic using the magnifying glass feature in top right corner of your screen on BiggerPockets you will find a lot of discussion on "Quit Claim" "Buying through LLC", "LLC or not" etc.

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.

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*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

[Benjamin Sulka]

Quote from @Wale Lawal:

@Pradeep Velugubantla

Many considerations, such as your preferences, investment goals, and unique circumstances, will determine which state is best for you to establish an LLC in order to engage in real estate. To assist you in making a well-informed choice, think about these points:

1. Where You Live: It's usual practice to register an LLC in the state in which you call home. You're typically subject to by the rules and laws of that state, but it streamlines the administrative procedure.
2. Location of the Property: Setting up an LLC in the state where you intend to invest may have certain benefits. For ease and consistency, several investors would rather register their LLC in the same state as their investment properties.
3. Asset Protection: Take into account the degree of asset protection offered by state legislation. LLC members are more protected in some states than in others. Protection of one's assets is essential, particularly when investing in real estate, where there may be inherent hazards.
4. Tax Implications: Find out what taxes may be involved in registering your LLC in different states. While some states may have more business-friendly tax systems, others may not have any income tax at all.
5. Requirements for Registered Agents: Recognise each state's criteria for registered agents. The individual or organisation in charge of accepting legal papers on behalf of the LLC is known as the registered agent. Certain states have rules governing who is eligible to act as a registered agent.
6. Legal Advice: Consult with legal and tax professionals to get advice tailored to your specific situation. They can provide guidance on the legal and tax implications of choosing a particular state for your LLC.

Good luck!

 This is a great contribution. Super informative. Thanks, Wale!

[Benjamin Sulka]

Pradeep,

I definitely want to emphasize that a lender can invoke the "due on sale clause" and call the amount of your mortgage due if you transfer into an LLC later.

I've heard this is extremely rare but it is still a possibility to be cognizant of. 

All the best! 

[Luis Alvarez]

@Pradeep Velugubantla I'll preface this with the fact that I have a legal background, specifically with estate planning and asset protection. However, this is not specific legal advice to you, just an opinion based on the circumstances described.

Do I Need LLC?

Short answer is no, you don't need it.  A better question is "Should I have a rental property in an LLC?", the answer there (to me) is Yes. I would never own rental properties in my personal name. Yes, there are many out there that do it and nothing bad has ever happened, and I say kudos to that, I just would never do that. Second, in terms of asset protection, LLCs are not invincible, but I think what many don't understand is that they are not designed to completely shield your assets from liabilities, on the contrary they are designed to contain and isolate liabilities. They keep inside liabilities inside and outside liabilities outside. Read that again. The reason you see a person’s name and all their entities listed in a lawsuit is because Plaintiff (the suing party) attorneys have to list everyone and every entity that can be remotely tied to a cause of action, otherwise, if enough time passes and through the legal process discover that a separate entity or just a person was truly liable and they didn’t name them in the lawsuit, they are out of luck. Basically, they name everyone because they’re hoping and counting on the fact that people set up their own LLCs and didn’t adhere to basic entity maintenance and kept things separate (like bookkeeping and separate bank accounts). 

Location of LLC?

Typically, we set up entities in the state in which the property resides. The reason is that one wants to be able to properly avail themselves to the laws and protection of the corresponding state where the property lies. If a person owns a rental property in PA and if something happens on that property, the cause of action (lawsuit) would go before a court in PA, with a PA judge, citing PA law. Therefore, one would want a PA LLC to have title to that property.

Transfer from personal name to LLC/Due On Sale Clause

If one is transferring property title from personal name, a Grant/Warranty Deed would be drafted/recorded to transfer title. NOT a Quitclaim Deed, because Quitclaim Deeds do not fully warrant the rights and covenants of property as does a Grant and/or Warranty (or equivalent depending on state) does. Most purposes that people on the BP forums are transferring properties to an LLC, would be exempt of the Due On Sale Clause. There is statutory, and now Fannie/Freddie guidelines, that exempt many transfers from being subject to the Due On Sale Clause...asset protection/estate planning purposes are typically covered.

Why Use LLC when an Umbrella Policy Does the Same?

Umbrella Policies are good, but they are not an asset protection tool, they only cover litigation/damages after you’re already in litigation or found personally liable. Also, most Umbrella Policies only pay out if your underlying policy pays out, and the underlying policy will do everything they can to find an exclusion or that you were negligent (which you probably were) in the cause of action to get out of paying the claim. And yes, attorneys make money from forming LLCs, but they make way more when you were negligent and didn’t know what you didn’t know and end up in a lawsuit.

[Wale Lawal]

Quote from @Benjamin Sulka:

Quote from @Wale Lawal:

@Pradeep Velugubantla

Many considerations, such as your preferences, investment goals, and unique circumstances, will determine which state is best for you to establish an LLC in order to engage in real estate. To assist you in making a well-informed choice, think about these points:

1. Where You Live: It's usual practice to register an LLC in the state in which you call home. You're typically subject to by the rules and laws of that state, but it streamlines the administrative procedure.
2. Location of the Property: Setting up an LLC in the state where you intend to invest may have certain benefits. For ease and consistency, several investors would rather register their LLC in the same state as their investment properties.
3. Asset Protection: Take into account the degree of asset protection offered by state legislation. LLC members are more protected in some states than in others. Protection of one's assets is essential, particularly when investing in real estate, where there may be inherent hazards.
4. Tax Implications: Find out what taxes may be involved in registering your LLC in different states. While some states may have more business-friendly tax systems, others may not have any income tax at all.
5. Requirements for Registered Agents: Recognise each state's criteria for registered agents. The individual or organisation in charge of accepting legal papers on behalf of the LLC is known as the registered agent. Certain states have rules governing who is eligible to act as a registered agent.
6. Legal Advice: Consult with legal and tax professionals to get advice tailored to your specific situation. They can provide guidance on the legal and tax implications of choosing a particular state for your LLC.

Good luck!

 This is a great contribution. Super informative. Thanks, Wale!

Most welcome!

Keep learning and growing...

[Benjamin Sulka]

Quote from @Wale Lawal:

Quote from @Benjamin Sulka:

Quote from @Wale Lawal:

@Pradeep Velugubantla

Many considerations, such as your preferences, investment goals, and unique circumstances, will determine which state is best for you to establish an LLC in order to engage in real estate. To assist you in making a well-informed choice, think about these points:

1. Where You Live: It's usual practice to register an LLC in the state in which you call home. You're typically subject to by the rules and laws of that state, but it streamlines the administrative procedure.
2. Location of the Property: Setting up an LLC in the state where you intend to invest may have certain benefits. For ease and consistency, several investors would rather register their LLC in the same state as their investment properties.
3. Asset Protection: Take into account the degree of asset protection offered by state legislation. LLC members are more protected in some states than in others. Protection of one's assets is essential, particularly when investing in real estate, where there may be inherent hazards.
4. Tax Implications: Find out what taxes may be involved in registering your LLC in different states. While some states may have more business-friendly tax systems, others may not have any income tax at all.
5. Requirements for Registered Agents: Recognise each state's criteria for registered agents. The individual or organisation in charge of accepting legal papers on behalf of the LLC is known as the registered agent. Certain states have rules governing who is eligible to act as a registered agent.
6. Legal Advice: Consult with legal and tax professionals to get advice tailored to your specific situation. They can provide guidance on the legal and tax implications of choosing a particular state for your LLC.

Good luck!

 This is a great contribution. Super informative. Thanks, Wale!

Most welcome!

Keep learning and growing...

 A little bit every day! That's my goal

[Pradeep Velugubantla]

Quote from @Luis Alvarez:

@Pradeep Velugubantla I'll preface this with the fact that I have a legal background, specifically with estate planning and asset protection. However, this is not specific legal advice to you, just an opinion based on the circumstances described.

Do I Need LLC?

Short answer is no, you don't need it.  A better question is "Should I have a rental property in an LLC?", the answer there (to me) is Yes. I would never own rental properties in my personal name. Yes, there are many out there that do it and nothing bad has ever happened, and I say kudos to that, I just would never do that. Second, in terms of asset protection, LLCs are not invincible, but I think what many don't understand is that they are not designed to completely shield your assets from liabilities, on the contrary they are designed to contain and isolate liabilities. They keep inside liabilities inside and outside liabilities outside. Read that again. The reason you see a person’s name and all their entities listed in a lawsuit is because Plaintiff (the suing party) attorneys have to list everyone and every entity that can be remotely tied to a cause of action, otherwise, if enough time passes and through the legal process discover that a separate entity or just a person was truly liable and they didn’t name them in the lawsuit, they are out of luck. Basically, they name everyone because they’re hoping and counting on the fact that people set up their own LLCs and didn’t adhere to basic entity maintenance and kept things separate (like bookkeeping and separate bank accounts). 

Location of LLC?

Typically, we set up entities in the state in which the property resides. The reason is that one wants to be able to properly avail themselves to the laws and protection of the corresponding state where the property lies. If a person owns a rental property in PA and if something happens on that property, the cause of action (lawsuit) would go before a court in PA, with a PA judge, citing PA law. Therefore, one would want a PA LLC to have title to that property.

Transfer from personal name to LLC/Due On Sale Clause

If one is transferring property title from personal name, a Grant/Warranty Deed would be drafted/recorded to transfer title. NOT a Quitclaim Deed, because Quitclaim Deeds do not fully warrant the rights and covenants of property as does a Grant and/or Warranty (or equivalent depending on state) does. Most purposes that people on the BP forums are transferring properties to an LLC, would be exempt of the Due On Sale Clause. There is statutory, and now Fannie/Freddie guidelines, that exempt many transfers from being subject to the Due On Sale Clause...asset protection/estate planning purposes are typically covered.

Why Use LLC when an Umbrella Policy Does the Same?

Umbrella Policies are good, but they are not an asset protection tool, they only cover litigation/damages after you’re already in litigation or found personally liable. Also, most Umbrella Policies only pay out if your underlying policy pays out, and the underlying policy will do everything they can to find an exclusion or that you were negligent (which you probably were) in the cause of action to get out of paying the claim. And yes, attorneys make money from forming LLCs, but they make way more when you were negligent and didn’t know what you didn’t know and end up in a lawsuit.

 This is great, Luiz!