When, how and why set up an LLC

[David Rutledge]

Good morning,

I am a new investor and I just recently had an offer accepted on my first two homes. One in NC and the other in IN (I live in CA). 

I have had all the inspections done and I am now in the process of sorting out insurance/ finance etc...

Both of these properties are rental properties and neither require any work. I have seen on here that most people seem to place their properties in LLCs rather than in their own names.

I am clueless about this and I was wondering if someone on here may be able to provide me with some more information about how it all works, the advantages of an LLC etc...

Why should I put my properties in an LLC and how do I go about doing this? Also, at what point do I do this. Before/after I get homeowners insurance? before/after the lender funds my loan?

Any help or guidance with this would be greatly appreciated.

I am sorry for the basic questions, this is my first time and I feel like I am learning something new everything single day in the process.

Thanks so much for your time.

David

[David Dachtera]

@David Rutledge,

The "real" answer is, "it depends".

Since those properties are in different states, you may want to have an LLC in each state. Remember that any transaction the LLC does will be governed by the laws of the state where that transaction occurs, NOT by the laws of the state where the LLC was formed.

If you're looking to the LLC to augment your credit availability, you'll want to get the clock on that started ASAP. Lenders typically like to see at least a year in business. So, START THAT CLOCK!

All that said, of course, you'll want to isolate yourself from your business entity structure as much as you can. They way that is typically done is to establish a personal trust (NOT named after you!) of which you are the beneficiary, but the trustee is a third party. The trust will part owner of each LLC and also part owner of your S-Corp (you WILL need that!). The S-Corp is another owner of each LLC. So, each LLC is multi-member for good protection, and none of the entities is owned by a human person. Piercing one veil simply leads to another. Erect more than one barrier to discourage such challenges.

As far as lenders, yes - heed the "Due on Sale" warning. It's uncommon, but there are some traditional lenders who are notorious for it. Anything in the BofA family, for instance.

When the LLC acquires a property it will be getting commercial financing, not "traditional" loans. So, you'll be dealing with the commercial loan department at the bank or with commercial lenders.