Straight to LLC or not?

Question

I'm preparing to buy my first rental property, single family. Ultimately I hope to have several and plan to own them in an LLC. My debt-to-income is such that I could definitely qualify for a traditional 30-year mortgage, with a 20% downpayment and low interest rate but it would be in my name. Under this route, I'd transfer to the LLC in the future.

However, I know there are risks with transferring to an LLC in this fashion so am I better off just biting the bullet and taking the loan out through the LLC, meaning 30% downpayment, likely less than 30 year loan, and likely a bit higher interest rate?

Am I even thinking about this the right way? Any thoughts are appreciated.

Rik Chatterjee · Answer

@Jay Helms, that certainly helps. I am assuming it is called an umbrella liability insurance, when I talk to my agent.

Steven Stokes · Answer

Being that it's your very first investment property, putting it in an LLC immediately wouldn't be the first path I would consider. Using an umbrella insurance policy would give you liability protection and you can still keep the more favorable terms lenders give to individuals buying real estate over LLCs.

Scott wrote a good article on this subject awhile back I will try to find it.

https://www.biggerpockets.com/renewsblog/2015/06/0...

I would focus on getting good finding profitable deals, funding the deals and building wealth and once you have a couple of properties under your belt then talk to a really good CPA about the best holding strategy.

But this is just my opinion.

Good luck!

Jacob A. · Answer

@Eric Eckman

Congrats on taking the steps to move into the real estate investing world man.

My advice is this. Find a deal first that makes sense. Then worry with the rest of it. I personally tend to lean the way of using the owner occupied strategy due to the numerous options for financing. I would not get caught up in the whole LLC vs S Corp vs Personal debate just yet.

1) Find a deal

2) Make sure that the numbers work on the property

3) Contact lenders and use it as personal residence for a bit

4) DONT  GET CAUGHT UP IN LEGALITIES THAT WILL COST YOU THE DEAL

Hope this helps and again this is just my opinion!

Best of luck!

Scott Smith · Answer

@Eric Eckman and @Rik Chatterjee It is never too early to start putting together an asset protection strategy.  Especially if you plan to purchase more real estate in the future.  Just as thought you can look into when considering: Series LLC.  Message me if you have any questions.

Best of luck!

Costin I. · Answer

This being your first rental, I would concentrate on getting the deal done and many more after. The low equity itself should act as deterrent, so you need to worry more about good insurance and proper property management before getting fancy with other asset protection structures. I suggest you read Every Landlord's Property Protection Guide: 10 Ways to Cut Your Risk Now and implement as much as possible first.

Hint: Insurance doesn't cover you in all situations (like fraud and mold). Also, you need to worry about attacks from "inside" (like tenant suing you) and from "outside" (like, you crashed your car into someone).

Once you have more properties and more equity accumulated, then you need to look into more advanced means of asset protection. By then you'll be more familiar with deals, financing, managing, insurance, deed transfers, DOS, etc. I can send you my notes on the whole asset protection subject research I done - it will give some insight in the many concepts involved and the pros/cons.

Eric Eckman · Answer

Thanks all for the replies. It's really helpful to hear the feedback from people that have been living in this world already. It seemed like everything I read pointed to putting my properties in an LLC for asset protection and tax savings. Definitely sounds like that's not necessarily the case.

Jay Helms · Answer

@Eric Eckman & @Rik Chatterjee - what you guys are concerned about is asset protection right? You don't want to be found guilty when sued (personally) if an issue occurred on one of your properties that is titled in your personal name and give the plaintiff an option to take all your personal stuff. One way to assist in this asset protection is an Umbrella Insurance Policy.

For newbies, this is great.

Typically you can place up to 4 properties (addresses, not units) under a single Umbrella Insurance policy. They should be provided by whoever holds your car insurance and a $2MM policy should be <$300/year.  Does that help?

Rik Chatterjee · Answer

@ali Boone, I am a newbie, just thinking about getting in. I have the same question as Eric and my motivation will be legal issues or liability.  If I am buying as myself how do I handle such a situation?

Ali Boone · Answer

What would be your motive for so adamently pursuing the LLC?

Straight to LLC or not?

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