Starting a company in PA. Advice?

Question

Hello all,

So short story, a friend and myself are really eager (but cautious) about starting in the real estate (buy and hold) business. We are looking into PA, more specifically the Lehigh Valley area. We have read multiple books, done plenty of research, talked to a lot of knowledge people, and think we are prepared to start our endeavor. Now with all of that said, we know that there is sooooooooo much more that we still need to learn. We believe that we are going to set up an LLC taxed as an S-Corp. Our biggest questions right now are:

Is setting up an LLC taxed as an C-Corp the correct move?

When is the best time to set up the LLC? A few months out from the first purchase? Right before the purchase?

When is the best time to fund the LLC? As soon as the bank account is set up? Right before the purchase?

How hard is it to find a bank to give a mortgage to an LLC even with 20%-25% down?

Is it wise to start an LLC in a state like NV or WY to own the PA LLC for better asset protection?

I'm sure there are questions that I'm missing, but I think this is a good start. Don't worry, I completely understand that any advice given on here is simply that, advice and not something that should be taken word for word, and yes we will be getting a hold of a lawyer and CPA to help us with all of this. We are just kind looking for some simple guidance as what to do to get us started on this.

Thank you all for any information that you can give, it will be a great help!

Chris K. · Answer

@Brian Bogart

Welcome to BP. Some thoughts:

• Tax: this has been discussed a countless number of times here. The general advice is that you want to elect to get taxed as a sole propertier/partnership if you are doing buy-and-hold. If you are doing flips, you may want to elect for S-Corp. I personally don't see any reason why a C-Corp should directly own any real estate. In any event, the real answer --- as you know --- is to talk to a CPA or other qualified tax professionals.

• LLC Formation: In Pennsylvania, you incur realty transfer taxes everytime you assign a sales agreement. So you probably want the LLC formed before you enter into a deal.

• Funding LLC: not sure if it really matters. Maybe others will have a stronger opinion on this. Just don't dilly dally too much so that it causes closing issues.

• Mortgage: you can find ones. Most of them will probably not be 30-year notes. Let's say most of the loan product you run into will be around 15-20 year notes, has some kind of balloon, and has an adjustable rate. Not saying that every single product will --- just in general.

• Out-of-State LLCs: in my personal opinion, no. My general rule for holding property is to create an LLC within the state where the property sits. Most of this is driven by the consideration is that I don't want to deal with multiple lawyers from different jurisdictions. For smaller purchases (say anything under a $1 million), it really doesn't matter. But due diligence issues can have some impact if you are doing bigger deals. I generally want the attorney/law firm handling the closing to also deal with setting up the LLC, etc.

Good luck!

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

David Ribardo · Answer

@Brian Bogart, my recommendation is that you focus on building a team and finding deals first. Many new investor clients spend months working on websites, LLCs, and "business systems", but none of those will ever make you money without a deal! If you haven't already, step one is finding yourself a good agent, lender, property manager, and CPA. Then, start looking for your first property. It's a hot market and that will be your first big challenge.

Once you have your first property under contract, that's when you can start putting together financing details. I do recommend you talk to a lender when you are getting started, but typically they will only talk in general terms until you have an actual property picked out. The initial conversation should be to identify your purchasing power and make sure you can qualify for the loan. There are good investor friendly lenders here that offer creative products ranging from construction loans, non-recourse loans, and commercial lines of credit. Assuming you have liquid assets to find the purchase, finding your lender will not be difficult.

You shouldn't need to get a lawyer involved here in PA for routine business. Most closings are handled by title agents, and most LLC's are set up by CPAs. I'll refer a client to an attorney only when they have questions about our standard contracts or need something non-traditional written up.

Chris K. · Answer

@Brian Bogart

For LLC purposes, you can basically do whatever you want when it comes to ownership interest compared to economic interests. For example, you could have someone be a 99% member of the LLC but only get 1% of the profits from the LLC. Not saying it's a good idea but you could. Unsure about the federal tax consequences --- that's a CPA conversation.

You can do either a partnership or S-Corp. The default status is as a partnership.

Property-taxes wise there are exemptions but I don't think there are any that a real-estate investor could realistically take advantage of. When you get to the "big boy" level, you might be able to play around with LERTA stuff. But those are mostly for bigger developers who can meaningfully negotiate with the local municipality.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Brian Bogart · Answer

Thank you all for the responses! So some more information/questions which I did forget to include:

We have two properties that we have already run the numbers on and they are very good, even being on the super conservative side of everything. We must have looked at at least 200 different properties in PA, NY, and NJ before finding something that actually worked with our numbers that we were looking for.

We definitely want a CPA and Lawyer to pretty much help, if not walk us through, our first deal to make sure that we do everything 100% by the books. We are obviously new at this and don't know all the laws or best ways to do everything. We have decided that paying a little extra and learning in the beginning will be the most valuable investment that we can make.

We have an agent, but we might be shopping around for a new one soon. We have a CPA, but we haven't gotten into the real detailed oriented stuff with him, so might also be shopping around for a new CPA if we need to. We have a great property manager lined up that we know will work out well. The lender is going to be our biggest step to take now. We have some other friends who are going to invest for our initial down payment plus our own money that we are going to put in.

We need some suggestions on what a loan from a private investor might look/sound like?

If we have an LLC with four total members, can we file our taxes as a partnership or do we have to file as an S-Corp? And do we have to flow the on paper losses to all the members, or can we select the members the losses flow to? (This one is really complicated, so we will definitely be talking to the CPA/Lawyer about it.)

Is there any LEGAL way to not pay property taxes? Such as, if the company can show a loss, does that effect property taxes? Or is there any other LEGAL loopholes pertaining to property taxes? LEGAL is keys because the last thing we want to do is get in legal trouble right away.

@Chris K. and @David Ribardo, Thank you both so much for the information. I'll admit, I didn't think I would get such timely and informational responses. This definitely renewed my drive to make this happen!

Gregory H. · Answer

Think less about the LLC and more about the real estate in which you plan to invest.

Starting a company in PA. Advice?

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