To LLC or not to LLC?

Question

As a new investor, do you guys recommend I work on getting my LLC set up or is this something I can get along the way? You're help is appreciated!

Scott Smith · Answer

Hey Antonio,

The purpose of the LLC is to separate the liability of your life from that of your business/assets within the LLC. I had a friend some time back who got into a car accident, and due to the circumstances of the accident he lost over $3 million of his investments. Obviously this is an extreme case, but it is important to understand that if there is no liability protection between you and your investments, then each additional investment adds to a liability pool that can be accessed either through issues in your personal life or your investments. The LLC helps compartmentalize you and your investments when structured correctly.

None of this is legal advice, but simply my personal opinion on these matters as a real estate investor. Your situation would really depend on the size of your first investment and your future goals. I would generally recommend throwing together an LLC - but you need to operate it correctly to maintain the protection. If you plan on growing, you may want to look into the Series LLC as explained in this article. It's better to look through your options earlier than alter when it comes to anything legal, because once any type of legal action is taken, or even threatened, you will not be able to restructure.

Tahra Wright · Answer

Hi Antonio!!!

It takes about 10 minutes to set up an LLC, especially if you are the only member. I do it all the time. You can go right on to the state website and set it up and get your EIN fast, so there's really no reason not to do it now.  If you are setting it up with a "3rd party" then you need a good operating agreement in place so it might take a bit longer, but you still need that in place before you both go off looking and getting deals with business partners.  It saves you from the "I thought he/she was doing that, or giving that, or agreed to that" later on.

Plus, if you are dealing with bank-owned properties and get them under contract, in general they DO NOT let you transfer the contract after it's accepted.  It has to close in the name of the person/entity who put the offer in.

For other properties that are off market or with homeowners selling, they typically don't care if you change the purchaser name.  If you are purchasing buy and holds, it gets to be a little trickier if you use a bank loan in your personal name and try to flip it to an LLC later.  You will have to deed it to your LLC and in some states (like NJ) you have to pay the realty transfer tax on the transfer (ask me how I know...lol), plus now the insurance has to be changed to insure the LLC and some lenders if they find out can enforce their due on sale clause and accelerate the loan (this is a risk of business some folks just take, if it happens you can always deed it back to yourself and pay that transfer tax again!)

Amy Kendall · Answer

I'm sure you will have a lot of mixed opinions on this matter.  Personally, I started out by renting out my first home and moving to another.  I didn't have an LLC set up until awhile after that.  I would just get started with your first property and worry about the LLC later.  Unless you are buying in cash, you will probably have a mortgage in your name anyway.

Anatole Doak · Answer

Hey Antonio, welcome to BP!  I agree with Amy - it's something you can do along the way.  I had the same question, and think it's one thing that can stop a lot of us investors from ever getting started because we're worried we need to set one up in order to get going.  I'd say just start finding deals and then worry about the LLC thing later once you've got one.  I've listened to a lot of Podcasts and read in a lot of books that say the same thing:  you don't need it to start, but you should do it once you're going.

The other thing to consider is as (Amy pointed out) if you're doing a traditional mortgage, you will probably have to have the mortgage in your name.  Then you could transfer that to an LLC, but research more about that because the bank could potentially call the note due.  There's a really good chapter about this in @Brandon Turner's book on "How to Invest in Real Estate" about this subject, highly recommend it.

To LLC or not to LLC?

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