When to open an LLC?

Question

Hello Everyone,

I've been listening to BP for a year now and finally ready to house-hack! I'm wondering if I should create an LLC for my first duplex in Massachusetts? The purchase makes sense now because of my fiance's job location but in a few years I'd like to move to and buy in the Texas area. Can I own an LLC across different states? Thank you all in advanced!

Scott Smith · Answer

As many posters have mentioned above, most people don't for an LLC until they start acquiring more properties. But it really depends on what you are comfortable with. The risk you run is that if there is a lawsuit that exceeds your insurance or is denied entirely, they will be able to call a judgment or settle against everything you own. If you have an LLC it creates barriers to how what people have access to.

This is not common, but real estate investing is the second most litigated industry in the country and so your risk runs about as high as doctors and law enforcement for being sued. Some people find that paying a few hundred dollars to protect their fledgling portfolio invaluable while others decide to leverage that money into other deals and grow faster.

I honestly just encourage people to sit down with an experienced attorney who is familiar with real estate investing to get an understanding of the risks involved and have a strategy laid out for them - the investment is worth the peace of mind it offers and allows you a solid answer to anyone who asks questions on the topics.

If you have more questions feel free to ask. I will also link a solid article that explains a healthy progression of asset protection strategy, so feed free to refer to that.

Best of luck moving forward! I am based out of Texas and love it here both personally and professionally!

Scott Smith · Answer

A Warranty Deed would be recommended, as opposed to a Quit Claim Deed, in order for the investor to maintain Title Insurance.  Most Title Insurance companies will cease to offer insurance if a Quit Claim Deed is used for the transfer as the Quit Claim Deed offers no warranties as to clean title.

Lenders will often send threat letters regarding the due-on-sale clause, but it is very rare for them to ever take action on those threats while the investor is still paying the note. While you could rely on this, I always tend to lean on the safe side and ensure there are legal barriers to protect my investments. In this situation I would just transfer a property into a Land Trust, then assign the LLC as the beneficiary. This type of transfer is excluded from the due-on-sale clause since it is an estate planning tool and protected by the St Germain Act from the due-on-sale clause. This article covers it in a bit more detail. This still allows for the liability protection for your asset without giving the bank any excuses to bother you. On top of that the Land Trust has other benefits, but those are off-topic for this discussion!

Account Closed · Answer

Umbrella policy is probably a solid idea if you're looking for protection. You can also purchase in your own name then quit claim into an LLC whose members are the same people who were on the original loan. Extremely doubtful you would trigger the due on sale clause in your loan terms by doing this. The lender would likely never notice, and if they did... furnishing an operating agreement and articles of incorporation might shut them up.

Tim Herman · Answer

@Cristina Cantos From my understanding to refinance you will have to put the duplex back into your name or use commercial lending which will be at a higher rate. Then if you transfer back to the llc it could trigger the due on sale clause. Me I just add an umbrella policy. I've owned rentals since the early 80's. Only been sued for return of security deposit and never lost.

Anthony Wick · Answer

@Cristina Cantos

I didn’t create my LLC until I joined up with two unrelated partners. Before that I just purchased in my own name and had great insurance. Easier and cheaper. And I also do not open a separate LLC for every property.

Chad Ackerman · Answer

I like @Scott Smith's advice.  I am sitting with my attorney tomorrow to have the same conversation with him.  Sounds like the next meeting I should have is with my insurance agent like @Tim Herman suggests.  Good advice as well and as always Mr. Herman.  Thanks!

Good luck @Cristina Cantos!

Lauren Juarez · Answer

Which part of Texas will you be moving to?

Cristina Cantos · Answer

Thanks for the response @Tim Herman! I was planning on buying cash (with help from family) since the property is in pretty bad shape and fixing it with time. I don't have many assets yet, but will hopefully build a portfolio in the next few years. I've been reading that transferring a house to an LLC after the purchase can be expensive so I thought maybe now would be easier. Since the property is being bought in cash, would a later transfer to an LLC become easier than with a bank lender?

Tim Herman · Answer

@Cristina Cantos Won't be able to house hack with a LLC. Have to take possession in personal name. What assets are you trying to protect? Cheaper when starting out to get an umbrella policy. Yes you can use a llc across states.

When to open an LLC?

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