The Best Starting Real Estate Investment Business Structure?

Question

Please share good and bad lessons learned about setting up an optimal business structure to buy a first rental property but be ready to scale to 5, 10, 20, and more in multiple states. What would you recommend? Those who are super-successful in building a large real-estate investment portfolio using BRRRR: please share what business structure you use and how you optimally protect your assets and manage them and your taxes. What would you recommend to someone about to dive into a first BRRRR buy?

Bobby Kumar · Answer

Thanks @Andrew Frishman, but for the FIG properties, I would assume you probably should not try to cash out until at least a year or two after it is stablilized otherwise just increasing carrying costs. Also thanks for your input @Josh Bauerle. I have heard the same advice from others. However, the legal liability is no small issue especially as one builds their portfolio and net worth. The LLC isn't the most important issue upfront, but will be more and more important as we hopefully succeed on our endeavors. Hence the question of how best to start out on the business structure.

Josh Bauerle · Answer

@Bobby Kumar I can pretty much guarantee the structure you start with won’t be the structure you stick with as you grow.In my experience trying to “optimize” these things before you start lead to delayed or never starting. Get started and talk to your attorney/cpa/insurance broker as you grow to make sure your current structure continues to work.

Frank Patalano · Answer

Hi Booby,What do you mean that lenders won't accept this?All of my mortgages are in LLCs. Get Commercial Mortgages.We even have single family rentals in LLCs with Commercial Mortgages.

Andrew Frishman · Answer

I looked into investing with Fig...The large down payment made it cost prohibitive for me...I like Mr Kumars @Bobby Kumar creative approach using a Refi to put down payment money back in your pocket.. Has anyone successfully done a refi on one of Figs properties? I look forward to future posts..!

Josh Bauerle · Answer

As a CPA I will say this isn’t overly important. If your loan allows, buy the property in an LLC. If it doesn’t, buy it in your name personally and make sure you have plenty of umbrella coverage. The structure will make no difference for tax purposes so the only thing to worry about is legal liability.

Bobby Kumar · Answer

Hi @Robert Carlson,Yes, I'm still figuring out how the whole LLC will work with the loans. I'm actually investing with FIG- fourplex investment group. They build new communities with duplexes and fourplexes geared towards investors in great markets. These are all new construction and require a hefty 25% downpayment on a $700K property, but it is essentially turnkey. They have a good system set up. I won't be making as much profit as if I did a BRRR and there is a 1 year construction timeline. However, I thought this was the best way to get off my butt and jump in with lots of help... Currently the plan is to get the construction loan in my name and then refinance. I believe after refinance I can put the property in an LLC. I know many lenders won't accept this, but the lender FIG works with is used to this since many other investors use an LLC. We'll see how it goes. One thing I did in the meantime is to increase my umbrella policy to hopefully protect me from any issues while I get the LLC worked out.As for Mass, yes the taxes are high and the new tax changes hurt quite a bit this past April! I'm sure there are deals for investment properties to be had here, but besides during a major BRRR on a >100yr old house in a suburb of Boston, I'm not sure how else one would make money here. Neighboring smaller cities in Rhode Island seem to have much more prospects for profitable rentals with lower capital outlay. I can imagine the DC/northern Virginia area may be harder and harder to find deals at as well.

Bobby Kumar · Answer

This is great question Robert. I am in this situation right now. About to buy my first fourplex out of state and hope to add more in the future. Looking forward to the replies.

Bobby Kumar · Answer

Thank you all for your input. It is greatly appreciated. Thanks especially since this was my first post! I agree with getting started first and then sorting out these smaller details.

Robert Carlson · Answer

Thank you for the info, @Frank Patalano.

Frank Patalano · Answer

I am not an accountant. I only had one property in my own name. When I switched it to an LLC my accountant said that since I am still part of the entity it is not a capital gains event.