Brand new. Should I start an LLC for rentals and flips? Is having a partner beneficial?

Question

Hi everyone. Really glad I found this site. I am NEW to the game and haven't quite taken the dive yet, but want to make the plunge soon. I have ready several books, been through the buying process along with friends a couple of times, and once myself before backing out for good reason.

My goal is to buy some single family homes as rental properties and start a property rental llc. I plan to start small and work my way in to flipping a house or two when I can.  I would like to avoid using other peoples money as much as possible as that can be dicey, but I am open to hearing ideas.

What is the process for starting an LLC? Is it absolutely necessary to protect your assets should a tenant try to sue? Tax Benefits?

I have read much about having a good real estate attorney to ensure your transactions are legal, etc? Thoughts here? Cost?

I am sure this is an obvious question that everyone would like to know, but what is the best way to find REO properties before they hit the MLS?

Where would a partner come in to play? I have a friend who wants to do similar things as I but is less agressive. Advantages, Disadvantages?

I know I am going to have to dive in and just make some mistakes at some point, but I'd like to learn as much as possible before I go in. Thanks so much for all the help.

Aaron Mazzrillo · Answer

This topic has been discussed at length on many occasions. Please do a search and you shall find the answers you seek.

Gene Hacker · Answer

I highly recommend the NOLO self help law books.  You can pick up used copies on Amazon or Half for very good prices.  I have several and I refer to them often.

As far as partnering goes...hard money is likely cheaper.  Partnerships are often a disaster waiting to happen.  I have heard tons of partnership horror stories over the years, not as many as tenant horror stories but almost.

Adrian Chapman · Answer

Michael that is great advice. I appreciate it and I can definitely see where you are coming from. My plan is to start small and if I do not partner with an investor who has the power to help us purchase multiple properties then I will absolutely start with one. I can see how many people get sidetracked or bogged down or overwhelmed.

Joe I would be interested to see the reasoning behind the s corp or LLC for each type of investment. Why do you prefer one over the other?

Jonathan I will look in to land trusts.

Michael B. · Answer

Here are my thoughts, though I may be in the minority on this board with this advice:

Don't set up an LLC or anything else at this point. Wait until you're ready to buy your 2nd or even 3rd investment.  Here's my reasoning:

I mean no disrespect in this, but most would-be real estate investors never buy their 2nd property. Either they never find the right property to begin with, or the whole buying / financing / fixing / renting ordeal is too much to consider a 2nd. Or maybe life happens somewhere here and suddenly other things take priority.

Wait until you have a purchase under your belt, and know that this is for you. It's not that big of risk early with only a single property, assuming you've got your liability insurance in place. And it's not hard to move your current properties into the LLC afterwards.

So, for now focus on getting the right deal for your first purchase. One that will be financially lucrative and not a lot of hassle. Once that's in place and rented (or flipped) then you will be able to make the decision to go forward and buy another. That would be a good time to put the LLC in place to hold your investment.

I don't doubt that you'll probably go through with buying investment properties. But many people don't. And creating and then shutting down an LLC (or s-corp) is just an additional set of expenses if you decide this life isn't for you in the long term.

Joe Delia · Answer

I'm not a lawyer, however, my preference is S-Corp for flips, LLC for buy and holds

Jonathan E. · Answer

I recommend a land trust as well..

Adrian Chapman · Answer

I Shall Then...Aaron the reason I ask is because there is so much "fluff" out there that I appreciate when professionals and experienced investors can give me as clear and concise answer as possible without all the toppings I don't need. I have read so many real estate books and websites that talk so much about getting in the game and how you should do it and how to motivate you but never give you any solid concise direction. And when they do, it is information we have all heard before. But I certainly will continue searching, I want to learn as much as possible.

Amy, I understand the financial risk you take on if financing, generally falls back on the individual unless it was a small business loan. Or am I wrong there? Can you separate Small business loans from personal financing?

As far as the LLC is concerned I believe the law is different here in Kansas but from what I can tell the tax benefits and protective benefits make it a must if you are handling multiple properties.

Amy A. · Answer

Where I live (Maine) and LLC cannot represent themselves in court for an eviction.  Something to keep in mind if you plan to do your own evictions instead of hiring a lawyer.  Usually the tenant will move out before court anyway.  Also, most lenders will make you individually responsible for a loan (full recourse) so the LLC won't protect you there.  I've also heard that it's easy for a good lawyer to penetrate the "corporate veil" of an LLC, but am interested in hearing the experiences of people here with regard to this.