Tax Write-Offs, LLC, and Financing

[Jeremy Barren]

Hello BP Forums. I am starting off in REI and will be purchasing a first rental property in early 2021. I am going to partnering with another individual and we were curious about whether to LLC now or wait. Between the two of us, we have ~$425K in starting capital and intend on scaling fairly quickly (and cautiously). Our goal is to have 10 units within two years. Since our goal is to grow with speed, does it make sense to form an LLC prior to our first purchase, and if not, why? We will likely not be going for a traditional mortgage, but rather investment loans. We understand the costs of forming and maintaining an LLC, but wanted to know if there are any other challenges associated with having one? If we chose not to form an LLC, can both my partner and I write-off the same amount of expenses for tax purposes as we could if we had a legal entity formed? Are there any issues in accessing financing if we are able to make 20% down?

Thanks in advance! 

- Jeremy

[Nick Dunbar]

@Jeremy Barren

Lots to consider here. If you for an LLP you would share the expenses at whatever percentage you delineated in your partnership agreement. Most the struggle comes with Lending.

Most banks do not like lending to LLCs or LLPs. Even fewer banks are willing to let you close in your own name and transfer the deed to a entity with permission. The bank can always “call the loan due.” Effectively saying you “sold” the ownership to the entity by transferring the deed regardless if you are a managing member in the entity and requires you to payoff your loan in a certain time frame. Obviously creates a massive issue and headache.

If you are going to do it (I transfer mine) get it in writing from a bank that you can transfer the deed. You will have the most luck (in my experience) with local lenders.

You have great starting capital. Protect your nestegg. Analyze deals constantly, ask for feedback from other investors, and be ready to act. Form the entity, find a lender, and an agent willing to write a lot of offers long before you are ready to get going. Finer point, if you don’t plan to buy until 2021. Don’t incorporate until 2021 or you will have a filing fee and a tax filing requirement in 2020.

Good luck! You got this!