Business/legal advice for a first time investor

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Business/legal advice for a first time investor

Fernanda Herrera
Los Angeles, CA · Member since 2020 · 4 posts · 0 votes

Hi everyone,

Future investor here, doing my homework before jumping in. I wanted people's opinions on the best time to address the business side of REI. I know there are tons of advantages to forming a corporation and having the advice of a good CPA and lawyer at hand. How do investors typically approach this? How far in advance should I form an LLC/S Corp, reach out to a lawyer, etc? Keep in mind, I don't own any property just yet. I just want to be prepared so that there aren't any delays or mishaps on my side when I am ready to buy.

Also, is an LLC the way to go for someone looking at long term investing in CA?

Thank you in advance,

Fernanda

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  • Bill Liu
    Investor · Hackensack, NJ · Member since 2017 · 15 posts · 3 votes
    5y

    How big do you want your first deal to be? If your first deal is 4 units or under just buy it in your personal name. People do all these fancy things but I dont think its right for a first timer.  You can hold up to 10 mortgages from fannie mae in your own personal name. The only thing is i would have a 2-3 million in umbrella policy

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  • Fernanda Herrera
    OP
    Los Angeles, CA · Member since 2020 · 4 posts · 0 votes
    5y


    Thank you for the advice, Bill! I'm currently looking at OOS duplexes, but I haven't made a final decision. It will most certainly be under 4 units, though. I was under the impression that it was advantageous to create an LLC prior to purchase for tax purposes. Can you elaborate on the umbrella policy? Are you referring to home insurance?

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    @Fernanda Herrera

    It is actually a myth that you need an LLC to take advantage of deductions/credits.

    You are eligible for the same type of deductions regardless of if you have an entity or not.

    Regarding LLC vs Corporation.

    You live within the state of California which likes to charge its residents $800 on an annual basis for businesses entities with limited liability(Corp or LLC) so this is something to be mindful of.

    You can always start off with an LLC and then request to be taxed as a corporation later if you find it that your business is generating self-employment taxes that can be reduced.

    However, whether you have an entity or not should be a discussion you decide on after you talk with an attorney and insurance agent.

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  • Katie L.
    Attorney and CPA · San Diego, CA · Member since 2017 · 590 posts · 422 votes
    5y

    @Fernanda Herrera

    There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.

    Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

    Creating an LLC in California would cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation.

    You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

    These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

    *This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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