Should I start an LLC or wait until I actually have assets?

Question

Should I start an LLC right off the bat or wait until I actually have an asset or 2 and then transfer. If I should transfer later, what do I do about the "due upon transfer of ownership" clause from the bank? Can I get a local bank to agree to a transfer into my LLC? Obviously I would love to capitalize upon the lower interest rate of acquiring the financing through my personal name.

David Jay · Answer

Before you consider an LLC make sure you are properly insured. I have a 5M liability umbrella to cover my properties. Cost is only $1k per year. Not sure I see a lot of value in an LLC with this level of protection. I guess it’s like wearing a belt and suspenders. Certainly wouldn’t rely solely on an LLC to protect me without carrying sufficient liability insurance first.

Alex Martens · Answer

Hey Dustin,

I just went through this decision making process this week, so I’d like to share with you my experience and what I did. So I found a small, local bank that does portfolio loans. A portfolio loan is when the bank keeps the loan on their books and does not sell to a secondary mortgage market. This means the local bank can lend money on the terms they will allow, vice what the secondary market will allow. This can mean more leniency for lending.

I was very honest with the woman I was working with as to what I was trying to do and what my goals were. This is important because it will help the lender best work the situation through with you. It turned out, that since they are a portfolio lender, they could give my LLC (if I made one) a “conventional” 30 year loan at 3.75% The down side was that it would be an adjustable rate after the first 5 years up to a certain percentage. My other option was get a conventional loan in my name at the same initial interest rate, but it’d be fixed for the 30 years. After weighing the options, I figured that it was more worth while for me to take the fixed terms in my personal name than get the adjustable rate just for that sake of it being in an LLC. If in the future I feel the need for the property to be in an LLC, then I’ll see what I have to do to get it done and go from there.

My point with the long story is that if you should find a portfolio lender or two, and schedule a meeting to open the line of communication and see what they can offer you in terms of both an LLC or just you personally. I hope this helps. Best of luck!

Joshua Morgan · Answer

My opinion is, based on your question, you don't need an LLC right now and it may actually cause you difficulty.

(I am not an attorney, talk to your own attorney, etc)

Financing inside of a new LLC is going to be much harder than getting a loan in your personal name. You're almost certainly going to finance your first couple of properties in your personal name. Even if you can transfer it into the LLC right after closing, you're likely going to want to refinance in a year or two, and might have to move it *back* into your name from the LLC to do the refinance.

Unless you have a significant amount of personal assets, remember that the debt in your property is an element of your asset protection. A lawyer likely isn't going to recommend pursuing a large lawsuit if you only have 25k in equity and 10k in the bank. The fact that your property is likely significantly leveraged means there's less incentive for someone to pursue your assets.

Focus on finding and purchasing a couple of deals for now. Set up the LLC when it makes sense. I would say it makes sense when it's just as easy (or only slightly harder)  to purchase inside the LLC as it is personally. If you're doing a deal with only seller financing, might as well put into an LLC. Getting a commercial loan? Use an LLC. Until that time, just hold off and focus on closing deals instead.

The only other aspect to consider is if it makes sense to set up an LLC to run your property management functions out of. You don't really get any asset protection or liability reduction benefits, but having a proper business entity that you can get business checking accounts with, etc can help out on some aspects. It can help you seem more credible to suppliers and vendors, and it kind of enforces some rigor in your finances. It's really easy to conflate your personal and business expenses when all out of the same checking account. Forcing yourself to have clean books is good. These can be good reasons to set up an LLC and get the ball rolling toward your long term systems. But, wait until you have your first property purchased, otherwise you'll be tempted to spend time & money on business cards and branded ink pens instead of taking down deals.

Christopher Winkler · Answer

You should really get it first as you would have to buy in your name if you did not, and that is not really a good idea, especially if something happens. And it does not cost a lot. Also some lenders won't loan to an individual. We did our most recent one in Wyoming...

Ryan F. · Answer

I started in my personal name with an umbrella policy equal to my net worth. I used to run all my own rentals so I had a pretty good handle on my risks (i.e. knew all my tenants reasonably well and was in my units with some frequency to know the current state of repairs on everything).

Now that I have more properties it all goes into LLCs. There are plenty of banks that will finance into entities but terms may not be as favorable -- you may need to do commercial loans which commonly have prepayment penalties/5-7 year balloons/shorter amortizations. PM me if you want some names of people to reach out to if you want a lender who will lend to an LLC.

Anyway, my $.02 is that getting deals should be your #1 priority. If you have a deal and decide you need to set up an entity most attorneys can knock that out in the time it takes to close on a place. Obviously talk to your tax professional as well.

Ryan Kelly · Answer

@Dustin Leonard a best practice for most starting investors is to purchase the property first in your name, then transfer the property into your LLC at a later date. You can secure residential loans with lower interest rates and longer terms versus commercial loans. The loan stays in your personal name, but the deed is transferred into the LLC. You can only get commercial loans for an LLC, and if the LLC doesn’t make any money, it’s very difficult for you to qualify for commercial loans.

Eudith Vacio · Answer

Ah, this is all great information. Thank you everyone for sharing - I had the same questions in my mind :)

@Lisett Tito

Dustin Leonard · Answer

Thank you Alex. That’s great info.

Dustin Leonard · Answer

Thanks Joshua. That was right in line with where my head is at on it but I have absolutely no idea what I’m doing so I really appreciate the feedback.

Patrick Villaviza · Answer

Hi, I'll be following this thread because I'm on the same boat as you. I new to the game. I've been listening to podcasts and studying REI. But yeah, I need to know as well when would be the ideal time to make/transfer to LLC?

Should I start an LLC or wait until I actually have assets?

Most Popular Reply