Buying in my own name

[Claudia Bonaudo]

Hi BP members, 

Can someone help me with this?, I'm buying my first hold, live and then rent property, should I buy this under my name and after a year or when I moved out I put it under my LLC name or I buy it since the begining under the company name?

Thank you all

[Bill Gulley]

@Claudia Bonaudo

@David Faulkner

@David Faulkner@Marcelo Ricarte

Kathy, not ignoring you but you probably know this.

Those getting into real estate are suffering from LLC mania, symptoms include avoiding liability, hiding your identity, protecting your assets and thinking you'll have tax deductions. None of these are a good reason to start an LLC, individually or collectively, at least in holding a single family dwelling (SFD).

Those who generally promote forming an entity generally have a profit motive, fear is a great motivator.  

Beginners usually don't have a real need for any entity, with a SFD. You accept more risk driving your car than owning and renting a SFD. Apartments are different because the concentration of tenants increases the risks of ownership, there is a difference between someone who trips over a skateboard left on a step by a neighbor kid than by one left by your kid on the front porch.

Insurance takes care of most risks, but not all, the risks not covered stem from your management and knowledge, which is the very best defense. 

Understand the risks of hiring a contractor, allowing others access to the property, how you advertise, accept tenants, account for money and other aspects of management. To be liable you must be at fault.

A business entity has disadvantages, cost of maintaining the entity, legal, accounting and management. Trying to manage your property through an LLC has no real advantage as you are still responsible for the management and if not maintained properly it most likely won't afford any advantage as to protecting your assets or shielding you from liability.

You could have a car accident and end up losing the LLC as it is personal property you own, all assets held by the LLC are then gone or the income gained from the entity can be lost. If you can be held personally responsible, your ownership of an entity won't do you much good. Same goes for bankruptcy or loans you personally guarantee.

First question, what assets do you have that need to be protected? If you have very little, what's the point?

Next, protecting your future income, what is the likelihood of insurance not covering you and you being personally liable if you employ good management skills? I'd say with a SFD, slim and none. 

Understand too, that in many jurisdictions, if an LLC is the property owner, you can't act to represent the LLC in court, you'll need an attorney to show up for an eviction or whatever the nature of a legal issue.

While you can achieve better liability management through a business entity, it's not just a given that you won't be nailed. 

Someone who decides to actually spend money to go after you will initially find that they will likely need to spend more going through entities than attacking you personally, this may deter them from acting. But this is really to small claims, if it's a big deal, an entity isn't a gatekeeper locking them out.

There are no tax advantages as to property ownership by a company, you have better or the same tax advantages individually. 

An LLC makes some expenses easier to allocate to a business, it has it's own accounting, so buying office supplies is generally accepted by the IRS as opposed to you buying paper for your printer at home. But, if you employ the same accounting principles as an individual, much of the questionable expense matters go away as well.

A bigger plus is to marketing, if you advertise as ABC Properties, LLC, the public perception is different than advertising as Mom and Pop. Business cards have a purpose. (I've had business cards with just my name and number, too!) Signs will look more professional than saying call "Bill".

Convey a property from your name to an LLC, you violate the due on sale clause of the mortgage, the lender can call the loan.

Insurance premiums will be higher for a company than an individual generally. You'll need a separate business liability package but that might be good too as an individual. Not changing your insurance after a conveyance can cause issues with claims as well.

You'll find that loans will only be available on the commercial side for an LLC and you'll be providing a personal guarantee unless your company has a history of great income and assets held. No Fannie May, Freddie Mac or VA loans to an LLC.

Now, as you acquire more properties, your risk level changes, seeking a gatekeeper is more relevant. Consolidating accounting and legal requirements can be easier. Advertising is more professional. Your contact with the public is on a more professional level. You get t use the old "that is company policy" line, LOL.

Land development is a different animal than holding a SFD, so is construction or flipping, so your business needs should be addressed for the strategy you follow. 

I'm not an attorney, but a businessman, starting off, especially with you living in the property, you won't need a business entity. Your area, jurisdiction and the political flavor of your courts influence whether or not an LLC is right for you, so see your attorney. Just understand that some attorneys will gladly set up a business for you and represent that business, so make sure you really understand their advice, as well as that of your accountant who is also in the same boat. :)