LLC or umbrella policy to protect first property?

Question

Debating on creating an LLC for protection and tax benefits.

I've been told the LLC set up as a sole proprietorship (what I'm planning) won't give me any more tax benefits than owning a property and carrying a heavy umbrella policy.

I've also been told that it would be difficult to get a loan on a property under the LLC, especially since it will be my first.

Anybody been in this situation?

Scott Smith · Answer

@Mike S. has a really good point. When I discuss these topics with clients it is important to understand what asset protection does - and how an LLC functions. For some investors the first property is all they own and they live pretty tame lives, so simply sitting with insurance works fine for them. Others will have many personal assets and a lot to risk when they purchase their first property (way someone working a W-2 job for several years stashing money away) - and putting some money down to create and maintain an LLC is worth that protection. I usually break it down into 5 pillars of asset protection (though in reality there are many more...)1st pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur.2nd pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.3rd pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property they can’t touch you or the other properties. You should use either LLC’s (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE- check out this article to learn more.4th pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a “asset holding company”) and a completely separate company handles all of your operations (this is a traditional LLC a/k/a “operating company”) For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.5th pillar is owning everything anonymously. If people don’t know what you own, then they are less likely to sue. People don’t sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner still, it doesn’t matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.Realistically I would say that meeting with an experienced attorney to see what you risk is before you decide how to move forward. I would always be careful taking advice on forums, too, as all the people giving advice aren't in your seat - and they don't have skin in your game. Best to get educated and make the best decision for you based on that knowledge.This is not legal advice, just my opinion as a real estate investor.

Clint G. · Answer

@Mike S.Thanks Mike! I think I'm leaning toward umbrella right now also for the fact that I've heard getting a loan under an LLC could be difficult. Once I have a nice set of assets I'll funnel it to an LLC.

J Torres · Answer

Doubling up on what @Bill Brandt said. Garett Sutton has a book, "Loopholes of Real Estate" which is awesome and covers this in great detail. Umbrella insurance for an "outside attack" and good property insurance for an "inside attack."

Clint G. · Answer

@Scott SmithThanks again, Scott!

Scott Smith · Answer

Haha, this one is on the house. But if you really feel so inclined, shoot me your address and I'll send you a bill later! Getting into real estate investing can be tricky due to all the different puzzle pieces you end up having to put together. I've spent a very significant amount of time focusing on this piece and think it is good to keep it in perspective for anyone who is trying to put the whole real estate investing puzzle together. Some underestimate some pieces, other overestimate them. Just keep moving forward and doing your due-diligence (like asking in forums about different questions you get) and you will generally stay ahead of the curve if you are proactive. Best of luck to you moving forward, and feel free to connect with me if you have any questions in the future or want help setting these up.

Greg Schuricht · Answer

An LLC will isolate your investment property from your personal assets (if maintained properly). Do you have a lot of personal assets that you'd like to protect against potential liability? An LLC may be a better alternative. Not a lot of extra cash laying around? The umbrella policy would probably suffice.

Mike S. · Answer

@Greg S.It all depend on the value and what will make you sleep better at night.For me, any property that equity is worth more than $100,000 has its own LLC. But I also carry liability and umbrella insurance. All of them are complementary and one does not replace the other.The recurring cost of an LLC is only around $200 a year. However the set up may be more, especially for your first one. Also you will need to learn the proper way of using it. If you expect to buy more property I would then suggest to start your entities structure now. If you won’t expand for a few years, you need to decide the cost/value ratio of setting it up now vs later.

Bill B. · Answer

Llc won’t give you any tax advantage. You don’t even need a large umbrella. You’re only protecting the money you put down. If it’s a $400k building and you put $100k down, you only need to protect the $100k. But, The umbrella should be equal your net worth if you’re thinking of protecting yourself from some sort of natural gas explosion or running over a kid in your car. The umbrella will be more likely to protect your from a personal accident than a rental incident if you have only one property.

Jason D. · Answer

@Clint Galloway for one property, you really dont need either. You can get a landlord homeowner policy with $1 million liability, and an LLC has no tax benefits.

Clint G. · Answer

@Scott SmithWow, man....excellent advice! I feel like you need to send me a legal bill after that!