Investor · Union City, NJ · Member since 2015 · 21 posts · 4 votes
I'm getting a few different point of view on this from equally qualified and experienced house flippers.
Here's the scenario: you purchase a house using 123 Main St, LLC. You fix up the house. You sell it to an owner-occupier. All good.
But what happens to 123 Main St, LLC?
Can you purchase another would-be fix and flip with it?
Can you use it to do an LLC purchase wholesale deal?
Can you use it to do a buy and hold deal?
Can you use it to start that super cool social media marketing company you always dreamed of?
I always thought you should dissolve that LLC immediately. Because if there is a legal issue which arises between 123 Main St, LLC the new owners of the actual house at 123 Main St (or contractors, buyer agents, etc) that last thing you'd want is new real estate owned by 123 Main St, LLC. Because it would put that new real estate at risk, right?
You can continue using the LLC as you move forward, but the issue is that you still have the liability attached to it for the times it was the owner of the previous property. So, in this case, you would essentially be placing a new flip into an LLC that now has liability for the current property and the liability from the one you handed off. So while you can continue using the LLC for future properties, it can defeat some of the purpose of the LLC in that you are attaching liability from different properties to the one you currently have in the LLC.
Many investors who work through fix and flips have found the Series LLC to be the idea entity for this type of issue. You can check out this article for more. The Series LLC works in a partent-child function. You establish the "parent" Series LLC, and once it is formed you can create unlimited "child" series. Many flippers will create a "child" series for each investment. The best part of this is that you can create a "child" series from your computer at home, it doesn't require to forma brand new LLC for each property, while still offering the liability protection you are looking for.
I set up entities like this all the time, so if you have questions about it feel free to ask! Just wanted to throw a strategy I have seen that works for both individuals scaling up quickly or doing lots of flips.
This is not legal advice, just my opinion as a real estate investor.
Rental Property Investor · Augusta, GA · Member since 2017 · 825 posts · 278 votes
7y
Hi! In my turf opening an LLC is enough of a pain (have to register with the county as well as the state, etc) that I don't plan on opening an LLC for single deals. I might do such a thing with a land trust. What's your overall strategy? what you are aiming for will probably make it easier to decide what to do with an asset, including an LLC.
Investor · Union City, NJ · Member since 2015 · 21 posts · 4 votes
7y
Thanks for the replies. The question is regarding fix and flips, but could also relate to the disposition of buy and hold properties. Would be great to get an attorney's opinion. But the concern arises if there is any legal action against the LLC pertaining to a past sale. If the LLC now owns a new piece of Real Estate, wouldn't it stand to reason that the new property may be at risk of seizure in a law suit that ends in plaintiff's favor? The plaintiff in a law suit pertaining to a past property may come after that new property to collect on damages. The whole purpose of LLCs is to limit personal liability, and limit exposure of real assets to 3rd parties. So is recycling LLCs dangerous in this regard?
You can continue using the LLC as you move forward, but the issue is that you still have the liability attached to it for the times it was the owner of the previous property. So, in this case, you would essentially be placing a new flip into an LLC that now has liability for the current property and the liability from the one you handed off. So while you can continue using the LLC for future properties, it can defeat some of the purpose of the LLC in that you are attaching liability from different properties to the one you currently have in the LLC.
Many investors who work through fix and flips have found the Series LLC to be the idea entity for this type of issue. You can check out this article for more. The Series LLC works in a partent-child function. You establish the "parent" Series LLC, and once it is formed you can create unlimited "child" series. Many flippers will create a "child" series for each investment. The best part of this is that you can create a "child" series from your computer at home, it doesn't require to forma brand new LLC for each property, while still offering the liability protection you are looking for.
I set up entities like this all the time, so if you have questions about it feel free to ask! Just wanted to throw a strategy I have seen that works for both individuals scaling up quickly or doing lots of flips.
This is not legal advice, just my opinion as a real estate investor.
Investor · Union City, NJ · Member since 2015 · 21 posts · 4 votes
7y
Scott, I'm literally slow-clapping from my office while reading this. This is exactly what I needed to know. Thank you for clarifying this, I really appreciate it. I will definitely checkout the "Parent" series LLC. Thanks again.
Investor · Union City, NJ · Member since 2015 · 21 posts · 4 votes
7y
@Scott Smith I just read your article, thank you. Is it possible to turn our existing LLC (which gets taxed legally as an S-Corp) into a Series LLC retro-actively? Or do we need to start from scratch?
@Scott Smith I just read your article, thank you. Is it possible to turn our existing LLC (which gets taxed legally as an S-Corp) into a Series LLC retro-actively? Or do we need to start from scratch?
Unfortunately, the Series LLC requires specific language to be formed and so it can only be done at the time of formation. On top of that there are only 12 states which allow you to create the Series LLC in them (you can have properties from all 50 states within a Series LLC, however.)