Should I create an LLC to invest in my first multi family deal

Question

Was wondering if I should start and LLC to begin investing in multifamilies or is it okay to do it without forming a separate legal entity? What are the pros/cons?

Thank you and looking forward to your responses.

Erik W. · Answer

I did a post on this yesterday for someone else who was asking about loan implications of deeding property in an LLC. I know of 3 basic reasons most people form LLCs: 1) Asset protection / Anonymity. 2) Pooling funds from a small investor/partners that do not require syndication to forma business entity. 3) Because someone told them you're supposed to do that. The first two reasons have validity. The last one is, of course, pure bunk and should be ignored, unless they relate to items 1 or 2. LLCs (limited liability companies) are governed by laws at the state level. You will want to learn your state's laws. For example, in Missouri my LLC must hire a lawyer when we evict someone, because that is a court action, and the LLC is it's own separate legal entity. If I were to go to court as the advocate/counselor for my LLC, I would be practicing law without a license. So there is an increased cost of evicting vs. DIY filing. However, I would hire an attorney anyway to ensure it gets done correctly, and it adds only $150 per filing for the attorney, all of the other court fees I would be paying anyway. Banks/lenders won't typically loan money to LLCs, unless they have assets in them that can be used to fully collateralize the loans. Even then, most lenders will require you and any other members to sign personal guarantees on the note so you can't try to walk away if the deal goes bad and claim only the LLC is responsible for paying. Separate banks accounts for the LLC. Do not mingle your funds/expenses with personal funds/expenses. Meetings and decisions must be recorded and kept for review if requested by a court. Different states have different rules, so you'll want to consult with an attorney who specializes in LLCs inform you about what your duties are so you can peform them. Otherwise, the courts can set aside any liability protection the LLC may offer you because you aren't acting in a manner fitting the LLC model. Too, LLC was designed for groups mostly. Individual LLC owners/operators are directly involved in the day-to-day management unless you hire a PM company. So odds are you would be sued as well as the LLC if something goes wrong and your assets outside the LLC could be at risk. Carry a beefy liability insurance policy that names both you and your LLC as insured parties. Hope that helps. I definitely recommend consulting an attorney that specializes in asset protection & LLCs, as well as contact a reputable insurance provider.

Greg Dickerson · Answer

First make sure to discuss this with your attorney and accountant. That being said Yes you should set up an operating LLC to manage the properties and be the manager of the property level LLC. Each property should be placed in a separate LLC. Some lenders including agency lenders will require the property to be placed in a separate LLC so no other assets or entities or personal legal issues can affect the asset.

Michael Ealy · Answer

David,Most (not all) of the answers you got so far are from landlords who own single family homes and small multis (2-4 units). In those cases, I agree: an LLC is not necessarily mandatory and might even hurt your chances of getting bank financing. Loans on single family homes and 2-4 units are considered residential loans and those, generally, don't want to lend on LLCs.However, when you're dealing with bigger apartments like 20-units...having an LLC is for all intensive purposes, required (loans on those are commercial loans). MF lenders will require you guarantee the loan personally and will likely require you to take title to the apartment building into an LLC or corporation.Also, with larger apartment buildings, and say you need to raise capital (through syndication), having an LLC/corporation is again, better. The passive investors are buying LLC membership interests when they invest money so you really can't do it without an LLC.What are you buying when you said 1st multi family deal? If 2-4 units, an LLC is a good idea but not required.

Evan Polaski · Answer

@David Minaya, an additional item to add to @Erik Whiting discussing financing. With a personal guarantee, it is a contingent liability and does not show on your personal credit report. This can help with any personal financings you may want/need to do.Make sure you disclose these items, but I have had loan officers tell me they do not take them into account when underwriting the loan, if it isn't on my personal report. I am sure this varies bank by bank.

Calvin Thomas · Answer

It's always recommended, but so is good insurance. You will, however, have to get commercial rates instead of homeowner rates. However, your personal assets (and other commercial assets outside the LLC) are protected.

Greg Dickerson · Answer

Erik - just an FYI any passive investment or JV partner investing in a deal with you is considered a security if they are strictly passive and have no active role in the JV or LLC thus requiring an exemption with the SEC and the State to be filed.

Todd Dexheimer · Answer

Get together with your attorney and CPA, but I would highly consider purchasing properties in a LLC or Trust.

Ryan Mercer · Answer

I started an LLC to purchase a commercial property we lease in Southwestern Ontario, this was done under the recommendation of my accountant. Being my first investment property I never knew otherwise. I’ve since (4 years later) had some chats with a few lawyers who have mentioned an LLC is pointless and a waste of money (costs to start one, filing corporation taxes is a lot more, etc) unless you are doing business that is uninsurable. I’d like to know why it is advisable, or when it is advisable (how many properties, or price of portfolio) to start a LLC. Does rental insurance not cover you in case of accidents or when situation arise on your properties?

Hyoung Choi · Answer

Instead of doing an LLC, has anyone thought about getting an umbrella insurance policy on the home or yourself to keep you protected from litigation and liability? I was recommended to that instead, especially if you only have a few rental properties.

Pete Storseth · Answer

You wouldn't start an LLC for house hacking, right?