LLCs and personal mortgages

[Jared Ryan]

Hello BiggerPockets!

I'm exploring the possibility of getting a 10-unit apartment building. With that in mind, I'm wondering if I should get an LLC.

Benefits of LLC:

1. If I live in the property, I, Jared, can rent from my LLC, and that provides come interesting tax advantages. Though I got lost in the weeds here, I couldn't quite figure out how advantageous that would be.

Could someone please provide more insight on this?

2. Liability protection. Well, sort of. Everywhere I read says just go for good insurance, at least for newer investors. Maybe when the portfolio gets larger, or if I were branch into other areas of real estate, it would make sense (wholesaling, agent, flip, etc.).
3. If I want to go buy more real estate, the commercial loan and LLC don't show up on my personal credit.

That's pretty nice if I want to go buy future 1-4 unit properties. However, I've read that the commercial loan / LLC is still something I need to disclose as I try to get funding for my next property. So, does the LLC actually benefit me at all, when it comes to seeking future loans? If the lending institution knows about the commercial loan / LLC after all, it seems like I would probably qualify for the same mortgage amount that they would lend to me without an LLC, but just perhaps I would get a better rate with having the commercial loan in the LLC because I would have better credit.

The reason I ask is because I have not yet utilized the oh-so-beautiful FHA loan, so after I use my full borrowing capacity on the commercial property, I'd probably try to buy up the most expensive 4 unit or smaller that the bank will let me purchase, and knowing how LLCs impact my personal borrowing ability will help me gauge how much I should be able to borrow for the FHA loan. And if I should get the LLC at all.

Cons of LLC:

- It costs time and money to set up and maintain, and it costs different in each state. So...to know if I should get one, I should just make sure the benefits outweigh the cons.

Are there any other pros/cons I'm missing here?

Thanks in advance!
Jared Ryan

[David M.]

@Jared Ryan

You might want to read this first:   https://www.biggerpockets.com/...

Some more info is here:   https://www.biggerpockets.com/...

Next, in general consult a professional...  Also, consult a professional about #1.  That should be a self rental situation.  In that case, your rent is considered active income, subject to all taxes at your ordinary rate including self employment tax I believe.  Meanwhile, your expenses are passive.  That is a really bad situation.

The LLC doesn't provide any tax benefits, only liability protection. But, that being said, there is much talked about how lawyers are able to pierce the corporate veil. I think its because most people don't operate their LLC correctly. Many brag about all the deductions they are doing and that their cpa/accountant is doing for them and its right. However, the corporate veil is a legal issue, not an accounting issue. So, "pure" accountants don't know or care about the corporate veil issue.

Protecting the corporate veil basically brings in lots of additional costs/overheads. The big one is needing to use commercial financing since a legal entity, such as a LLC, is not eligible for conforming residential loans.

Realize that 1-4 family homes are considered residential.  5 or more family homes/properties are considered commercial properties.  So, if you are doing larger properties you are going to be handling it as a commercial transaction anyway.

FHA loans require owner-occupation.

I'm not so sure you understand what you are trying to convey with the following: "...so after I use my full borrowing capacity on the commercial property..."  I don't.

Be wary of those that want you to have the loan in your personal name and the Title in the LLC. I elaborate more in this discussion:

https://www.biggerpockets.com/...

Also, I don't think you fully understanding how real estate lending works...

For your reference, here is a post on the insurance idea side:  https://www.biggerpockets.com/... .  The general idea is when you are starting, you really don't have that much liability that the insurance can't handle is the short of it.

I'd  be happy to chat if you'd like.  Its save me from having to type out a "one-way lecture."  Good luck.