Investing in Real Estate with LLC?

Question

Thinking of Investing in real estate under a LLC. I would like to have a business account for all cash flow.

Dave Spooner · Answer

Hi @Nico Burgess I think you are on the right path by putting the property in an LLC. If you own the property as an individual and someone files a lawsuit against you, then all assets in your name are at stake. However, if you create an LLC, then the only assets at stake are those owned by the LLC. In other words, the rental property is the only asset at stake.

Once you start the LLC you will need to open up a new bank account for it. I usually see no more than 7 properties on one LLC, but if you want to eliminate as much risk as possible you can set up an LLC for each property.

Dave Spooner · Answer

@Nico Burgess the short answer is yes, you would definitely want to setup an LLC first.

But buying with an LLC means you need to put 20-25% down (probably 25%) and some lenders won't even lend to you. If you buy it personally, especially if you plan to live in it, you can secure the property for less money down (which is a huge advantage). You can always transfer ownership into the LLC in the future.

And again, don't feel like you have to put each property in an individual LLC. It depends on how much risk you're willing to take on and, in large part, the laws of your state. This is incredibly expensive and time consuming in California, for example. But other states make it really easy.

The best way to handle this is to use what's called a Series LLC (https://www.thebalancesmb.com/...). I'd say this is way ahead of where you need to be though. I'd figure out what is going to make acquiring the property easiest and handle the LLC afterwards if needed. But be sure to use one!

Max Versteppen · Answer

Not only should rental properties be placed under an LLC, but each property in a respective portfolio should have its own separate LLC. Not only will filing as an LLC award investors with great tax benefits and asset protection, but each subsequent LLC will provide another layer of protection.

Nico Burgess · Answer

@Dave Spooner I haven’t bought my first property yet. I should set up that LLC first correct?

Dave Spooner · Answer

@Ryan Jenkins Thanks! You can do it yourself, but if you want to ensure you have the proper protection, you'll want a pro to do it for you. I'd suggest reaching out to a title company. It should be just a couple hundred bucks at an absolute maximum. Here's a pretty good article if you're set on doing it: https://www.legalzoom.com/arti...

I'd also strongly suggest contacting your lender first. You want to make sure there isn't a due on sale clause that they might call up. That would mean that upon transfer, you'd have to pay off the full mortgage. It's not likely but it's a disaster if it happens.

Ryan Copeland · Answer

@Max Versteppen I've never heard that before, but I'm a newbie😄. Seems like a sound idea.

Ryan Jenkins · Answer

@Dave Spooner thanks for the details and the link. Very helpful.

Ryan Jenkins · Answer

@Dave Spooner great information, thanks. What’s involved in transferring to an LLC later?

Evan Polaski · Answer

@Nico Burgess, again, this is all personal choice.  If you have other assets to protect, and LLC is likely the way to go. I own my rentals in an LLC. If you want to drop down that rabbit whole than you could create a series of LLC to not only hold the properties, but also stack those within operating and umbrella LLCs and so on.

There some real financial reprecussions to owning in an LLC though.  To not pierce the corporate veil, everything has to be separate and documented.  As Dave mentioned, financing will be at higher interest, higher down payment, and typically shorter am and term.  Insurance will have to be in the LLC, which often times is slightly more expensive.  Separate bank accounts, which likely have balance minimums.  You will need an operating agreement or corporate resolution for most things, including buying, financing, selling.  Then there are the logistics of making sure everything is signed as XYZ LLC by: Nico Burgess, {title}

Again, I own my properties in an LLC, so clearly think it is worth it.  I just wanted to make sure a fuller picture is presented to show it is not quite as simple as forming and opening a bank account.

Nico Burgess · Answer

@Evan Polaski I appreciate that. It’s so many questions I have about that aspect of it, but I didn’t necessarily know what questions to ask. Where do you recommend I go to learn everything I need to know about LLC’s? Is there a book in particular dedicated to LLC’s regarding rentals?

Investing in Real Estate with LLC?

Most Popular Reply