Should a Private Investor create an LLC before supporting a flip?

Question

I am considering investing in a flip for the first time and am hoping to get some feedback on how to best structure the transaction. Are there any advantages or disadvantages to designating an LLC for the deal? How do private lender vets prefer to set it up? I would like to establish partnerships and experience both in state and out of state (CA, IL, OH, CO) before investing in my own rental properties. I live in California.

Basit Siddiqi · Answer

@Luis MartinezIf you are investing in a flip, you want to make sure your interest is protected and you will not be sued if anything goes wrong.You may want to invest in some entity that provided limited liability - I.E. LLCYou also want to make sure that your interest is protected - Is your interest backed by the real estate itself?

Jerel Ehlert · Answer

I'm only licensed in TX, so I can't talk about any other state's laws. But ask yourself what you would be trying to accomplish by passively investing through an LLC?  What liability are you trying to limit?

If you pool money from others in an LLC, that may become a security under SEC regs.

As a lender, not an operator, your liability is almost none in most cases.  Certainly not more than Bank of America would for what happens in a property, for example. It is when the lender starts controlling the project do they start becoming liable for what happens.

Just be aware that different states have different ways to regulate lending. Your biggest concern should be to avoid making consumer loans.

Ujwal Velagapudi · Answer

Hi Luis! I used an LLC since it was just a small deal. It was not a syndication with a standard LP/GP structure, not that an LP couldn't be an LLC though. I have also invested personally, without an entity.

In most cases I would still use an LLC, have tax advantages if you use it as a business to scale into more transactions. Of course the liability factor is there. Could become a more reputable vehicle down the road, seemingly more professional, even though it will be your personal name that will carry the weight for the most part (almost exclusively in the early days).