When to work with an attorney?

Question

My wife and I are under contract on our first investment property, an STR in the Branson, MO area.

The condo we are purchasing is already cleared for nightly rentals, but we need to get a business license through the city in order to operate it as a nightly rental.   We need to have some kind of business entity registered with the state in order to apply for the business license.  I'm considering an LLC to own and operate the property, but I'm not sure if that is the best option.

Should we reach out to a local attorney to go over our options? If so, when should we reach out to one? We're scheduled to close on 8/31, are past the inspection contingency but not the appraisal (should have that back by end of the week or early next week).

I'd like to have an attorney to go to if we need one, I just don't know when I should start looking.

Thanks!

Gary Nelson · Answer

@Jon Roberts this is a great question and a pretty common situation. Your real estate agent should be able to guide you in the right direction here, but for the sake of this thread, and for other investors that may run into this same question, here is my take. Many investors in the area purchase and hold the asset(s) in their personal name, so you don't necessarily need to transfer the real estate into the LLC. Transferring could potentially trigger the "Due On Sale" clause with your current lender and would also limit your financing options in the future because LLC's will only get a commercial loan that normally has a higher interest rate, shorter amortization schedules and some sort of adjustable rate. You should look at this as two entities 1. the owner (individually or LLC) and 2. the property management company (LLC). So if you're going to self-manage, then yes, setting up an LLC as a MGT. Company is a good option. Or if you're hiring a management company, then they would be the ones to actually apply for this. If I remember correctly the fee is minimal, like $25. If I'm not mistaken, you actually can apply as a person using your SSN, but I wouldn't recommend that. If setting up an LLC, it's pretty easy to do on your own by going to the Missouri Secretary of State website to set this up and obtain your Certificate and Articles of Organization. This cost of this is around $50 and is ready same day. Then go to the IRS website and register that newly created LLC to obtain your federal EIN number, which is free. I hope this information is helpful, but if you have any specific questions, just shoot me a PM. My wife and I own all of our rentals is LLC's, and then hire out the property management services for 20% of revenues. And I help a lot of investors, and one of my favorites to do if your buying your first rental is if you have good credit, there's a local lender that offers a loan product of only 10% down 30-year fixed as a second home loan. A great option to see higher Cash on Cash Return rates and get into the space when we're in a competitive market like this.

John Mocker · Answer

Jon.

If you do start a sepparate LLC for management of the property, you should get liability for that entity.  If someone gets injured there, a good attorney will name everyone connected with the property.  The LLC may not get a judgement against it but it will still incur legal fees in the suit.

There are a couple of options you can look into:

1. a stand alone policy for the LLC (definitely the way to go if the LLC is going to manage other properties that are not owned).  It needs General and Professional Liability coveage.  Workers Compensation coverage may also be needed depending on state laws and what services the LLC provides

2. You may be able to add the LLC on to your Dwelling fire policy for the Condo unit as an additional insured.  If you do this you are splitting your Liability limits with the LLC potentially.  I recommend you consider adding an umbrella policy to get additional Liability coverage.

David M. · Answer

@Jon Roberts

You really should consult a qualified professional or two, but just we wary that they will try to "sell you" something...

It was discussed on bp a while ago that self-managing with a LLC but personally owning properties apparently doesn't provide liability protection --- I don't remember the details.  So, you'd have to take Title in a legal entity and setup for another legal entity to be your mgt effort.

You first might want to go over this thread:  https://www.biggerpockets.com/... (LLC Misconeptions)..  LLC's don't provide any tax benefits unless you are investing with a non-spousal partner.  Its really the same as investing with your own name plus the extra expenses for the limited liability.  You probably won't have time to switch right now in the middle of your transaction as your residential loan that I am GUESSING you are getting won't work.  Legal entities are not eligible for residential conforming loans.  You need to get commercial, i.e. non-residential loans, which generally have higher rates (although we are getting to par now) and worse terms.  DSCR's however are all the rage right now, which is to say i think they have the least "bad terms" as are less interested in your personal income.

Just make sure you understand that you need to operate the LLC as a separate entity, which includes NOT co-mingling funds and using it as an alter-ego

As you scale, you might want an umbrella insurance policy, ref:  https://www.biggerpockets.com/....  Even if you had one property in your personal name, the umbrella would be useful.  But, if the LLC held title not sure if its worth it to get one.  But, youstill need insurance --- everything you'd do holding it personally is still done when held in a lLC so the costs are the same, if not higher because its held in an entity.

Here is another thread about holding Title in the LLC and the mortgage in your personal name:  https://www.biggerpockets.com/...  I think its as bad idea.  Of course, people do it, but then they haven't fessed up to having been audited either...  You can do "anything" until somebody catches you --- doesn't make it right.

David M. · Answer

@Jon Roberts

Hey, no problem.  If you ever want to chat, please feel free to let me know.  Good luck.

Jon Roberts · Answer

Thanks @John Mocker.  This thread just keeps giving me stuff to add to my to-do list.  I appreciate the info!

Jon Roberts · Answer

@David M. Thanks for the information!  The universe decided a few things for me on this one.  Initially, we were using a commercial style loan because the condo we're purchasing is non-warrantable.  However, I didn't know my initial bank was still underwriting it as a second/vacation home (still not sure what happened there).  Long story short, they backed out of the loan when they got additional info from the condo association because of there is a management company on-site and some other things they didn't like.  We're using a local bank now that has done several loans in that complex to individual investors, and their product is an in-house loan that requires us to keep it in our name.

We'll likely create an LLC to manage the property as you noted above.  I'll check out the other links you provided too.

Thanks again!

Jon Roberts · Answer

Thanks @Gary Nelson.  I do plan on self managing the property at first in order to learn how to operate it as a business, and I hadn't considered splitting those two entities.

When to work with an attorney?

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