Should I get an LLC for my first deal

[Joshua Musquez]

Evening BP!

My fiance and I are looking to get into multifamily homes. we are going to house hack the first few since we are just starting in our careers. Our biggest discussion we have is before we buy our first deal should we create an LLC. If we are going to be house hacking is it a good idea to get an LLC or should we get a little more established before needing to get one? any advice is greatly appreciated thanks!

[Scott Trench]

I did not and do not put my house-hacks into LLCs. This is a legal question, so I cannot give you legal advice, and will not. I will, however, explain my rationale for not using an LLC in my personal situation:

1) Due on Sale Clause and Conventional Financing

I believe that the benefits to using conventional financing with it's low interest rates, long (30-year) terms, and low payments outweigh the likelihood of devastating personal liability in a litigation setting in my personal situation. I know of zero, none, nada, conventional lenders that offer loans on properties in an LLC. There is a long debate on the due on sale clause on BP. My personal take is that the banks won't call it due until they do, and I prefer to play by the rules, and abide by the contracts I sign.

I also did not have the financial capacity to put 25% down on my first house-hack when I was getting started. That would have been $60,000 on my $240,000 duplex. YEARS of saving. Instead, I was able to put down 5%, or $12,000, allowing me to get into the game considerably faster. 

That kind of low down payment financing (FHA loans, or low down payment conventional loans) with that low of an interest rate (3.75%) is exceedingly rare outside of conventional loans. I haven't really heard of someone getting terms like that in the private lending environment in a first deal. I'd love to hear if someone has achieved that however, and was able to put the property into an LLC after the transaction without violating the due on sale clause.

2) I forfeit many protections of the LLC by being a resident and manager of the property.

I believe it would be very difficult for me to separate myself from direct liability from issues resulting from the property, as I am a direct manager of the property (it's almost absurd to think that I will never perform any managerial tasks or be responsible for the same as a live-in owner-occupant). Why use an LLC if the other side is going to be able to "pierce the corporate veil" with relative ease in my case?

3) Anonymity

Many landlords are able to retain a level of anonymity behind an LLC. pretty tough to do for me as an owner occupant.

1) and 2) are by far the most important reasons I do not use an LLC in my personal investing with house-hacks. Bottom line is that I'd sacrifice significantly on financing terms or violate the due on sale clause, and I don't believe that the asset protection and liability limitation is really all that meaningful in my case as an owner-occupant in Denver CO. I think it's too easy to pierce the veil.

So for now, I limit my liability with a strong insurance policy with a high limit.

Plenty of time for LLCs as I increase my net worth and begin playing in a game with higher stakes.