Setting Up a Business Entity Before Purchasing a Property?

Question

I'm new to real estate investing and looking for some advice on when it makes the most sense to set up a business entity. While I know I need to talk with a real estate attorney & CPA, does it make sense to set up an entity before I purchase a property? My intent is to set up an entity which will own the individual LLCs in which I'll purchase the properties. Before generating income through the rentals, I'd like the ability to deduct the expenses I'll incur in finding a property -- direct mail, mileage expense networking or visiting properties, etc. Thanks in advance to the BP community!

Nicholas Aiola · Answer

@Nick Vollrath you generally can't immediately deduct expenses related to acquiring a rental property, unless you already have a property in that general location. They basically just sit on your books until you acquire the property, at which point they'll be added to your basis and depreciated.

Forming an LLC won't change that and @Jeremy England is right - all too often, I see people form LLCs and pay the annual fees and what not for a year (or even longer) before actually acquiring a property.

Brandon H. · Answer

This.  I went down the same road and decided that an LLC wasn't worth the cost when you have just one property.  Even if you have an LLC, if something were to happen and you went into litigation, your personal assets could be at risk of having the plaintiff "pierce the corporate veil".  As a result, you really should get an umbrella policy in addition to the LLC to properly protect you.  At that point though, the LLC is somewhat redundant unless you have several properties or a lot of assets at risk.

Put another way:  a $1M umbrella policy should be under $500/year for the premiums and takes 15 minutes to setup.  It costs more than that to setup an LLC in the vast majority of states + you have to deal with the complications getting a mortgage (often at a higher interest rate).  As a result, it is more cost effective and less hassle to simply buy the insurance and be done with it.

Perhaps in the future I'll change my structure but I agree with others who stated that many new investors get too caught up in the legal entities instead of actually investing.

Matthew Filepp · Answer

@Nick Vollrath

Hi Nick!

Hopefully this helps but I was in a similar situation back this winter when I was closing on my first investment property. I was thinking of whether to get an LLC or just obtain umbrella insurance and sufficient liability insurance. While all situations are different- after speaking with my lawyer I decided at least for the first property- there wasn’t too much of a need for an LLC. Speak to a CPA but the CPA who will do my taxes explained you can still write off expenses for a rental property even if not in an LLC. Please correct me if that’s wrong.

Also the umbrella insurance (if you choose to get it) and your liability insurance you will get through your homeowner insurance should be more than enough. In some cases if you purchase landlord insurance they will cover lost rent as well if covered under the insurance.

Sorry for the long-winded answer but feel free to message me if you want to discuss further!

Costin I. · Answer

Here @Nick Vollrath, diagram for your question:

Jeremy England · Answer

I think you also need to account for how you will be buying and paying for these properties.  Remember, alot of banks won't finance a house owned by an LLC.  Theyll finance YOU however.  Then you'll need to figure out how to get that property into the LLC without triggering any due on sale clauses.  Or just roll the dice and figure as long as the bill is being paid, the bank doesn't care.

Brian Bradley · Answer

@Nick Vollrath once you identify the property, then talk to your lawyer or get a Asset Protection Lawyer to then set up your holding company and trust. First identify and get the property under contract as @Jeremy England says, then before it closes, get your structure set up. If you need more on the type of structure and your option etc IM me and we can chat more and go into a more detailed legal discussion of your goals and situation etc.

Jeremy England · Answer

I think that is getting caught up in the minutia.  Just get a property

You can figure out what to do with it entity wise afterward.

Let's say you do start an LLC before.  How long before.  Now you are paying for an LLC, paying for a biz license, and god knows whatelse before you even get a property.

I say just find a good deal and buy it.  Deal with the minutia afterward

Setting Up a Business Entity Before Purchasing a Property?

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