Set-up LLC on Your Own or With a Lawyer?

Question

I have one rental property and would like to buy several more. Should I setup an LLC now?  How easy is it to transfer the house I do have to the LLC?  Eventually I would like to apply for credit with the LLC and not me personally. Finally, what is the advantage of a holding company and would you get a lawyer to set all of this up?

John Warren · Answer

@Matthew Sexton a lot of the things you want to do with your rental properties will become an issue once you have an LLC. It is fairly easy to hold your properties in LLCs if you are using commercial financing, but if you want the conventional loans, lines of credit, etc, you will run into road blocks. I ended up moving into the commercial space instead of trying to find every loop hole I could. I just closed on a 6 unit apartment building in Cicero, IL, and I closed on it in an LLC. It was the easiest thing in the world as that is almost expected by lenders in that space.

Scott Smith · Answer

Hey @Matthew Sexton,

Congratulations on entering the world of real estate investing! It really depends on where you are financially and what assets you hold. When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. A lot of time people only think they are risking their current investments, but in reality if there is a lawsuit that exceeds (or is just refused) your insurance they can take both personal assets along with your investments, impacting your long-term goals.

Generally though, I break it down into the "five pillars" of protecting your assets. The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.

The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can’t touch you or the other properties. You should use either LLC’s (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE. If you’re interested in using an LLC, this article  also further explains the advantages of a Series.

The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a “asset holding company”) and a completely separate company handles all of your operations (this is a traditional LLC a/k/a “operating company”) For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

The fifth pillar is owning everything anonymously. If people don’t know that you have assets, then they are less likely to sue because there’s no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn’t matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.

Each person has a different tolerance for risk, so in the end I would just recommend chatting with an attorney to have a realistic understanding of what you are risking before choosing which path to take forward. Either way, I wish you the best of luck as you grow! Glad to see new people getting into real estate and asking good questions! Feel free to shoot me a connection request if you want.

Account Closed · Answer

Get umbrella insurance instead. You have to maintain an LLC precisely in order for it to have any value and frankly few investors have that kind of patience and attention to detail. When you have $100,000 or so in equity, it's time to consider an LLC. And, yes, use an attorney. If you can't get your questions answered in a timely fashion, (like from a website) then an LLC is no good to you anyway. I recommend Keyt Law in Phoenix just because I know them personally, they have done over 6,000 LLCs and are are excellent at what they do. But, you probably don't need an LLC yet anyway. Talk to an insurance agent and get true protection.

Bob Prisco · Answer

@Matthew Sexton its very easy to set up , about 150 but I use a service, ( do not want to be bothered  $400 )  NOT an attorney. Also very simple to transfer to LLC title co will/ should do for you

Good luck

Set-up LLC on Your Own or With a Lawyer?

Most Popular Reply