Should I start an LLC for my first property

Question

I have an LLC already, for a separate, future venture, and my wife has a DBA for her teething jewelery business under our LLC. We're about to move out of our primary residence and use it as a rental. I plan on continuing to do deals in the future as well once I move and finish getting established in Hampton Roads.

My question is, should I establish a new DBA for the rental property to cover me since it is only one house and the house is in mine and my wife's name still and won't be in the LLC's name?

Thank you in advance for the help!

Scott Smith · Answer

Hey @James Horton,

What you are asking about would require the new LLC to be structured well and operated with really solid bookkeeping, but the truest protection would be to separate your operations (the DBA LLC) from you asset by keeping them both in separate LLCs. The issue with that is (1) it may be placing the cart before the horse and (2) it will come at a higher requirements for you to both fund and establish those LLCs. I will explain my perspective as a professional who works around asset protection every day, just for some reference.

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. 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.

The pillars you are considering now are 3 and 4. I would ensure that you are completely set by having a great management philosophy and/or company and ensuring your insurance is set. When deciding how much the next levels of protection are worth I would just recommend sitting down with an experienced attorney and asking them what your exposure is. To be fair, there are ways to get your hands on LLCs that are nearly free. But you will still need to commit to the strategy, so it is worth researching before committing to it.

Best of luck to you moving forward! Feel free to shoot me a message or tag me if you have more questions on these topics.

This is not legal advice, just my opinion as a real estate investor.

Stephen J Davis · Answer

I have owned over 100 single-family houses and I never use LLC or corp. You have 3 layers of protection that you control and don't need one.

1. Management style: Make sure the property is in perfect condition with no hazards. This will prevent almost all lawsuits. Mismanage your property and you will get sued. In 30 years I have only been sued once and my insurance took care of everything. See below.

2. Home owners Insurance: Keep a minimum of $500,000 liability on each house.

3. Umbrella Insurance Policy: Keep a $2,000,000 policy over all of your houses.

The lawyers don't want your personal assets. Don't let anyone scare you into doing LLC's. They want your insurance money.

Daniel Pepin · Answer

I would say it’s not necessary to start a new LLC for your one rental property. However, it sounds like you have future plans of having more. If that’s a path that you will inevitably be doing anyway then it wouldn’t hurt (it wouldn’t hurt to start one regardless). There are multiple benefits, as I’m sure you are aware, of having an LLC for multiple properties (some people have an LLC for EACH property). My opinion is to keep business separated by what is intended by that business. Therefore, my vote would be to have one for the added protections.

Best of luck!

James Horton · Answer

Thank you all for the information and time with your comments. I am definitely going to research all of the information and websites that y'all sent me! It has definitely helped me a bunch already as my wife and I take this first step in our journey! I look forward to hopefully learning more from y'all in this next step.

Frank Chin · Answer

I would say NO to mixing your businesses in any shape or form. It brings about complexities that you normally would not think of.

I owned an auto repair shop, software sales and consulting business, wife ran an mail order business while we owned rentals. As to rentals, we owned a number for 40 years and have yet involve an LLC.

First is insurance. I get insurance for my auto repair business through someone familiar with that business. Same with rentals, where I buy insurance with someone who knows about it. Do they sell insurance for someone doing auto repair, rentals, consulting? You get the base insurance for each, and umbrella on top.

Second is accounting and taxes. When I buy and sell a business, people want to see your books and tax returns, especially if you want a million or more. So I have the partnership 1065 and K1's to show, say for auto repairs. They don't need to know about my rentals. For accounting, I use QuickBooks, and the class structure gets too complicated for your scale of business, if everything is one business.

Third is the segregation of risks. I was doing computer consulting and many clients got messed up systems installed by incompetent contractors. One client wanted to sue his consultant for millions. Imagine if you're dumb enough to throw in your real estate portfolio into one LLC so they don't even have to pierce the veil.

Fourth is 1099 and workman's comp reporting. The more convoluted the business, the more complicated it gets. There's been discussions on this board about small RE investors not having to 1099, so I won't go into a long discussion of it. In my auto repair business, I sub contract out some work, and I have to report what I subcontract for 1099 reporting purposes and also for workman's comp where I get surcharged on the subcontracting. If it's one business, I have to report everything, including real estate, and it'll run my expenses up. Can't include some (auto repair) and exclude others (real estate).

If you need a DBA just for banking you don't need it to be in an LLC. I ran a mail order business while in college, filed for a DBA for myself, so I can deposit checks written to the DBA, with it's separate checking account. I didn't have to set up a corporate entity. But then, why would you want to do that for rentals?

Ernest Grindle · Answer

@James Horton rereading your post, I think you are talking about doing a DBA under the LLC of your future business. I wouldn't do that. Both "businesses" would be exposed to each other's risk, and it's not that expensive to just create a new LLC.

Mike S. · Answer

@James Horton

If it was your primary residence for more than 2 years during the last 5 years you may want to create a corporation to sell it to it to get the section 121 exclusion if your property has gained a lot of value since you purchased it.

http://clintcoonsblog.com/2017/04/10/sell-your-home-to-yourself-for-tax-free-income/

You can even make an installment sale to receive tax free money over the next few years from it.

Brett Miller · Answer

James, you have received wonderful advice once again. Stephen is right about the insurance absolutely. I would advise you to research your states leas and law set by court decisions. Wyoming and Nevada are the absolute best states to create LLCs for real estate. As far as utilizing an entity for different businesses it all comes down to your operating agreement. I would encourage you to build your team and utilize people like Garot Sutton @ corporate direct to design entities for you so you have maximum protection for whatever business practice you are engaging.

Real estate investing and LLCs is all about charging orders and how your state handles charging orders. The gentleman that spoke of insurance also brought up a very valid point about operating multiple businesses under one LLC, you have to know and understand the dynamic and the liability issues it may create for you across all your businesses. I have found that in the end the service I use is not expensive at all.

Ernest Grindle · Answer

@James Horton When you say New DBA Name, are you meaning doing a sole proprietorship with a DBA name? If so, I don't think that gives you any protection. An LLC would give you protection and you can do DBA names for that. I prefer LLCs for my properties to get the legal protection, but it costs me a little money for the accountant to do the extra forms each year.

Should I start an LLC for my first property

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