LLC or Series LLC, Which one? Why?

Question

Hello All!I am going to be starting my BRRRR Strategy soon and I wanted to know how I should go about purchasing the properties. I know I need an LLC for certain financing. But which one should I get?In order to refinance out of the BRRRR deals I know I can quitclaim if need be but will I need too? Which LLC best protects me legally so I don't lose everything if something goes wrong?Any help would be amazing! Thank you!

David Gotsill · Answer

@Samuel Liapis - Good luck with the first BRRRR. I hope it goes well. Not sure about all of the details of your situation, so it's possible that a Series LLC is just what you need, but I would think it unlikely. As @Jon Reed suggests, a standard LLC is likely a fine choice. (Note: I am a lawyer (eww), but this is not legal advice.) Jon aptly notes those certain formalities need to be followed for the benefits of an LLC to be realized. Since LLC set up and maintenance comes with certain costs, you want to be sure you also get to keep the benefits.One comment in your post caught my attention - that you "need an LLC for certain financing". What financing is this? Are you already speaking to a lender? If so, you should run your proposed LLC approach by the lender for any comment before you jump in (for example, recently had an Alabama lender that insisted we form a Delaware LLC, even though it was an Alabama property). Additionally, some lenders will refuse to lend to an LLC. That's why you hear about people quit claiming to an LLC - the bank would only loan to the individual (not the LLC).In short, it's unlikely that any benefit of a Series LLC justifies the additional costs and effort. FWIW, many states don't have yet have established law on treatment of Series LLCs, so in those states there's even a risk the Series all gets rolled into 1 LLC anyways. Remote risk, but depending on your behavior/use it's possible.

David Gotsill · Answer

@Samuel Liapis Did the hard money lender explain why they require you to hold in an LLC? Perhaps you're be required to pledge the membership interests in the LLC to the lender. That way, if you default on the loan they can exercise the pledge and take ownership of the LLC, without having to go through the real property foreclosure process. Would be a good move for the lender, but a bit less ideal for the borrower. However, since it's hard money, one cannot expect to have one's cake and eat it too. What's more, I'm not sure that a conventional lender would lend to you in your personal name if you received title via a quitclaim deed. They might require a proper grant deed from the LLC to you. You could ask a local (to the property) title company/lender if they have any input. Also, I think that transfer from the LLC to you would trigger transfer taxes to the LLC (maybe the same with a quitclaim, not sure), and also require the LLC to recognize gains for tax purposes. Would need to check with a tax professional there. @Daniel Mills - Dan - any thoughts on this thread?

Samuel Liapis · Answer

@David GotsillI am talking to a hard money lender and he said that in order for me to get a loan I need an LLC. I don't really like this approach because I will need to refinance it afterward and if I use a commercial loan for the refinance the rates will be higher. I wanted to refinance into a conventional loan but that would require quitclaiming out of the LLC into my name, refinancing and then quitclaiming back into the LLC.

Samuel Liapis · Answer

@Jon ReedWow I did not know this. Thank you so much for that information. Yeah I heard series LLCs were a lot harder to manage.

Jon Reed · Answer

1st... You should talk to a lawyer... I am not one2nd... Just file for a standard LLC. You do not need anything fancy or worry about how many different LLCs you need for enough protection. You are just buying your first BRRRR deal, you just need to work with a lawyer and put together a single LLC. Most lawyers will help you correctly create an LLC for $300-$800. Just remember that for every LLC you have you need to treat them as completely different businesses. Each rent has to be deposited into different accounts created under each LLC. Then each mortgage has to be paid out from the correct account. As soon as you start crossing money between accounts or using one LLC to pay the mortgage of another then you pierced any protection you had.