LLC or no LLC for my first property?

Question

Hey everyone! I'm closing on my first property next week (finally!) and I've been advised by some friends to go the LLC route. It's a triplex, and I do plan on purchasing more in the near future. I guess my question is: is it beneficial even for my first property? And if so, if I live in California but purchase mostly in Virginia, should I get an LLC in CA or VA? Lastly, any tips on who to use for the LLC and a business bank account?

Appreciate you!!

Jason Marino · Answer

Hi Brynnen,

As seen in the posts above, this is an issue with a wide variety of opinions. There are a 2 points that I would like to make in reply to the posts that were made. First, while you should have homeowner's insurance and umbrella insurance, these policies have gaps and claims can and sometimes are denied. Insurance should be a line of defense, but it does not need to be your only line of defense. An LLC is a secondary option to protect you and your assets if that is a concern to you. When created and run correctly, the entity provides good protection. Second, you cannot just create an LLC in Wyoming to own a property in Virginia. The only way that this will work is if that foreign LLC is registered in the State that it owns property. Owning property directly is considered doing business in that State, and, as a result, the foreign entity is required to register in the State. Not doing so can result in fines, and, worse than that, an unregistered LLC doing business in another State can sometimes be thrown out if a lawsuit is initiated against that entity.

Nathan Gesner · Answer

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.

Thomas Sullivan · Answer

Not legal advice but rental in the LLC is a defensive move used to protect your assets and net worth outside of the LLC. Like Katherine said, having great insurance (high limits and replacement cost insurance) and umbrella policies can be as beneficial if not more than an LLC at protecting your assets and net worth. A great insurance broker will help you get the coverage you need to sleep soundly at night.

Katherine Serrell · Answer

You would have to do a quit claim deed to get the property to transfer to the LLC post-closing which would mean your lender could call the loan and you would be responsbible for paying it immediately or refinancing. It is unlikely the bank would do that but they absolutely can if they want. Personally, I just have really good insurance policies and umbrella liability policies. That being said, id say no its not beneficial for your first property. That is what the majority of small investors I know do until they have 4 or 5 properties or need to use a commercial loan. You shouldnt get an LLC in California. From what I have been told and experienced, it is easier to get an LLC in the state you will be buying the property in but its not required. A lot of people use Deleware to create their LLCs (you can google why).

I use Chase for all of my business banking. Their online banking and mobile platforms streamline everything for me really well (especially as an out-of-state investor). Plus, I have personal accounts with them so it simplifies transferring money back-and-forth.

Hope that helps!

Ed B. · Answer

Please ignore such advise from well-meaning but IGNORANT friends about creating an LLC on you first property! Good grief! Save your money for more important things.

Ed B. · Answer

You are absolutely wrong! Transferring a deed to an LLC will not cause the lender to call the loan. I would never worry about that, but I'd sue the pants off any lender who did try to call it.

Steve Vaughan · Answer

Agree.  I have 4 LLCs for commercial properties but none for residential. My state only charges $60ish per year for renewal.In addition to hassles and unfavorable financing options, an LLC will cost ya like $800/yr as a CA resident.

Allan C. · Answer

@Brynnen Beierle best to set up LLC in the state where property is located. That being said, if it’s a single-member LLC or one with your spouse, then you’ll likely need to register that LLC as foreign entity in CA since you are doing business in CA. You’ll then be on the hook for the $800/yr CA franchise tax board payments.

As others have alluded, the LLC route likely isn’t worth the hassle until you have a significant amount of equity in the property or your name. It comes with higher costs and complexity that may not have more advantages than a personal umbrella.

My approach is to put larger properties or ones with multi-member ownership into a LLC, but I keep the ones with sole ownership under personal vesting.

Eliott Elias · Answer

Put it in your LLC, it's easy to set up. Talk to a CPA and see what states tax laws lean most in your favor. Use a local bank that will allow you to make wires seamlessly under your LLC

Kevin Suhr · Answer

Get a WY LLC. Read about it here: https://wyomingcompany.com/wyo...

Do not put a rental property in your name.

Listen to the first story in this recent episode, which starts at 8min in.

LLC or no LLC for my first property?

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