Question on operating LLC's?

Question

Hey Everyone!

Happy new year!

I was wondering if I were to purchase a property under my name at a conventional loan and maybe 6 months to a year from now I rent it out and were to purchase an umbrella policy, should I create an LLC to mainly deal with the operating side for collecting rent/ and creating lease agreements, etc or what should I do? Curious for someone if they only have 1-2 properties and how they go about it and if they slowly grow their portfolio?

Thank you in advanced!

Sean O'Keefe · Answer

@Aahil B this is a common question and a good one :) The answer is it depends and it may not be your choice.

• Generally, buying through your personal name can reduce the interest rate - commercial rates on LLC mortgages are usually higher but you can research this
• Most LLCs on incorporation don’t have any credit so it may be difficult to find.a lender
• If you own the property in your personal name you are exposing yourself to more risk and will want to transfer the property into LLC as soon as you can
• If you own property in your personal name and transfer to LLC the lender may not allow or can call the entire loan
• LLC or personal you need insurance

One solution to the above is to buy the property in your personal name and immediately transfer it to the LLC after closing, but you will need to get pre-approval from the lender before you buy a property and plan to do this since not all of them allow this. The lender can call the loan on transfer - this is a risk and you need to be careful. Finally, if you wait too long to transfer the property from personal to LLC there may be taxes on transfer.

The transfer is called a "Quit Claim". If you search the forums for this topic using the magnifying glass feature in top right corner of your screen on BiggerPockets you will find a lot of discussion on "Quit Claim" "Buying through LLC" etc.

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This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

Jason Allen · Answer

I'd suggest putting each property in its own LLC and have another company that owns the interest of both LLCs that hold those properties.

Jake Baker · Answer

@Aahil B.

A CPA once told me to put each property in a separate LLC. I feel like he was just saying that so they can do more tax returns for me lol. An attorney told me 5 properties in each LLC is fine. It's really up to your risk tolerance when purchasing more properties. Either way, get multiple opinions.

I have purchased several properties in my personal name for financing options and quitclaimed them into an LLC after closing.

Happy investing!

Glen Wiley · Answer

One small correction - you want to talk with an asset protection attorney about the LLC as a means for protecting you from liability and a tax expert regarding the implications to your taxes. Tax experts are rarely also experts at liability law.

David M. · Answer

@Aahil B.

This is basically a rephrasing of should I have a LLC question that comes up nearly daily.

With only a handful of properties in your personal name (which is fine), just do it in your personal name with an umbrella policy.  The legal entity doesn't change any of your taxation.  If anything, having a "property management" LLC only converts some of your rent into active income since it should be charging pm fees.  Yes, kinda silly to charge yourself and pay extra tax on it, but you'd want to run your llc properly and protect its corporate veil, that's the primary purpose of the llc anyway.

Chris Seveney · Answer

@Aahil B.

If you do then that LLC will need to get licensed and carry all types of insurance on the entity

If you think it’s worth the money to do so go ahead but it won’t give you any asset protection

Glen Wiley · Answer

Key point here is that for small/medium sized real estate investors you will probably simply file taxes as pass through entities anyway so the LLC is not relevant to your tax situation, it is primarily for asset protection.

You should talk to an asset protection attorney but bear in mind they will take the paranoid/extreme route.

Creating an LLC for operating and managing is a common approach (we did that). Usually it makes sense to have a slightly more complex structure (add in a holding company and separate LLCs for real estate ownership etc).

LeeAnn Owens · Answer

I would recommend talking to your accountant and getting their opinion on what makes the most sense for you and your goals. You do not need an LLC to write off business/ rental expenses.

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