Should I create a LLC?

[Vaundel Gassett]

Folks of BP. I have just closed on my duplex. Should I now form my LLC?

[Andrew Holmes]

Hey Vaundel: You bought a duplex I am assuming you bought it for renting it out for the long term. The discussion below is for rental properties only not cash flow properties. 

Please don't create an LLC or anything without thinking through all your options and long term goals.

Your long term goals will dictate what entity you set up. Most people think asset protection and taxation. They form entities with out understanding the long term goals. 

You are in the buying stage and building a portfolio stage you should form entities that are more helpful to build your portfolio rather than long term holding stage. 

Here are the stages of investing that investors should understand

1. Asset Accumulation (Buy in S corps my personal suggestion. Most attorneys and accountants will recommend LLC.)

This is my opinion show income and pay taxes because otherwise lenders will not give you refi loans. A lot of accountants will think you are nuts but if you want to buy at a high pace you need to show income from your properties. You cannot take huge capital expenses and heavy depreciation because if you show tight numbers on paper your growth will be hampered.

There are some other technical reason for buying in an S corp over an LLC. It's advanced refinancing techniques so I am going to keep that out from this post.

2. Asset Management Phase: Once you are not accumulating at a high pace then the properties go into management mode.

3. Long Term Asset Protection & Tax reduction Mode: Once you have equity of 25% or more then you need to think about asset protection. 

So think in terms of 

Accumulation Phase

Management Phase

Long Term Asset Protection & Tax Reduction Phase