Do i need to form a business for my properties??

Question

Hi everyone! First, just a little background on my real estate investments so far.

I am 23 years old and purchased my first duplex when i was 19. My wife and i have been living in one unit and renting out the other side for three years. Now is the time that we'd like to expand our real estate investments in rentals.

My question to you is, Do we need to form a business, if we plan to pursue this venture and continue to expand our properties? It has worked out thus far my collecting rent and keeping tenants happy. We are looking to buy a 6-plex and my concern is that we need to have all this under a business.

Any advice would be greatly appreciated! Thanks

Wesley W. · Answer

@Reid Schieler

Congrats on starting on your RE investing so young!  If we all knew then what we know now...*sigh*

This is NOT legal advice and is just my opinion based on my experience and research.  I was told by my attorney and CPA to hold assets in an LLC for liability protection, so we formed a few LLCs with that intent.

Since "banks don't loan to LLCs, they loan to people," the plan was to transfer title after closing to one of the entities.  The concern is always the "due on sale clause", but my attorney assured me this was a very low chance of happening on a performing loan unless the interest rates started to get ridiculously high and the lender could see a way to get a better return.  Also, he said he could argue the bank doesn't have any damages, and since the LLC members were the same people as the owners (whom personally guaranteed the loan), it should not be a great concern.  He also said if the bank still pushed the "due on sale" issue, we could simply move it back into our own personal names as a cure.  In our market, I know of no one who has ever had an issue with the strategy, nor has our attorney.  However...

...we chose ultimately to keep the properties in our own personal names.  Aside from the possible legal fees associated with the above, as I shopped for insurance I found that the premiums were higher (sometimes TRIPLE!) for LLC-held properties, and that would eat in to our cash flow significantly.

After consulting several investors with large buy-and-hold portfolios in our REIA, we decided to get a large commercial umbrella policy at this point.  In the future, we may revisit the LLC model.

Hope this helps!  Good luck!

Michael Lee · Answer

Hello and welcome!  Yes it's better for liability.  Just treat your new entity with serious mode or you might be treated as a personal situation.  Get with your attorney and accountant.  Ask them about your situation so you can make the best situation.  I'm 59 years old and have always been around construction and real estate so tread cafefully because you never know what will happen.  Luckily when I had a stroke I was covered by being incorpated and able to just lose my business.  Good luck to you!

Megan Aldridge · Answer

@Wesley Williams your comment on this post helped me a ton.  We have an LLC and with one paid off prop I was thinking we should quit claim to the LLC and out of our name for liability reasons.  If hazard ins. is up to triple for LLC-held props then I'm definitely going the umbrella policy route.  Thanks for your comment!

Will F. · Answer

@Reid Schieler

Also do you want the business for tax purposes or do you want it for liability/protection? Or my assumption would be both

Fred Heller · Answer

Conventional wisdom is that you should form some kind of corporation to protect your personal assets in the event you are sued over an issue with your rental property. Let's say someone is injured on your rental property and they come after you. If they are successful and the judgment is more than your insurance will cover, they can come after your personal assets if you are a sole proprietor.

Will F. · Answer

I've heard from some tax advisors that setting up a C-Corp or S-Corp for the management can be a good idea to be able to write off more property management expenses.  Then for holding the propertyies you can do an LLC or just put in personal name and get good liability insurance since an LLC is mainly for liability and can be pierced by good attorneys

Certain things cannot be written off as a landlord/sole proprietor...  such as certain travel, auto, advertising, office supplies, certain tools/ supplies relating to renting etc unless they can directly be related to the rental

I'm not a tax pro just FYI

Does anyone else with more tax-planning experience have some advice

Reid Schieler · Answer

Thank you everyone for your feedback! we are super excited to pursue our dreams for financial stability.

Dan Costantino · Answer

If you own one property, it is probably a waste of money.  IMHO.

Damon Duperre · Answer

I did. I don't really understand all of the reasons very well except that both my lawyer and my CPA said it would be a good idea. But, you aren't required to.

Marvin McTaw · Answer

Hi @Reid Schieler the short answer is "No" you don't have to form a legal entity for your current and potential investments...but you probably should. Putting your investments in an LLC can help shield you from liability and also provide some additional flexibility for you from a tax standpoint.

Do i need to form a business for my properties??

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