Form LLC or have properties on personal name?

Question

I am buying my first rental properties very soon (4 rentals) and I am wondering on the communities opinions on whether or not I should form a LLC and hold the properties in that or if I should just hold them in my personal name.

Scott Smith · Answer

You will get a lot of different opinions on whether or not you should place your properties into an LLC. Ultimately what the LLC will provide for you is liability protection. This means there is a separation between you and anything within the LLC. It's essentially like putting the investments in a liability box. If there is a lawsuit against the LLC then they shouldn't be able to come after your personal belongings, and if the law suit is against you personally they should be able to go after the properties in the LLC.When meeting with clients the first order is to discuss (A) their personal assets, (B) break down their current investments portfolio and other business ventures before discussing any (C) future goals. Each of these variables will dramatically change the advice for the individual asking this question. I often break it down into the "five pillars" of protecting your assets.1st pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur.2nd pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.3rd pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property they can’t touch you or the other properties. You should use either LLC’s (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE- check out this article to learn more.4th pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a “asset holding company”) and a completely separate company handles all of your operations (this is a traditional LLC a/k/a “operating company”) For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.5th pillar is owning everything anonymously. If people don’t know what you own, then they are less likely to sue. People don’t sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner still, it doesn’t matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.You might run into issues getting a good rate for an LLC, as @Beau Fannon was mentioning. Many investors will just purchase properties directly into their personal names, then transfer the properties into a land trust before assigning the LLC as the beneficiary of the land trust. This transfer avoids the financing issues, specifically the Due on Sale Clause, because a trust is seen as an estate planning tool. You can read more about it in this article.

Patrick M. · Answer

@Scott Smith's post should be tacked up in every one of these threads. Very informative and valuable! I say that as person who owns in my own name.I will venture that 98% or more of people who have there buildings (and businesses) in an LLC do not adhere to those guidelines. They believe that an LLC is some magical loophole that will protect their properties as if it itself is an insurance policy.

Beau Fannon · Answer

Just do it in your name for now. 4 units isn't worth the hassle of transferring title to an LLC and since you probably don't even have an LLC at this moment you'd be creating more financial headaches than you'd alleviate. Go ahead and start an LLC that manages your properties so it can begin the seasoning process. But don't bother transferring property titles to it yet.

Scott Smith · Answer

Thanks for the positive response! I had invested through law school with a partner to help pay my bills, which is how I got into real estate investing. But I actually kicked off my legal career litigating major insurance companies who refused claims - which is part of why I hold the opinions I do. I love insurance and hold it on all my own properties for nuisance claims and issues, but never rely on insurance as my only line of defense. The real estate investor community, especially those active in BP, are generally pretty ambitious and continue educating themselves. There are many who get it wrong, but I do give credit to the community for working hard to do things right. The issue is you never know which group you are in until it's too late and your livelihood is at stake - at which point you are no longer allowed to restructure until after the legal proceedings are completed. On top of that, an experienced attorney in real estate asset protection can often integrate your legal needs, paving the way for easy estate planning and tax savings. Some times it is worth paying to have something done right, rather than relying on a budget fix that leads to devastating damages down the road.This isn't legal advice, just my opinion as a real estate investor.

Patricia Steiner · Answer

You need an LLC...all properties - other than your personal residence - should be titled from the start in an LLC. This is a daily topic on BP; here's a link on the pros and cons of using an LLC: https://www.legalzoom.com/articles/forming-an-llc-...Please understand why investors would NEVER place their holdings in their own name. It's a risk that my clients and I would never find acceptable.

Justin Kane · Answer

yea dont worry about asset protection until you are REALLY worth protecting.. dont pass on a deal just because your scared of litigation. just go for it have the right insurance policy and you can transition later

Beau Fannon · Answer

^ this. @Scott Smith is laying down some solid wisdom and strategy.

Matt Gooding · Answer

Fund an LLC? Seasoning? What am I missing here? I was under the impression I would pay my attorney a small fee to form an LLC and that would basically be that.

Beau Fannon · Answer

And you have financing that will fund an LLC with no seasoning? Please let me know who that is!

Matt Gooding · Answer

@Beau Fannon I actually am in the process of buying them now so I would create the LLC first then buy them in said LLC's name instead of having to transfer titles or something if that changes your answer.