Buy and Hold Entity Structure??

Question

Hello everyone!So I purchased my first property in April this year. It was a lot that has two houses on it. I rent one house out and have a roommate live with me in the other! It works very well for me and has allowed me to position myself for my second acquisition!I am currently negotiating the details on my 3rd house and am ready to setup a separate entity. I am curious as to how other people have done this. I have heard of people setting up 2 entities (one to manage the RE and another to own it).What is your entity structure and why did you choose to do it the way you did?Thanks!Joe

David M. · Answer

@Joe A WarnerFirst, you do realize that by going with an entity, you really should go “all in” with it? Everything goes under the ownership of the entity, including the mortgage which becomes a commercial loan. Also, with multiple entities make sure you handle your operations and funds correctly to maintain your corporate veil.But to your question, while I don’t do LLC for my rentals, let me try to answer your question. Other than the newer series LLC, you could make an entity for rental (nb name the entity the street address so you can keep track), but many find that to be overkill and too much administrative overboard cost. Some use a $1M in equity as their max amount to put into an entityThe holding entity is useful for anonymity (register it in a anonymous favorable state, then register all the sub LLC’s where the properties reside). I think it may help a bit since it can also be a central point for all your funds to flow / redistribute across your entities. If you do any joint investing, then you can create a dedicated entity under it to partner on that deal. It keeps a single “point of contact” between you and your businesses, which might be easier especially if you get to selling off and entire entity (as opposed to transferring the real estate).The “system entity” goes something like this. Entity A holds Title to the property and the mortgage. Entity B is the property mgt entity. The two enter into a contract where B takes over the operation of the property. So now, leases are between the tenants and B. Depending on how the agreement is setup, I believe B can pay the property taxes and mortgage.The advantage to this is if somebody wants to sue, they should be suing the mgt company. But, it holds not assets so there is nothing for them to go after. This adds and extra layer between the potential suitor and your property.

Reggie Rearden · Answer

I went to my attorney and told him my short term and long term plan so he could set up entities based on that info. I have a holding company that controls all of my other llc's. "Parents" and "Kids" are what some refer to this as. I have multiple sfh's under 1 LLC due to the equity in them. We meet annually and the attorney reviews my portfolio and can create additional LLCs as needed. This is something you should definitely talk to your attorney about in my opinion.

David M. · Answer

@Joe A Warner...Just make sure if you group your properties under a single entity, to keep different investment types separate. That is, rentals separate from flips. You don’t want to crisscross your liability and increase your exposure.You use irrevocable land trusts inside the entity to obtain greater anonymity..If I had to do it, I’d only have the holding company if I wanted the greater anonymity and was going to be doing more serious type investing. For some efficiency sake, I’d probably just batch a bunch of rentals into one entity. I feel it’s more efficient because otherwise I’d have money left over in each bank account to cover min deposit fees and have some cash avail for each entity. Otherwise, it’s a ton of transfers and bookkeeping entries. As for the mgt company, eh... I’m been doing fine with my single family rentals for years, my tenants know me and generally like me (otherwise they leave anyway). So hiding behind a mgt co etc doesn’t have value. But then again, I don’t own large multi-unit properties where it might be necessaryI hope that helps. I’m sure you’ll get some more opinions here. Good luck

Joe A Warner · Answer

@David M. Thanks! That’s a lot to think about and good info.

Joe A Warner · Answer

@Reggie Rearden Thanks! Yeah, I have a meeting tomorrow with my attorney, I just wanted to see what other people were doing!