Should I get an LLC ?

Question

I currently have an single family house in which I live in with my wife and kids. We want to start to buy and hold property for rentals. Do I need an LLC to start out ? I would also like to know how do you keep obtaining properties with more and more mortgages? How do people have more than 3 to 4 properties without getting rejected by banks?

Nathan Gesner · Answer

You do not need an LLC to get started. I know investors with decades of experience that still don't have an LLC.

Focus on buying right and being a good Landlord that obeys the law, takes care of the property, and treats people honestly and fairly. That's more important - and more protection - than an LLC.

Tom S. · Answer

@David Walker Just chiming in on " how to acquire more and more properties" question: I bought my first three with standard bank financing until I started to get close to DTI limits. Then the next 3 with owner financing. I sold two, then added another three with local banks and commercial loans (portfolio lenders that hold the loan in-house and have more flexibility).

Hope that helps, and welcome to BP!

David Walker · Answer

@Tom S. Thanks alot I have always wondered because currently I only own the home I live in that I brought when I was 22 years old. I been here for eight years now and looking to build a empire through real estate. I never refi the loan or anything so I was thinking maybe get a  HELOC  for the investment property since I have equity in my home. I'm the first one in my family to ever buy property so I'm trying to learn as much as I can and have I create cash flow.

David Walker · Answer

@Jonathan Klemm I see what you mean.i was wondering if it made a difference if I brought investment properties through a LLC would I be able to get more properties than getting them through personal due to the Debt to income ratio rules. I'm currently in the Belmont Craigain neighborhood and I am interested in getting a investment property in the neighborhood first then branch out.

Cody Lewis · Answer

Nathan makes a valid point about doing right by the property and people. I am in "camp LLC" as I tend to do my best but plan for the worst. If someone were to come after you legally, LLCs can be a good barrier/protection from some of that. It's up to you just understand the risk on both sides of the fence.

Caleb Johnson · Answer

Hey David, great questions.

I just experienced this when I bought a duplex. You actually can't close a property with an LLC. It needs to be in your name and then you can put the property in the LLC after you close. An LLC doesn't protect you from getting sued. It just makes it a little harder for people to find out that you are the owner. What you need to get once you buy the property, is umbrella insurance. That is what will truly cover you if you are sued. Of course speak to your insurance professional and tax professional (make sure they have experience with investors) before you do anything.

When it comes to buying multiple properties, you can get multiple properties. You just need to make sure your DTI is in check. You can also 10 agency loans in your name. These are Freddie Mae and Fanny Mac. If this is the case, you can get the loan in your wife's name and then she can have 10 properties in her name. There's many more strategies.

I would also mention investing as a passive investor. This would allow you to have limited liability. You get a check in the mail as well as great tax benefits. This is usually for people that don't have time to invest in RE and their time is better served making money at their job.

Tom S. · Answer

@David Walker  If you have a lot of equity in your primary residence, then pulling money out for a downpayment on an investment property is what a lot of investors do.  Or get the funds, move into a new property and keep the original as a rental (the advantage being you can buy a primary residence for 5% down, versus 20-25% down required for investment properties).  And continue to repeat that process over the years.

Back to the LLC question, it doesn't make a difference for the number of properties you may qualify for because the mortgage will still be in your name.  And for tax purposes, the LLC is disregarded and the rental income and expenses all go on your personal Sch E of your tax return.

Hope that helps!

- Tom

Jonathan Klemm · Answer

@David Walker - It won't matter if in an LLC if it is still a residential loan, meaning 2-4 units (@Michael Facchini can you confirm?).  Sounds like you are doing all the right things and willing to put in the work the educate.  Keep it up and keep taking action!

I  like the idea of investing close to where you are if you can find a good deal.  It oftentimes allows you to be a little more hands-on.

Jonathan Klemm · Answer

@David Walker - My thought would be don't put the cart before the horse or create unnecessary work until it's needed.  I believe you can buy up to 10 properties in your own name.

Opening an LLC is fine, it just doesn't make much sense until there is an actual business behind the LLC.

Where are you at in Chicago?  Are you looking to invest in the same area or somewhere new?

David Walker · Answer

Thank you all for your insight it is really enlightening. When it comes to have more than one property won't they reject me because of the debt to income ratio. I'm trying to get started and trying to figure out how to navigate and start having rental properties and eventually get myself a bigger house. I live in Chicago I don't know things are different everywhere else.

Should I get an LLC ?

Most Popular Reply