New to investing, to form an LLC now or later?

Question

I have tried to find an answer to this question on YouTube, Google, and of course, here at BiggerPockets. I have found many answers and suggestions but none that truly answer my question, so I'm sure I'm being too specific.

My question is, should my wife and I form an LLC, or whatever entity would be proper, now before buying our first property or after we have a few properties? We have our current home that we will be staying in for now but eventually rent/lease out. What is the difference other than the legal protection, is the debt:income looked at differently, is there any benefit other than the legal protection which I understand is a big deal, but can we just start buying properties and roll them into a legal entity later on? Is it truly a benefit, or that risky to proceed to purchase before forming a legal entity?

Dmitriy Fomichenko · Answer

@Tyler Thomas

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Basit Siddiqi · Answer

@Tyler ThomasAs others have mentioned - You are not required to have an LLC to purchase your first property.You will find it that you will get better rates and keep expenses down if you purchase in your personal name. However, you want to make sure that you are properly protected. Consult with an attorney on asset protection.If you have a tax related question - feel free to reach out to me.

James Wise · Answer

If you're buying 1-4 units you'll likely want to do so using traditional 30 yr financing. Going this route the bank wants the property to be bought in your name so if all that is the case an LLC wouldn't be necessary at this time.

Matt Nico · Answer

@Tyler Thomas,      Hey man, I actually ran into this exact problem that you are running into now. I would say to check on how much the fees are for owning an LLC in your state. I'm in Florida, and its like $150/year to have the LLC, so thats no real burden on me. If your plan is to get at least a couple properties in the near future it cant really hurt to get everything set up now. Get the LLC formed, then go to a bank and have them set up a couple business checking accounts for you (1 for deposits to hold), and then you can start to establish yourself.

From my opinion, I wish I had set up my LLC in the beginning. The reason is that before banks will give you a business loan or a business credit card or any of that, you have to have 2 years of established business and 2 years of tax returns. This is really screwing me as I never knew that. Its not a crazy big problem because you can still buy property under you or your wife's name, but it would have been nice to know that info up front. I'm fairly new to BP so If I were here earlier then maybe I would have figured it out.

Good Luck,

Matt

Stone Saathoff · Answer

Not necessary at all to form an LLC for your first deal. Most first timers just lock it up in their personal name.

Jaysen Medhurst · Answer

@Tyler Thomas, banks do lend to LLCs. But not until that business has a solid track record. So, in the beginning at least, that's not really an option.

Secondly, title and mortgage are different things. You can hold title in a LLC, while you are the guarantor on mortgage. You won't get terms that are as good as if you hold personally, but certainly an option. In fact, once you get into commercial properties (5+ units), some lenders may require it.

The whole thing about the due-on-sale clause is a bit overblown. Fannie Mae explicitly allows a borrower to move title into a LLC. They alone hold 40%+ of U.S. mortgages. The key is to have a conversation with your lender/servicer to find a solution.

Tyler Thomas · Answer

@Jaysen Medhurst thank you for thank info that's what I'll do then. I reposted this in a different forum and someone responded saying as far as his understanding goes it's that banks generally don't lend to LLCs and if you move liabilities to an LLC after-the-fact then the bank could theoretically ask for the remainder then and there. Or something along those lines.

@Matthew Lopez thank you for the warm welcome!

Jaysen Medhurst · Answer

@Tyler Thomas, no need to worry about a LLC now. Concentrate on finding a good deal to pursue.

@Kai Kopsch, there are absolutely no tax advantages to holding property in a LLC. They are pass-through entities.

Tyler Thomas · Answer

@Kai Kopsch, thank you for your quick response! That's about what I've been finding too, and I just need to find a CPA I guess.

Kai Kopsch · Answer

@Tyler Thomas Welcome to BiggerPockets ...Congrats on joining a fantastic community! At one or two properties an LLC has the advantage of asset protection and the disadvantage of filing spread taxes and dues. when you get bigger LLC's can have a Tax advantage but you should consult a CPA.