Beginning investor question

[Uday S.]

Based on the podcasts, I understand that it's advisable from a Liability point of view to have a LLC for each of the investment properties. But, as a beginning investor, I was told that a new LLC will not qualify for Loans or some lenders will only loan to properties under investors name.

I was wondering as to how people over come this chicken-egg cycle, especially for new investors who want to start investing and also be covered from a Liability perspective, as it might be quicker to get a loan on one's one name, but then difficult to switch over to a LLC.

I am primarily interested in the Cincinnati market, but not sure apart from self owned LLC's, if there are management groups who can run property management and take another investor to share such expenses in the local markets. If there's one, can you provide me some pointers as I am looking to network with such groups or teams.

[Adam Walter]

@Uday S.  I am not a CPA or attorney and my advice is based on my own experiences.  You should seek professional advice for practices and procedures best for your situation.  With that being said you had a couple of questions:

1) Having a LLC for each property: I have heard this for asset protection, but in my case I have multiple properties in different LLCs. Even the big rental companies to this, and basically comes down to how much are you willing to risk losing one lawsuit? That is the number of properties you put into one LLC. As to the risk involved, you are less likely to get sued if you treat people with respect, fix things that need to be fixed, and do the right thing. I have been a full time investor for 15+ years and haven't been involved in a lawsuit (knock on wood). I've even had an apartment fire with some tenants getting injured and had Elk and Elk snooping around. Putting the property in an LLC, having good insurance, and treating people fairly is the biggest keys to not getting sued in my opinion. Investors who do put their investments into on entity usually use Land Trusts and not LLCs.

2) Getting a loan in an LLC: If you get a secondary market loan, you will probably have to have the property in your personal name and get your spouse (if you are married) to sign off on the loan. After the loan goes through, you put the property back into the LLC, which technically violates the due on sale clause but I have never heard a bank call the loan due. I have even had loan officers help with deeding the property back into the LLC; it's a common practice. You are willing to jump though these hoops because these loans usually offer the best rate and terms. Another option is to get a loan with a smaller, local bank who will keep the property in the llc, and you and the llc guarantees the loan. These loans are easier but the rates and terms are a little higher.

3)  Property Management:  Not sure what you mean by management groups.  There are several property management companies in the Cincinnati Market.  My opinion is that the best management groups are not available to you because they only manage their own properties and portfolios, like myself.  Some are better than others, but I feel no one will have an ownership mentality or performance like you will.  I'll just leave it at that.

4) Liability issues/LLC: The LLC is set up to limit your liability if you get sued. If a tenant slips and falls at the property, he/she sues the LLC and not you personally. If he/she wins she goes after the assets of the LLC and not your personal assets. That is what a LLC protects. Like I mentioned above, treat people with respect, do the right thing, and also have a thick skin. Tenants (and maybe Property Managers) will do things that make you more angry that you can imagine. What I do, is take a deep breath, sleep on it and think of ways to solve problems that benefits you and the person involved. I've managed properties in C-/D areas and come across everything imaginable. The tenant who used her rent money to bail her son out of jail to the tenant's girlfriend who OD'd and was taken to the hospital, came back the same day and OD'd again! If you have a situation, and am not sure how to address it, post in a Facebook group and you'll get lots of advice!!

Hope this helps.