Where to get started with out of state rentals

Question

I believe I’ve decided I’m ready to purchase a rental home, but want to be as prepared as possible when stepping out into this. I’m an over thinker, and at times can suffer from analysis paralysis. I have several questions and have had a hard time finding info applicable to my exact situation. At this point, I plan to purchase a rental home in a market a couple states away as it’s more landlord friendly than the state I live in. I have questions like:

• I live in a no state income tax state, but the state I’m interested in (Indiana) is an income tax state. How will that affect me?
• Do you create an LLC or what type of asset shielding should I be looking at?
• If an LLC or some sort of business is the right answer, do I create that in the state I live in or the state I’m investing in? Are there tax implications either way?
• How do I best shield myself from greatly changing my personal tax situation because of the income produced via rentals? I know earning this income will impact my personal taxes, but is there anything I can do to minimize the impact?
• What else should I be asking?

I have tons of questions, but the above are a sample of what I’m concerned about. I’m curious who I should reach out to, to help with these questions? Is that a CPA, an attorney in the state I want to invest in or the state I live in, or is there someone else I should be reaching out to? Any suggestions on a specific person you’ve had experience with?

Colton Hahn · Answer

Cannot answer most of your questions, just wanted to say we buy MF in Indiana (and the midwest) and have found great returns here. Sounds like you agree with our thesis, and it will probably do you well :)

Jon R. · Answer

Hi there,

I can't answer most of this but regarding the LLC questions, I'd recommend listening to episode 105 on the real estate rookie podcast. It's been a while since I did but per the feedback, open it in the state where the property is located. LLC's are also the first layer of protection.

Also, coming from a fellow over-thinker, and since you called it out, just make sure you are still taking action to actually secure a property. You could very well be doing this with an agent, but just throwing that out there in case you're getting stuck. :)

Good luck!

Jon

James Liwski · Answer

Jeff,

I think the answers you will find here suggest there is no one "best" answer as to putting your property into an LLC or not.  I'm an Indiana real estate attorney that sets up LLCs and I can't give you a yes/no answer.  It depends on you and your business model. What I will tell you is that Indiana, like most other states, will want your LLC registered as either a domestic or foreign entity so the state can reach out as needed (via your registered agent of course);  If you decide to create an LLC, you would be wise to seek qualified financial advice from a CPA or other advisor to insure you understand the expenses and depreciation available for the real estate you hold.  You will also want to get a good business insurance agent to provide the right coverage and protection.  Of course, you understand your LLC is considered a "pass through" entity for taxes meaning any profit the entity makes will be assigned to the entity owner(s) to report as income on their tax return, so your CPA/financial advisor can help you minimize any profit and tax burden.

Hope that helps answer some of your questions

Adrien C. · Answer

I manage properties for a lot of out of state owners (I'm in NW Indiana). Some buy in personal name and some buy in LLC. I've spoken with half dozen attorneys on it and get half dozen answers. As long as you have adequate insurance on house plus umbrella policy, probably doesn't really matter which route you take when you have a handful of properties. Most with LLCs have a registered agent in Indiana for the Indiana LLC.

As far as taxes, you really shouldn't pay much especially if the property is leveraged. The expenses (taxes, interest, insurance, repairs, management fees) plus depreciation usually get you pretty close to a net $0 on a single family home. If it's owned cash, you'll likely see a gain but we're not talking about a life changing amount per rental. The appreciation and other benefits offset the minimal amount of tax you'll pay on the gains. But chat with your CPA and give him some fake numbers to play with to see what it'd do to your situation.

Jake Stadelman · Answer

Hey Jeff,

I have bought 8 out-state properties and three this year. First, you need to find the right market which you have done in Indiana? Why did you pick that market if you don't mind me asking? Make sure you do your research as to the market, jobs, growth, etc... In my opinion, you should open the LLC in the state it will be operating. I am not a lawyer or tax professional but all of the research and lawyers I have talked to said to open it in the state you are going to be operating. LLCs are more important later in your investment career my opinion would be to find a good deal and get an LLC later. You can have the tax from the LLC transferred to you so you don't get doubled taxed.

Also, there are fees in creating an LLC and I paid 500$ last year just to have the taxes prepared for mine so starting out that is going to cut into your profit is why I would wait until you have more investment properties unless you are buying the house with someone else then you might want an LLC. It all depends on your situation. There are more fees as well. I had to pay a layer $200 to transfer it from my name to the LLC and it depends.

My best advice is to find a good deal and act so you can learn more along the way. Once you buy one the snowball effect will happen and you will continue to learn as we all do.

Other things to ask are is the state you are investing in is landlord or tenant-friendly? For example, in CA the tenants have more rights than the landlords. Good luck hope some of this helped you.

John Duston · Answer

@Jeff Graybeal

You only have to worry about income tax if you have income which in the current market after accounting for appreciation and repairs with the new rental is a bit hard. Going forward it's just a simple out-of-state filing that a lot of CPAs can hand.

LCS are just simply one tool in a lot of whether or not you should use it is dependent on your personal circumstances and you really seek out a professional rather than a forum for answers on that.

First person talk to the real estate broker. If you want to ask CPAs and lawyers tons of very specific questions you should be making money so that it's worth your time to ask questions and pay for the answers

Where to get started with out of state rentals

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