The classic LLC question - but with a twist

[Brian Walters]

We have all seen and read opinions on what people just starting in real estate investing should do in terms of creating a LLC to own and operate each property. Most of what I have read speaks to the opinions for young investors who are getting started. A lot of these seem to lean toward not setting one up, being the person is just getting started and wouldn't have much at risk either way.

However, what I have not seen a lot on are opinions on what would work best for new investors who are further along in life. For example, I am 15+ years into a good career, but still looking for ways to invest. Being married with kids my #1 goal is to provide and protect my family. Based on this, since I have started trying to learn, I have always leaned toward the LLC being the better way to go. The up front cost, if for nothing more than peace of mind, seems well worth it to me. I'm curious what others feel, or what others in similar situations have done.

Also, would you typically set up a separate entity for each property owned?  And if so, would each of those fall under a single, higher company, or just exist as individual entities?

The goal is to start investing in the Las Vegas/Henderson area over the next year so if anyone has any advice specific to that area I would love to talk in more detail.

Thank you to all who take the time to read and provide any thoughts and insight you may have.

[Lavon Newborn]

@Manish Shah True, but a LLC is meant for business purposes, if your home is for personal use rather than cash machine then you don't need it, but LLC is the way to go regardless it's a one shot barrier to protect you in many ways.

[Marcus Auerbach]

@Jerry W. I am with you on your final conclusion, it's a good idea to put substantial assets into an LLC. Your number is 400k, I'd go a little higher. An LLC is a firewall that seperates your assets. If you have only one it's pointless.

But I will challange what you said before: "an LLC does not provide asset protection" - that is correct. It is called a limited liability company, meaning it limits the liability of the owner (and his other assets). It does nothing to protect the asset within the LLC. Zero. You can sue an LLC and if you win potentially take everything the LLC owns.

But you also have to be awarded enough by the court. If you win $5,000 and you get paid, by the LLC or the insurance thats the end of it.

@Preston Hunter what is the point of an LLC during the renovation when you put it in your personal name later? Make sure you see a copy of current liability insurance from your contractors!

[Preston Hunter]

@Marcus Auerbach

Yes, always a good reminder to get those insurance certs from contractors. I was actually suggesting the opposite steps. I'm about to close on a 4-unit which I could buy with cash in my own name, renovate, rent, and refinance (taking advantage of the better terms of a non-commercial loan) THEN transfer the asset into an LLC.

. @David M. identified the issue of the mortgage note being in my name and asset in the LLC. Is it possible to solve this without jeopardizing the corporate veil?

[Marcus Auerbach]

@Preston Hunter I see now, that makes sense. Make sure your note does not have a due on sale clause. I'd be shocked if you have a residential note without one. It is correct that a lot of people will transfer title into an LLC after closing and they get away with it, because lenders don't check and there is no reason it should come up. At least not until something triggers them to look at the title again.

When your LLC get's sued step one is to research everything about you, the property and the LLC and look for anything that could be used to make the case the you have violated the weil of the LLC.

The only way to completely shield you from this is to treat it like it is an independent business with it's onw books, bank account and - commercial financing. If there would be a better way around it, every on on BP would know :-)

In most cases the value of the law suit is so low that it does not pay to go through that research as the accusing party, so it won't even get to the LLC, but then what's the point except making you feel better?

[Joe Splitrock]

@Brian Walters you don't need an LLC to have a business or claim business expenses. An expense is either a business expense or it is not, whether you own it personally (sole proprietorship) or in an LLC, makes no difference as to claiming the expense.

As far as tax advantages of an LLC, there is some mis-information in this thread. There are no tax advantages to putting the property in an LLC versus being a sole proprietor. They are treated the same for tax purposes. The only difference is your CPA has to prepare extra paperwork for the LLC and you have annual filing fees on the LLC, so the LLC is going to cost you more.

The only advantage of an LLC is some separation for liability, but you have to be careful to keep the LLC separated. It is common for people to purchase the property in their own name and transfer it into an LLC, which can be used to "pierce the corporate veil". What that means is an attorney can argue that you are not separate from the LLC, which allows them to bypass the LLC and go after you personally.

In my opinion, even in your situation, good liability insurance is a better strategy. The danger of the LLC isn't that it will hurt you, but rather that it will give you a false sense of security. It is not a magic shield and it is not a substitution for high dollar blanket liability insurance. It is not a tax shelter and it is not needed to own a business.

[David M.]

@Preston Hunter

No, there isn't a good way to deal with the mortgage and Title not being in the same name. I think MAYBE when you first create the LLC since its the only way to capitalize it your corporate veil will be intact. However, I believe you will have reduced protections since "everything" isn't under the name of the LLC.

Also, if you quit claim there are more issues than the Due on Sale clause for crying out loud.  Your home owner's insurance may require an update to the mortgage clause.  That automatically informs the servicer of a Title change since they will have to update the clause.  Also, your Title Insurance may be voided since there has been a transfer --- double check.

I agree with Auerbach. If you really want the protections afforded by the LLC, you need to operate it like its own entity. This post started out supposedly having a "twist" on the classic LLC question. But, from the start its the "same ol' same ol."

If there is a "good way around it," nobody has offered it up on BP...

Good luck.

[Brian Ellis]

Umbrella policy should be enough starting out, LLC will just complicate things with the bank and take away from your cashflow.

I opened up an LLC at first thinking it was the smart thing to do, But ended up using it for something entirely different.

[Anthony Wick]

Age, marriage, kids, has nothing to do with my opinion. I simply don't think an LLC is necessary to start investing in real estate. Nor does your career. An umbrella policy can do the same thing an LLC is meant to do. Protect your assets. Now, do I have an LLC? Yes I do. But I didn't right away. We formed an LLC when we took on two friends as financial partners. That was to put everything in writing and to protect each party from each other; especially a Buy/Sell agreement.

I've seen others advocate for an LLC for each property and for a separate bank account for every property. I still have no idea why that extra work and cost is necessary. I haven't actually read any reasons or examples of anybody showing that protected them from anything more than an umbrella policy would do.

[George Skidis]

Here is my twist. Our LLC is located in Illinois. Illinois Land Trusts are a great privacy tool that avoid probate. The LLC owns nothing and leases the properties from the various Land Trusts that do own the property, with the right to sublease the unit and not disclose the owner. The LLC also assumes all liability for real estate taxes, insurance, maintenance and so forth.

Land Trusts have no annual fees and are not required to file an income tax return. The ownership of a land trust is considered "Personal Property". The owner is a referred to as the "Beneficial Interest". The beneficial interest can be another person or entity.

1. Always consult with an attorney before implementing any asset protection strategy.

2. Always buy both property and liability insurance. 1,000,000 liability recommended

3. Always buy both Commercial and Personal Liability Umbrella Insurance. 2 Million

4. Always maintain your properties to avoid as many liability issues as possible.

Just remember a moat was not the only line of defense for a castle. They also had walls, a drawbridge and other defenses. You need to do the same.

[Steve Vaughan]

Originally posted by @Brian Walters:

Also, would you typically set up a separate entity for each property owned?  

It depends on the asset type and whether debt or partners will be involved or not.  That's always missing from these questions. 

Whether you've been working for 5 years, 10, 15 years, etc is not the info I need. What are you buying? Will you be trying to get that sweet 30 yr fixed financing? Will non-spousal partners be involved? 

I looked into this extensively when I started and now have multiple MMLLCs after consulting with a good attorney. I use LLCs for commercial property only.  Sometimes 1 per, usually 2 as long as value total does not exceed $2M.

I have no LLCs for residential property. The insurance co is willing to give me $300k-$500k in liability coverage for less than $100/yr. That's how afraid of it they are. I act above board, carry an umbrella policy and don't over-withhold deposits on residential rentals. Owning personally allows us to get conventional 15 or 30 yr fixed financing. An LLC will limit you to much riskier terms.

[Christian Carson]

I form an LLC for every separate line of business, including real estate rentals. I follow a rule of thumb to use an LLC for everything unless it is otherwise made impractical due to some outside influence.

Quite frankly, the unincorporated sole proprietorship strikes me as unprofessional. From a marketing perspective alone, a business entity lends credibility to the operator (at least in my eyes). I'm willing to take some operational penalties to achieve this separation.

Secondly, if you're ever sued personally, that record is attached to your name forever. If a plaintiff manages to obtain a default judgment against you individually without serving you properly (and believe me, it happens more often than you think), it can prevent you from selling your personal residence until the matter is dealt with--and it may well require you to pay off a bogus judgment just because you're under pressure to close the sale. 

[Nick Pawlowski]

@Brian Walters I'm just starting out but I read that you can't own rentals under an LLC? Am I missing something?

[David M.]

@Nick Pawlowski

Of course you can own an investment (rental) real estate property with a LLC. It's just being discussed here, and all over bp, the pros/cons of having the LLC.

[Brian Walters]

Once again, thank you to all for the input.  It seems like there are definitely pros and cons and I can see the points made by both sides.  

I am a little curious how those that don't go the LLC route clearly separate the personal expenses from business, though I'm sure this is more for a CPA to help determine. The umbrella insurance does sound like it would provided the protection which was part of my initial thought around going with the LLC(s) and something I will look to learn more about.

On the other hand, keeping it outside of a LLC does allow for the better loan terms, which is a big plus.

My plan right now is to BRRRR single family homes, using a property manager. I would be the investor, no partners, and want to keep myself separate from the business and tenants so I can focus on growing the business and buying more properties. The areas I'm looking into have properties between $150K-$400K. Not sure if that sways anyone's opinion on what they would do.

[David M.]

@Brian Walters

If no LLC, no need to separate funds. There is no "co-mingling" issue since it's effectively already comingled.

That being said, I am guessing perhaps the answer to your question is to run your accounts as if there was a separate business.  Have a bank account just for your rentals/investments.  Depending on how you interact with your bookkeeper/accountant/cpa, this should help them, as well as yourself, keep up with your rental income/expenses.

To be clear, just because you haven’t formally/legally established a business, it doesn’t mean you can’t organize/operate your finances/acccounting like a separate business.  Difference between legal and accounting...

Another side note:  one perk of doing it personally allowed you to more easily generate rewards point so your credit cards (if you do that sort of thing...)

Hope this helps.  Good luck.

[Bob Floss II]

I'm an attorney, so of course I'm going to say always put your properties into an LLC, and if possible a series LLC. I also find it a bit concerning that everyone has so much faith in their insurance policy. One of the biggest fields of law is insurance defense. There is a long history of people thinking they are covered by insurance and the insurance company telling then otherwise.

[William McSeveney]

Depending on your state laws, you could set up separate LLCs for each property. This is referred to as a "series LLC." For example, I practice law in WA which doesn't allow this. But I also practice in TN, which does allow this kind of structure. There are pros and cons to each. I recommend speaking with an attorney to discuss those pros and cons. Protecting yourself and your properties now will pay off in the long run.

[Ray Evans]

@Brian Walters Good news,you are in the best state for a LLC and it's main object to keep you the owner hidden or protected.I am a Fortune Builder Alum,and I have had my LLC since the end of 2018.I currently rehab properties,but plan to add rentals sooner than later.IMO I would not create an LLC for each property but would put them in groups.3-5 6-8 the object is in the severe case that a lawsuit or judgement was issued ,you would lose a small group not the entire nest egg.

Best of Luck!

[Brian Walters]

@David M. that credit card points.... point, is a great one. If expenses can run through a card that gives points, or cash back, that is added positive that you may not account for in the initial analysis but could serve as a nice bonus.  Or a way to fund time away with the family.

In the end it's clear that having access to a good lawyer and CPA are key in making this work regardless of going with an LLC or not. Either way my plan is to use a separate bank account to run all funds, and income through. I want to make sure the investments are separate from my personal income/expenses. The last thing I want are legal issues or hearing from the IRS.