To LLC or not to LLC

[Account Closed]

After listening to the podcast with Ken McElroy, I bought Ken's book, The ABC's of Real Estate Investing, and it's phenomenal! I have a quick question though. There is one section where he poses a hypothetical dialogue with a potential seller, and in the event that the seller asks who you are, the response is somewhere along the lines of, "we are a real estate investing company in (your town) and are looking for..." This is followed by a comment that if the owner asks to tell him a little bit about your company to be prepared with some thirty-second speech about it. My question is, would you recommend to start a company if you are an individual investor to appear more legitimate? I am new and will be in the market soon for my first investment this year and would like to know if being independent or actually forming an LLC of sorts would add credence to my endeavor. Any suggestions?

[Duncan Taylor]

Originally posted by @Michael S.:

@Duncan Taylor

Obviously it is a very personal decision when you decide to switch from "just get an umbrella policy" to "I want to spend 5 grand having a lawyer set up some trusts for my massive wealth." And, I know nobody on here is offering legal advice. Do you think it makes sense to switch over once the value of your properties exceeds the value of your umbrella liability policy? Or, wait until the equity exceeds the total liability coverage? How about taking a net present value of your cash flow, discounted at market rates, add that to your equity to see if that number approaches your liability coverage?

Yes, it is a very personal decision and yes, this is absolutely NOT legal advice.

When I first started out I fell for the 'buy in an entity' crap. I am old, LLCs didn't exist when I was starting the fad then was subS corps.

The first three houses I bought I used my shiny new SCorp. I quickly realized was a complete and useless pain in the *** it was. I got an attorney, fixed the mistake and from that point I bought in my name or partnership names for almost 10 years. About 5 years in, I started buying apartments and for those I did use a corporation for each one but that was to solve daily operational issues.

I used a strong umbrella policy. It was $1M at first and eventually grew to $5M.

When I had about $3.5 M in personal assets, my attorney and I started working on protecting my personal assets as well as isolating the liability from the investing assets. I still kept my umbrella policy and still carry on to this very day.

Protecting your personal assets and the business assets are two entirely different issues and definitely NOT appropriate for DIY.

Today, I do things much differently than I did then or would if I were starting out now. But, today, I have assets to protect and kids and grandkids I want to make sure are provided for as the years go by.

If I were starting out today, I'd probably not do anything other than an umbrella policy and common sense until I had about a $5 M net worth. You can certainly do it sooner. I have neighbors where I live right now who have done it and probably are in the $1 M - $2 M range but it is more of a status symbol for them.

I had one actually share their net worth they had in 'foolproof' protection with me and asked me how much I had. Maybe it's a 'southern' thing? I politely declined and said I don't measure myself against others by net worth. He then said he noticed they had not yet filed the mortgage on my house, he thought the closing agent had made a mistake. I laughed and said, "What's a mortgage? Do they cost much? Do they come in colors?" From the look on his face, I think he finally understood.

Bottom line, if you are starting out, focus on doing deals. Everything else you will face are just details you can handle as needed.