What Business Structure to choose?

[Ryan Prange]

hello everyone, over the past couple of years we have purchased two single-family homes and also built a guest house on our property. I now have three tenants and I lease part of one of the properties back to my business as a storage yard (so 4 streams of income). My question is ... if I would like to keep doing this or work in fix and flips or other forms of real estate investing, how should I structure an actual business? right now I manage everything using Sessa and have individual bank accounts for each property. I keep good records and have clean books. I have loans on two of the properties and am concerned that if I transfer the properties into an LLC that the loans would be called .

My Landscape company is an S Corp so I am familiar with that business structure, but I just don't know the best way to structure a real estate company. Would I be a property manager? Would I be something else? I appreciate everyone's advice. 

[Adam Bartomeo]

Normally, people open a S Corp instead of an LLC so that they can pull a salary from the S Corp and save on taxes. This is rarely the case with rentals. Most people use LLC's so they can protect their other assets from the different entities. Most investors have several LLC's for the multiple properties that they own.

The loans should not be accelerated as you are still the individual responsible to pay the loan. I have not heard of anyone's loan being accelerated because they switched to a LLC.

[Nathan Gesner]

Quote from @Ryan Prange:

You don't need separate bank accounts unless they are under LLCs, then you will need a separate bank account for each LLC. When property is owned in your personal name, you can keep all the funds in one account. Simpler usually better. I would keep one checking account and one savings account for all the investments because it's so much simpler. You can track individual funds using your spreadsheet or software.

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney, and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State's website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appear on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your primary insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 14 years of experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.

If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require extra, on-going effort to maintain.

[Nicholas Coulter]

Quote from @Ryan Prange:

hello everyone, over the past couple of years we have purchased two single-family homes and also built a guest house on our property. I now have three tenants and I lease part of one of the properties back to my business as a storage yard (so 4 streams of income). My question is ... if I would like to keep doing this or work in fix and flips or other forms of real estate investing, how should I structure an actual business? right now I manage everything using Sessa and have individual bank accounts for each property. I keep good records and have clean books. I have loans on two of the properties and am concerned that if I transfer the properties into an LLC that the loans would be called .

My Landscape company is an S Corp so I am familiar with that business structure, but I just don't know the best way to structure a real estate company. Would I be a property manager? Would I be something else? I appreciate everyone's advice. 

Do you have a CPA that you are currently using that is both Small business and REI friendly?

[Alecia Loveless]

@Ryan Prange Disagree with the thought that you only need one bank account for all your properties. I have an individual bank account for each of my properties and feel it makes it simpler to track profit and expenses by the property.

Have just hired a bookkeeper and at first she questioned having so many accounts but is now finding it a simple way to deal with the complexity of the fact that I have 7 properties and in keeping track of everything.

I can see if you had 20 properties maybe less accounts but I’m not there yet so I can’t say.

[Tanner Bellamy]

Quote from @Ryan Prange:

hello everyone, over the past couple of years we have purchased two single-family homes and also built a guest house on our property. I now have three tenants and I lease part of one of the properties back to my business as a storage yard (so 4 streams of income). My question is ... if I would like to keep doing this or work in fix and flips or other forms of real estate investing, how should I structure an actual business? right now I manage everything using Sessa and have individual bank accounts for each property. I keep good records and have clean books. I have loans on two of the properties and am concerned that if I transfer the properties into an LLC that the loans would be called .

My Landscape company is an S Corp so I am familiar with that business structure, but I just don't know the best way to structure a real estate company. Would I be a property manager? Would I be something else? I appreciate everyone's advice. 

Hey Ryan,

First off, I do recommend sitting down with a tax professional so that they can understand your specific set of facts and circumstances. 

That said, typically you want to keep your passive and non-passive income separate. Your non-passive income is subject to Self Employment (SE) tax and passive income is not. That is why your landscape company is structured as an S corp... to lower the amount of SE tax you have to pay. I would recommend an S corp for fix and flips generally... but again depends on your facts and circumstances.

For real estate investments, generally, you want them in LLC's. Not for tax preferences, but for legal reasons. Real estate/passive investments are already preferential when it comes to taxes since they usually show a loss on paper and the income is not subject to SE tax.

You are in a great situation for some tax planning. I would wager that if you haven't sat down and done a tax plan before, spending a few hundred dollars with a tax pro could save you tens of thousands in the long run. 

Good luck!

[Zachary Jensen]

Quote from @Ryan Prange:

hello everyone, over the past couple of years we have purchased two single-family homes and also built a guest house on our property. I now have three tenants and I lease part of one of the properties back to my business as a storage yard (so 4 streams of income). My question is ... if I would like to keep doing this or work in fix and flips or other forms of real estate investing, how should I structure an actual business? right now I manage everything using Sessa and have individual bank accounts for each property. I keep good records and have clean books. I have loans on two of the properties and am concerned that if I transfer the properties into an LLC that the loans would be called .

My Landscape company is an S Corp so I am familiar with that business structure, but I just don't know the best way to structure a real estate company. Would I be a property manager? Would I be something else? I appreciate everyone's advice. 

No need to complicate things! Just hold the real estate in an LLC, and DONT make an S corp election. S corp is great for things like service businesses, but when it comes to owning real estate, we want not to make the S corp election. This can cause us to pay MORE tax then nessessary.

[Ashish Acharya]

Given your situation, setting up an LLC is a solid choice for liability protection and managing your real estate activities. However, since you have loans on two properties, you'll want to check with your lender about any due-on-sale clause that could be triggered by transferring the properties into an LLC. To avoid this issue, consider purchasing future properties directly through the LLC.

You could also set up a Holding LLC for the properties and a separate Management LLC to handle operations, keeping liability and management activities separate. If you're interested in fix-and-flips, using an S Corp might be beneficial since you're already familiar with that structure. For long-term rentals, though, an LLC is generally more tax-efficient.

[Zachary Jensen]

Hey Ryan, 

It sounds like you’ve built a solid foundation with your real estate investments and have a good handle on managing your properties. If you’re planning to expand and explore other opportunities like fix-and-flips, structuring your real estate business as an LLC (Limited Liability Company) might be a great next step.

An LLC offers flexibility while protecting your personal assets from liabilities related to the properties. You can continue to operate with separate bank accounts for each property, and an LLC would provide a legal entity to manage them under. This is particularly useful for tax purposes and liability protection.

However, you're right to be cautious about your loans. Some lenders include a "due-on-sale" clause, which could mean transferring properties into an LLC might trigger the loan to be called. A good option is to speak with your lender and ensure they're comfortable with the transfer or consult a real estate attorney for advice on how to proceed without disrupting your financing.

[Melanie Thomas]

Quote from @Ashish Acharya:

Given your situation, setting up an LLC is a solid choice for liability protection and managing your real estate activities. However, since you have loans on two properties, you'll want to check with your lender about any due-on-sale clause that could be triggered by transferring the properties into an LLC. To avoid this issue, consider purchasing future properties directly through the LLC.

You could also set up a Holding LLC for the properties and a separate Management LLC to handle operations, keeping liability and management activities separate. If you're interested in fix-and-flips, using an S Corp might be beneficial since you're already familiar with that structure. For long-term rentals, though, an LLC is generally more tax-efficient.

THISSS! I got burned several years ago. Do your homework!