All Forum Posts by: David Cianci

Quote from @David Cianci:

Hello, curious to ask if I should create an LLC before I purchase a real estate property.

I will most likely either buy a house hack, small multifamily, or partner deal with my first purchase. 

I understand that banks do not like lending to LLC's to start off so maybe I would have to take some personal liability to begin with or get an umbrella insurance policy which I have heard could be an option.

I have also seen that it can be complicated to move a property into an LLC when the property was purchased before the creation of the LLC in terms of the mortgage terms.

I am curious if I could benefit from the taxes benefits from forming an LLC right off the bat or if the annual costs would outweigh them to begin with.

Wanted to reach out to the community and make sure it wasn't a necessity to create an LLC as soon as possible because I would like to make sure I hedge my risk as much as possible in case an emergency would occur at or with a property I purchased and own outright, thanks.

There are no benefits to creating an LLC before you have a property. It is a distraction to keep from buying properties. ;-)
It may not have any benefits after you buy a property, depending on how you run it. Yes, it requires work to run an LLC properly.

I'm not an attorney, so take my advice with a grain of salt: a broker who works with investors of all walks of life, big and small, I've noticed most form an LLC once they have two properties or more.

Many will form one if they just have one, but if you're talking about house hacking, keep in mind, conventional lenders don't allow entity closings and they are the only lenders that'll allow you to live on the property.

DSCR/hard money lenders allow you to close in an entity, but you can't live on the property.

Primary reason to place all rental property into a limited liability entity is to protect your assets from tenant-related liability. Also, as others have mentioned, most institutional lenders do not lend to LLC's and have never given me any good reason for their position, since the owner is always required to assume personal liability via a personal guaranty. I agree that a $2M general liability umbrella policy is the next best thing to an LLC.

NOTE: One "new" negative is that all small LLC's are now subject to the Beneficial Ownership Information Reporting requirements of the Corporate Transparency Act. For entities formed after December 31, 2023 you have 90 days to file these reports and 30 days to file any changes to those BOI Reports. For entities that existed prior to January 1, 2024 the deadline is December 31, 2024. Penalties for failure to timely comply are $500 fine PER DAY and potentially jail time. I am an attorney in NY, DC & MD and this is NOT LEGAL ADVICE.

David, 

I'm in the same boat as you and I want to let you know what my plan is.

I'm buying my first house hack this year in my own personal name. Eventually, my plan is to put the property in its own LLC. Not even really thinking about that because I'm prioritizing taking action and actually buying real estate.

Trying to focus on one thing at a time and the most important thing for me is just buying a property and getting started. 

Good luck man! 

Hey David, I don't think there is too much of a reason to purchase a property under an LLC if it is your first one.

That being said if you are going and buying a 10 unit apartment building, then yes the liability is definitely worth it

Generally your liability is not that high with just one property and if you're just getting started, then you should take advantage of a house hacking strategy and use the lower interest rate and down payment to get into your first deal. 

Once you have a few deals under your belt, then you can start looking into LLCs

Hope this help man. Also I am an investor and agent in the area and would be happy to talk anytime!

Hey @David Cianci,

Depends on how much asset protection you need. See below my asset protection tier list to decide whats right for you: 

Worst:

– No coverage, held in your name.

Bad:

• Relying on insurance. This is the most basic level of protection and it is not very effective, but it is still better than nothing. Insurance companies have many exclusions and they may not cover everything, but they can help to pay for some of the costs of a lawsuit.

Good:

• Using one LLC for all of your rental properties. This is better than relying on insurance because it protects your personal assets from liability. However, if someone sues you and wins, they could take all of your rental properties.

Better:

• Using a separate LLC for each rental property. This is the best level of protection because it isolates each property from the others. If someone sues you and wins, they can only take the LLC that owns the property that was involved in the lawsuit.

Best:

• Using a combination of LLC and land trust to protect your rental properties. These are more complex legal structures that can provide even more protection than a traditional LLC alone.

Here are some of the key things to keep in mind when choosing an asset protection strategy for your rental properties:

• Your risk tolerance: If you are not very worried about being sued, you may not need the best level of protection. However, if you are worried about being sued, you should use the best level of protection that you can afford.
• Your state laws: The laws governing asset protection vary from state to state. You should consult with an attorney in your state to make sure that you are using the best asset protection strategy for your situation.
• Your budget: The cost of asset protection can vary depending on the type of protection that you choose. You should make sure that you can afford the cost of the protection that you choose.

@David Cianci

The decision to create an LLC for your real estate investments involves various factors, and it's a choice that should align with your specific goals and risk tolerance. Here are some considerations to help you evaluate whether forming an LLC is the right move for you:

Advantages of Creating an LLC:

Limited Liability Protection
Asset Protection
Potential Tax Benefits

Considering and Difficulties:

Finances: As you pointed out, it may be more difficult to obtain a mortgage for a property held by an LLC. Particularly when it comes to residential properties, most lenders would rather lend to people than LLCs.

Transfer of Property: Your mortgage's due-on-sale clause may be triggered if you subsequently decide to transfer a property that you now own in your name to an LLC. You might need to get the lender's clearance or pay off the current mortgage in order to accomplish this.

Annual Fees: There are expenses associated with running an LLC every year, including possible franchise taxes and state filing fees. Even though these expenses are rather low, it's important to compare them to the advantages the LLC offers.

Umbrella Insurance: An alternative to forming an LLC for asset protection is obtaining a robust umbrella insurance policy. This can provide additional liability coverage beyond what your regular property insurance offers.

Steps to Consider:

Speak with Legal and Financial Experts: Prior to making a choice, get advice from a tax and real estate lawyer. They can offer tailored guidance depending on your unique situation and objectives.

Assess Your Tolerance for Risk: Take into account both the type of properties you intend to invest in and your level of risk tolerance. In case you're involved in riskier tactics, having an LLC might provide you further assurance.

Understand Local Laws: Recognise local laws pertaining to LLCs and property ownership. There can be particular laws or costs in some places when it comes to putting properties under an LLC.

Examine Financing Options: Look into financing choices for properties held by LLCs. Certain investors opt to buy properties on an individual basis, which they subsequently transfer to an LLC when funding is obtained.

Ultimately, whether or not to create an LLC before purchasing a property is a personal decision. It's crucial to carefully evaluate the benefits, drawbacks, and costs associated with forming an LLC and consider how it aligns with your overall investment strategy and goals.

Yeah I think in the future when you have more properties it makes sense to have an LLC but not for a single property.

You can easily incorporate language into your agreement of sale that allows the transfer of the sales contract to an LLC that has not yet been created. This way you can create the LLC once you know you are proceeding with a purchase. The creation process can be completed relatively quickly, and would not delay the property purchase. Just remember to notify the title company of the change in purchaser. I don't see why you would want to go through the hassle and expense of transferring the property into an LLC after the purchase was already completed. While its possible, you will still incur the transactional costs of deed prep and pay the transfer tax in most instances equal to the assessed property value. I see you are in Philadelphia. Philadelphia's transfer tax is greater than 4% between state and county.

Also, don't let the LLC ownership's impact on originating a loan interfere. Most lenders are perfectly fine lending to an LLC. Ultimately the debt will still be recourse meaning you are personally guaranteeing the loan. Anyone who ever says they can't get a loan because the property is owned by an LLC has some personal blemishes that are the root cause, not the LLC ownership. If you have any more detailed questions, reach out. Happy to assist.