All Forum Posts by: Greg Boots

Shane, it's great to have you here!

If you have any questions just ask.

Most states prohibit the use of PO Boxes. However, when you are dealing with your tenants you can have a separate mailing address, so in that instance a PO Box is fine.

One important thing to remember is that creating the LLC is more than just filing with the Secretary of State. You must have a proper operating agreement for the LLC. If a lawsuit does develop it is the operating agreement that is going to provide the liability protection. If there is no operating agreement you are going to be leaving it up to the court's discretion on the level of protection you receive.

Additionally, make sure that you have a separate bank account and tax identification number for the LLC. You do not want business and personal funds commingled in one account. Also make sure that you always hold yourself out as the manager of the LLC. By acting in your official capacity you are putting other on notice that they are dealing with a formal entity.

Yes, you can transfer the property into the LLC once you take title. If you are using traditional financing the lender does have the ability to accelerate the mortgage on transfer. However, based upon market conditions lenders are not rushing to foreclose on properties that are current in their payments. If you are not using traditional financing it is a non-issue.
When the LLC is created there will need to be a business address listed, often it is a good idea to use a different address other than your home if you don't want your tenants knowing where you live. You will also need a resident agent. You can be the resident agent, there is no liability exposure and if the LLC is created in your home state there is no sense paying another person to be your resident agent.
Until you have tenants in the property your liability exposure is virtually nonexistent. So you have time to get the LLC established and the property transferred over.

It really depends on the state. In most states if you have equitable ownership in the property a quit claim is a legitimate method for the transferor to disclaim his or her interest in the property. They are used quite a bit between husbands and wives and other family members.

My practice focuses on business & estate planning, asset protection and tax reduction. My office is in Kent, i work with investors, agents and brokers across the country.

Since the DBA is filed through the existing business it is not necessary to open another account. However, it might be easier from a bookkeeping perspective to have a separate account.

I would also look for an attorney that invests as well. If the attorney is an investor he or she will be able to pass on the knowledge he or she has gained to protect his or her own investments.

I would use an LLC for your holds. Greater flexibility in management and asset protection.

If you use an LP for your rentals and you are the general partner you will open yourself up for unlimited liability exposure associated with the property. Another downside with an LP is that if you are the passive limited partner you will lose your ability to capture your annual depreciation from your holds.

I definitely agree with the other posts that your attorney and accountant need to be involved and on the same page.

The potential issue with holding the rentals in an S corporation is that although you do receive passive income distributions via a K1, if you are performing services in the S corp the IRS is severely cracking down on individuals who do not receive earned income out of their S corps.

With the earned income requirement you are converting a portion of your inherently passive income from rentals into earned income subject to employment taxes.

If the goal is to have a K1 to help decrease audit risk you may want to have an LLC taxed as a partnership.

Marissa,

LLCs are great for holding long term properties. The LLC will allow you capture the tax benefits of your rentals based upon the flow through taxation of the LLC. Additionally, the LLC will help contain liability exposure that may arise from the property inside of the LLC and away from you on a personal level.

The key here is that LLC contains exposure, so any other holdings or assets within the LLC would be at risk of an injury arose on a property within the LLC. Typically, when you are holding residential properties it is often not necessary to have an LLC per property. While it is true that you would only have that one property at risk, you need to do a cost-benefit analysis in setting up one LLC per property. On the down side you have creation costs, initial filings fees with the Secretary of State and in most jurisdictions you have to pay the Secretary of State an annual fee to keep the business in good standing. If the LLC is not disregarded for tax purposes a tax return will have to be filed for each LLC. Each LLC will need to have its own bank accounts.

Every investor has his or her own level of risk tolerance. Even though I'm an attorney and can create LLCs with no effort I will typically hold 3-4 residential properties per LLC. I manage my risk exposure by keeping an eye on how much equity I have in the properties. If I have more than $250k in combined equity I will reposition one of the properties into another LLC. Many of my clients will not have more that $100k combined equity in their LLCs. Another factor to consider is to keep similar properties together by not mixing higher risk multi-units in the same LLC as a suburban residential holding.

A good strategy to help minimize risk exposure from the investments will be to have another entity (LLC or Corporation) to serve as the manager of the LLC. This management company would be the entity that interacts with the public, maintains the property, negotiates contracts, advertising, marketing, etc. Basically, the management company is where the business activity occurs.

In certain circumstances these different business activities could be separated into individual components within a Series LLC. However, before jumping into a Series LLC I would consider a couple of factors. Are series LLCs recognized in the state where the investment properties and business activity occurs? If not, then the Series LLC will need to be created in another state that recognizing the Series LLC. Since it is in another state you will have to hire a resident agent in that state and then you will have to file the LLC to do business in the state you plan to conduct the activity (foreign file). These requirements will greatly increase your cost of doing business.

Another issue with Series LLCs is that since they are so new we lack adequate case law on whether or not the Series LLC will be respected in the state the LLC is filed to do business.

I know this is a long winded response but I hope it helps.

Greg