All Forum Posts by: Jared Ryan

Haha the sass just comes out more on some days than others, I get that and embodied it just a few minutes ago, @David M. Thanks for saying that, and again, for all your help. And noted about the househack not being straightforward. I definitely plan on working with a professional on my taxes next year, especially if an LLC and commercial loans come into the picture.

@David M.

First. That's why I'm here, David. Trying to learn all I can. No need to patronize me, it's a little insulting.

Second. For clarification, that's why I said on future properties. If I advertise in the future and things don't get filled right away, now I know I can still deduct back to that date that I put it into service. Not going to try to claim tax benefits back to December on my current property.

Third. Not making things up, David. Again, a little insulting. Here's a reference: https://www.nolo.com/legal-enc...

You can use any reasonable method for dividing these expenses. It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. However, the two most common methods for dividing an expense are either based on the number of rooms in your home or based on the square footage of your home.

So, for things like utilities, 75% is reasonable as 1 / 4 people in the home. For pretty much all other deductions, though...it's square foot of their 3 bedrooms and 1 full bathroom divided by the total square footage of the house. Probably more around 35% for my home.

I appreciate all your advice, but not always loving the way you share it.

I didn't advertise until March, I took my sweet time moving in. So nothing reported on tax returns. But good to know that you can roll back those benefits to when you start advertising for all future properties.

It was interesting looking into tax benefits for househacking. It seems like I can deduct 75% since I'm 1 of 4 people on depreciation, repairs, insurance, etc. If my "reasonable" estimation goes by square feet, it doesn't look as good for me...so maybe more around 40-50% for some items. But still, on everything that can't get deducted, the taxes hurt so much. The problems of living in an expensive market...you make more, but you also get taxed more.

And with that in mind, I would probably not pay myself a salary out of my LLC since I'll probably keep my W-2 for another 1-3 years to really kickoff the portfolio, and that would lead to high taxes on that rental income. It's good to know that is an option in the future, though; when I quit my W-2, it'll depends more on if I want to make more from tax deductions, or if I want to qualify for loans. I'd need to revisit this, at that point.

Thanks all, it seems pretty clear that the DTI being separate is only applicable if the LLC has its own track record and I'm not personally guaranteeing the loans in it. Which, I would have to do with my future LLC being brand new, and being the sole owner. Maybe setting up an LLC and using it years down the road, then possibly, maybe it could qualify for loans based on its own merit, and then I could qualify for personal loans where they focus more on my own merit (even though they would be aware of the LLC, too).

But until then, there is the Global Debt from the LLC perspective taking my personal finances into account for getting loans for the LLC, and as the person signing the LLC's loans, the LLC is very much visible on my personal finances. There's no real way that these can be separated when you're starting out, which makes sense because the finances are very much dependent on each other in the beginning.

And yeah, the link David M. had provided also made it pretty clear...don't rent to yourself. Thanks for also confirming that, Joe Splitrock.

And yes, that's right, I only started renting it in April 2021, so I'll need to get educated on that for when I file taxes for 2021 next year. But that's a completely different discussion.

Found this on the first thread David posted: https://www.biggerpockets.com/...
 
Fannie Mae published new guidelines for lenders on November 8, 2017 that allow transfers to LLCs! Here is the exact language:

"Unless the previous borrower requests a release of liability, the servicer must process the following exempt transactions without reviewing or approving the terms of the transfer.

A transfer of the property to a limited liability company (LLC), provided that a) the mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and b) the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence)."

So yeah...you could buy properties with nice, conventional, personal loans in your name, and transfer to the LLC. Just, if it's like an FHA loan, for example, then that's not okay. You'd have to refinance it to get a loan that is compatible with an investment property. And if you wanted to refinance that property into a new Fannie Mae loan, you'd have to transfer it back to a person. And transfer taxes may apply depending on your location.

But @David M. pointed out on that thread that this is bad as far as "piercing the veil" goes. I think I'm inclined to agree. So...this would provide some nice financial benefits to be get loansmore quickly, but if you were brought before a judge when getting sued, it seems like it would be hard to make the argument that your LLC is separate from your personal finances. So you'd lose the liability-isolation benefit of the LLC.

@Jim Spatzenfeld With that in mind, it sounds like solid strategy to acquire residential properties, then, would be to acquire the funds, purchase them as yourself, then pass on the property and debt to your LLC. And repeat. This keeps your personal DTI as clean as possible, so you can keep borrowing as much as possible.

Just make sure to not go too crazy and over-leverage.

And I suppose this only makes more sense when you have more money to burn and are growing fast...since you'd need to refinance your loans over to the LLC. Or possibly take out commercial loans in the first place against yourself instead of a residential loan, and that would be directly transferrable to the LLC, if the lender doesn't complain.

This might also count as "piercing the veil". I'd have to look more into that and the threads David posted earlier, they talk more about that.

@Jim Spatzenfeld Thank you for giving me a practical example of how it can be useful for acquiring properties! I am just very grateful for the BiggerPockets community right now, I feel like I'm learning a lot in short period of time, and it's keeping me out of analysis-paralysis.

So, in your situation, you passed on your debt to the LLC in order to change your personal DTI, and you were able to get personal mortgages. That makes sense to me. And it works inversely, too, right? That means there is a separate DTI for the LLC. Which, in your example, wouldn't look as good since you just transferred all the loans to it. So, if you wanted to borrow from the LLC in the future, you'd need to improve that DTI, and one way to work around that is to be the personal guarantor on the loans, so the lender can take your good personal DTI into account when underwriting the LLC's loan. Does that sound right?

@David M. To answer your question, that property is a househack. I bought it in December and found renters for the other 3 bedrooms in April, so I'm unfamiliar with what a SchE is. Is it this? https://www.irs.gov/pub/irs-pd...That's good to know what to expect for my tax returns next year. I frankly don't understand everything you said with respect to this, but that's fine, that's out of scope for this post, and I can study up on that for next year's returns.

Regarding the LLC, everything you said makes sense. Thank you for your patience in explaining it to me. So...if I understand correctly...

An LLC is a legal entity that can be set up to isolate a business from the owners' personal finances. Setting it up and maintaining it has a set of fees. The benefit is of the LLC is that liability is limited to the LLC: in other words, an LLC doesn't show up on the owners' personal credit score, and the owners' personal assets aren't on the line if the business is sued—as long as the LLC is run correctly (you cannot "pierce the veil") and legally (if you commit crimes in the name of the LLC, it's still "you" who committed them). Only the assets the LLC owns are liable. If the owners want to protect the LLC, just like with anything else, they would take out an insurance policy on it.

All profits/losses just "pass through" the LLC to the owners as agreed upon in the operating agreement. In simple terms, if you're the only owner, then all profits/losses are yours personally; they belong to you, and they show up on your personal tax returns. 50/50 split? Then 50% of the LLC's profits/losses show up on your personal tax return.

@David M. Okay, I think understand now.

LLC Facts:
- An LLC really should limit my liability to whatever properties is in it, if I run it correctly by not piercing the veil.
- An LLC will not affect my DTI as the sole owner. If I get partners, then it could change my DTI...but it gets complicated, so if I get to the point I have partners, then I'll look more into it. Good to keep in mind as I scale.
- An LLC does not show up on my personal credit score. Good to know, but not super important for getting loans.
- An LLC has no tax benefits.

LLC as applied in real life:

As a solo investor, it makes sense to talk to a professional to figure out if it's right for my current risk profile, since its usefulness could swing either way, especially with good insurance being a good alternative.

And if/when I get into business with other people, then it's more of a necessity, and I should talk to a professional about setting that up correctly.

Does that sum it up pretty well?

@David M. You're right, the DTI is the most important part. The focus on credit card was just quoting from another thread about LLCs, and how they don't impact your personal finances. But if that also applies to DTI, then this is a bigger deal than I thought.

The real question is: if I put things in an LLC, how will that impact my personal application for a conventional loan? It appears from Jim's experience that if you put it in the LLC, they don't impact your personal application at all. And, for me personally, putting my 10 unit investment propertiy in an LLC would be much better for my personal DTI. So, I'm leaning that direction.

So, as you mentioned, David, now that I got some information, I can take the question to a few loan officers and know just enough that I can understand what they have to say about it. I was hoping one would show up here and could clarify, but I need to get some quotes on both types of loans for this anyways, so I can kill two birds with one stone.