Hi All,
I am working with a business partner to invest in real estate. Our near-term strategy is probably best described as BRRRR single family residential (detached SFR). We are currently in the planning stage, but hoping to put money to work within the next ~6 months or so.
Know question of "to LLC or not to LLC" is probably one of the most repeated / annoying questions from newbie investors, but was hoping to connect with experienced investors, legal professionals, CPAs, etc. who could help shed some light on our situation.
Here's some background context:
- Two business partners, both based in CA (both have W-2 background in Finance)
- Looking to invest both in / out-of-state, but our 1st deal will likely be out-of-state given capital constraints
- We are planning to use a Pledged Asset Line of Credit (i.e., revolving credit line collateralized by stock / bond portfolio) instead of HML / private loans to finance upfront purchase / rehab
Would love to get the community's input on the various ways to structure the business entity (LLC? Partnership? Tenancy in Common?), with a specific focus on the following topics:
1) What are the financing considerations for permanent / cash-out refi financing (e.g., 30-yr fixed conforming)?
- My understanding is that an LLC structure would disqualify us from Fannie / Freddie loans so we would get less favorable lending terms (rate, term, amortization schedule). Does this mean that I'm effectively losing access to favorable financing in exchange for legal liability protection (which I could instead purchase via insurance)?
2) Are there any tax implications around structuring one way vs. the other?
- Would interest expenses under one structure be deductible against my personal (W-2) Ordinary Income? Any tax-efficient strategies that folks have used in similar situations?
- If we purchased under one structure, then decided to move to another at a later date (e.g., Tenancy in Common -> LLC), are there any tax complications we should keep in mind? e.g., having an "inside" vs. "outside" cost basis when contributing owned property into an LLC?
3) We plan to spit ownership 50/50 and are trying our best to keep things simple. What is the best structure for easy / simple / clean bookkeeping?
- Has anyone run into trouble with bookkeeping using any particular entity structure? Any war stories folks care to share?
- Like most others on this platform, we're looking to build a long-term, sustainable business that minimizes day-to-day headaches... we're willing to invest upfront / be proactive to structure things "correctly" and avoid challenges in the future (e.g. trying to separate personal vs. business receipts and figuring out which goes where)
Sorry for the long post but hopefully this can spark a productive discussion for everyone involved. Please feel free to comment or DM - looking forward to connecting with the community and trade notes!
Best,
Rich
