The Great LLC Debate - To Form or not to Form
I have seen countless threads about using LLCs to hold real estate. It seems like it is fairly typical for people to come on here and ask about whether or not they should use one. Several very seasoned investors on this site have repeatedly advocated using LLCs.
However, I also see plenty of threads where people (including myself) who have actually tried to follow that advice, have run into major roadblocks with financing, taxes, and even insurance. Those threads tend not to have any fantastic answers, and eventually someone just says "well you don't really need to use an LLC" and the discussion ends there.
I am in favor of using LLCs, however I am running into a lot of roadblocks. I'd love to get some feedback from experienced investors about LLCs, and for those who use LLCs, how you have gotten past these obstacles.
Obstacle #1 - Financing. This is arguably the biggest issue with using LLCs. The second you tell banks you want to take title in an LLC, they run for cover. Most banks have said they will only do a commercial mortgage in that case. Then it ends up being higher closing costs, a higher rate, and typically a short term (like 5 years) with a longer amortization, and you are basically forced to refinance the loan every 5 years. These costs will literally kill many deals. Plus with the amortization dragged out, you are not going to build up much equity in the property.
Of course it is possible that some people are simply buying with cash, but without using the leverage of a mortgage, the return on real estate is much lower. I have to believe there are investors out there who are getting around this.
Obstacle #2 - Insurance. If you can get financing in place, then you need to get insurance. What I am also finding is that when you want the insured property to be owned by an LLC, many/most insurance carriers will also charge you a much higher rate. What is the reason for this, and how do you get around it? Again, paying more for the same level of insurance coverage = killing deals. If you pay $100/month more for your financing, and another $50-100/month more for your insurance, the next thing you know there is little to no profit/cashflow left. Again... what are the experts doing?
Obstacle #3 - Legal/Taxes. An LLC is only helping you if you follow the rules, and treat it as a true separate business entity. What are some of the common mistakes that can be made to render the LLC invalid? How much capital should be left in the LLC at all times? What is the appropriate way to withdraw profit from the LLC as it generates revenue beyond expenses?
Do you need to file a separate tax return for the LLC in order to maintain the protection of the LLC as a separate entity?