This week, it’s time for something different.
My articles tend to present my amazing readers with one of my opinions, supported by data of course. This week I’m going to present a decision I’m grappling with, give you data I’m using to make said decision and see what you folks would do. In a previous article I mentioned an auction I was attending. Well…we were the highest bid on one of the properties…go us!
What I’m trying to figure out is how should we take title for said property?
The funds to make this purchase are in SBRE4, an Indiana LLC with assets approximating 4 million dollars, 1 million of which is cash. This property is a retail location in Minnesota and will cost about $700k all in and yield about $75k in cash flow a year.
There are a number of options of how we take title:
- Buy the property into SBRE4 like any other investment to date.
- Form a new LLC, which is a wholly owned subsidiary of SBRE4, and put the building into that.
- Buy it into a new LLC, and take the funds out of SBRE4 to do so.
Removing an Option
Psych! We’re not going to do number 3. We believe that our investors, including us, should all be treated equally. Creating multiple fund pools will create conflicts of interest and the hurt the overall diversification.
We’re making the initial purchase in cash. We plan on working with a lender to either get conservative financing (50% loan to value) or a secured credit line (I like to call them YOYO’s). This should bump our return a bit, but more importantly it will keep our “power dry.”
I’ve talked to a number of bankers to see what structure they would prefer. Here are some considerations:
To get a FHA loan, which has amazing rates, the borrower must be a single asset LLC. From what I’ve garnered, most of these loans are to multifamily apartment complexes and since this property is retail a FHA loan might be a moot point.
One banker told me they would love this property in the same entity as our other holdings…more to go after if things go belly up. However, the rate would not be as good as the FHA loan.
If we put the property into its own LLC, then the “Limited” in “Limited Liability Company” would protect the rest of our assets if there is a slip and fall lawsuit. On the other hand, we can use insurance to remove most of this risk, albeit at extra cost.
Administration and Bookkeeping
If we keep this in SBRE4, it will make our live easier:
- Cheaper tax preparation (one less company saves us about $500 a year)
- No new LLC startup costs. We’ll still need to file to do business in Minnesota and pay the annual registered agent fees, but we’ll save ~$300 up front.
- This property will create very few transactions (I would guess about 100 per YEAR), so not having to create a new bank account would save us some time and hassle throughout the year.
There won’t be much of an impact from for our income taxes. Either way our profit/loss it will flow wind up on our SBRE4 return and our investors will get one K-1. However…if we decide to switch from one to another at a later date, its a headache. We would likely pay capital gains and depreciation recapture.
Wrap it up
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What do you think? What am I not considering? What am I wrong about?
Photo: OberazziCommercial Purchase and LLCs: What Would You Do? by Kenny Estes