When is it time to incorporate?

Question

I realize that buying property puts you at risk for being sued.  At some point, I think you become a target, and should protect your personal assets.  Is incorporating a good way to do that?  I know insurance protects you, but doesn't the corporation protect your personal monies?  When is the right time to do so - incorporate?

Also, what benefits do you get out of having a corporation own your property vs. you personally owning your property?  Tax or otherwise?

Albert Liu · Answer

I agree with wealthloop... Many people think that incorporating or getting an LLC name on ownership papers/deeds can completely protect them with the "corporate veil" but I think that concept is old and yes, "the courts can/will file a deficiency judgment against you for any unpaid liabilities and these will follow you until paid off." - wealthloop.

And just a comment on incorporating... please make sure you read what TYPE of LLC you're filing as when going through the process... at least on the state level I know, you can get royally messed up with minimum taxes and etc if you do it wrong... I've worked (not in real estate) with people who have messed up pretty badly.

(New Jersey)

PS - I know this is a pretty old thread - but I couldn't resist putting my 2cents in...  :D

Jon Holdman · Answer

That's a mis perception.  You really do own the property.  You've given the bank a mortgage or deed or trust, but you really do own the thing.  Real estate is different than cars, where the lender holds title until you pay it off.

Revocable land trusts will give you some privacy, but don't give any asset protection.  William Bronchick's book "Wealth Protection Secrets" gives a pretty good overview.  Seems like an optimal (though expensive and complicated) structure is to put each property in a land trust with an LLC as the beneficiary.  Then, have a corporation to do the management.

Jon

Account Closed · Answer

Even if you have no assets, you do not want someone being able to sue you personally. They could get a judgment on you that would pop up later when you do own something.

Michael Rossi · Answer

Unless you're going to have only a few rentals, I would NOT put each property in its own LLC.  That is very cumbersome and can be quite expensive (depending on your state).

If you're doing rentals, the 80% LTV is irrelevant.  If you borrow more than 80% LTV, you will have a negative cash flow in almost every market.  My LLCs have borrowed 100% of the purchase price many times with the LTV < 70%.

Mike

Travis S. · Answer

Get an LLC for each investment property.

Scott Miller · Answer

It depends on who you speak to (the leveraged money folks don't like this limitiation)...

Regards,

Scott Miller

Account Closed · Answer

In Minnesota it is easy to form an LLC, but $180 when I checked. So, I am just getting started, and delaying that cost for as long as possible. Tough to be broke! :D

Phil M. · Answer

ltv is really irrelevant unless you dont have a down payment at all..

John Michailidis. · Answer

Be careful -- your thinking on the subject isn't quite correct.  While you might not currently own assets, doing business in your own name opens you up to personal liability.  Just because you don't have current assets doesn't mean you are off the hook -- the courts can/will file a deficiency judgment against you for any unpaid liabilities and these will follow you until paid off.

Make sense?

Jon Holdman · Answer

Indeed, keeping your properties mortgaged to the hilt will keep creditors at bay.  They can still put a lien or judgment against a property, though.
Jon

When is it time to incorporate?

Most Popular Reply