When Does Setting Up an Entity for Your Investments Make Sense?

When Does Setting Up an Entity for Your Investments Make Sense?

3 min read
Dave Van Horn

Dave Van Horn is a veteran real estate investor and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, real estate investor, and private lender.

Beginning his career in construction and as a Realtor, Dave bought his first investment property in 1989. After years of managing his own construction business, Dave became a full-time real estate investor, specializing in fix and flips, buy and holds, and eventually commercial projects, before moving into note investing in 2007.

Over the past decade, Dave has also invested his time into becoming a connector and educator, who helps others achieve success. He focuses jointly on helping accredited investors build and preserve wealth with his group Strategic Investor Alliance and with general audiences through the annual MidAtlantic Real Estate Investor Summit.

Dave has also shared his strategies and experiences with real estate and note investing via hundreds of articles published on the BiggerPockets Blog and with his acclaimed book Real Estate Note Investing.

Dave has been featured on the BiggerPockets Podcast twice (shows 28 and 273), as well as episodes of familiar podcasts, including Joe Fairless’ Best Ever Show, Invest Like a Boss, Cashflow Ninja, and many others. He also has been a guest of Herb Cohen’s on Executive Leaders Radio, which airs nationwide.

Dave is a licensed Realtor with eXp Realty with CRS and GRI designations.

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It seems that the question of whether or not to set up an entity for real estate comes up a lot, and the answer probably varies depending on who you ask.

If you ask an attorney, they’ll probably all tell you that you absolutely need one to own investment property in.

Usually, they’re thinking about liability protection, which is definitely a consideration, but whether or not setting up an entity makes sense really depends on your own situation and investment strategy.

At first, it seems like the perfect strategy for any real estate investor is to put each property in its own LLC, but the only problem is that we live in an imperfect world.

When an Entity May Not Make Sense

There are many variables to consider when evaluating an entity to hold real estate. Sure, liability protection is an important one, but you need to put that in context, too. How much overall exposure does the investor really have? Can some of this exposure be reduced through things like an insurance umbrella or mortgage debt against the property?


You should also consider the financial implications. For example, if you’re just starting out in real estate, maybe it makes sense to buy properties in your own name in order to utilize residential loans, which have lower down payments, lower interest rates, and lower insurance premiums than commercial loans. This is a strategy that I utilized when starting out, and it enabled me to build up my real estate portfolio that much more quickly.

Once you’re past the bank limits for owning real estate in your own name, then it starts to make much more sense to start owning real estate going forward in an entity, like an LLC or trust.

Related: 5 Reasons I Do NOT Invest in Real Estate Using An LLC

Potential Alternatives

For me, I’ve kept those first few properties leveraged with mortgage debt. With a HELOC (Home Equity Line of Credit), I was able to quickly recapitalize and continue building my portfolio.

Another strategy of mine was how I took title to those properties with my spouse through “Tenants by the Entireties.” An advantage of taking title this way (in a state like Pennsylvania) is that if a judgement is obtained against one of the spouses, the sale of that piece of real estate can’t be forced.

Tax Implications

As one’s portfolio grows, it may be a good strategy to have more buckets or silos of assets. After a while, the number of entities I had quickly grew. From land, mobile homes, storage centers, office condos, apartments, and notes, the number of commercial entities seem to accumulate substantially. Of course, so do the number of tax returns you have to do.

Related: #AskBP 013: Should I Have Several LLCS For My Real Estate Business?

That being said, you could set them up as pass-through entities, which could enable the LLC or trust to be taxed at a lower rate. For example, LLCs are taxed at the owner’s rate, and trusts are taxed at the beneficiary’s rate. So, if you were to own an LLC with your son who’s in a lower tax bracket, half of the LLC would be taxed at his rate.


Control vs. Ownership

The other factor to think about as you accumulate more assets is how to preserve and then eventually pass them on to your heirs. Does it always make sense to own everything, or is control really the most important aspect? Maybe some entities could be owned with future heirs now. Estate planning trusts may be wise to consider as well.

You can also have your trust own your LLC to give you some additional anonymity and to limit some of the frivolous types of exposures. There can also be some disadvantages to owning assets in a trust, especially if you need to get financing or you encounter transfer tax.

As you can see, entity selection can quickly become a complex decision depending on the exposure, domicile, and exit strategies of the investor. This is where it really pays to have a good team of accountants, attorneys, and financial planners to really help you strategize. But for me, the decision to start using LLCs was mostly a financial one.

So, for those of you on BiggerPockets, when did it make the most sense for you to set up an entity for your investments?

Leave your comments below!

You may have heard advice that you NEED an LLC to protect your assets -- but do you really? Get an expert's opinion here.