Is it Wise to Set Up an LLC When Starting in Real Estate Investing?
Before I get started, I want to throw a big, fat disclaimer out there and let you know that I am not an accountant and I’m not an attorney. Everything I am about to tell you is just my opinion. My advice is you should go and talk to your accountant and your attorney because everyone’s circumstances are different. So what might work for me and someone else may not work for you.
I honestly believe that anyone looking to start their real estate endeavors should try to keep things as simple as possible. There are way too many things to learn when it comes to investing in real estate. I’m a big believer in starting slow, starting small, and starting cheap. Don’t overcommit, and don’t overcomplicate by spending large amounts of money on legal and tax advice when you need that money to grow your business and get to that next level. Once you get to that level, then, by all means, you can start spending thousands of dollars on legal and tax advice. But for starters, once again, start small, start slow, and start cheap.
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The Pros of LLCs
These are my observations and perceptions. I speak to a ton of investors every day because they reach out to me asking for advice on real estate. Look, in my opinion, if you start an LLC, it’s a great way to minimize liability from any potential lawsuit. An LLC will separate you personally, as long as you structure it properly, from getting sued by a potential tenant or whomever it may be. So the only thing that is kind of at risk is the assets that the LLC owns. You aren’t necessarily liable for a lawsuit as long as they don’t pierce the corporate veil, but that’s kind of the main protection factor of owning a limited liability company and having properties owned by that LLC.
Another thing is that because it’s a business, you are able to run it and treat it as a business. So you can expense a lot of stuff from a tax minimizing standpoint that the business requires to run efficiently and for that business to run your portfolio and those properties efficiently. So there’s a lot of tax benefits there, too. That would be the biggest pro of owning an LLC and investing through an LLC.
Related: The 3 Best U.S. States for Forming LLCs or Series LLCs
The Cons of LLCs
The con would just go back to what I initially said: It can get complex. There are many ways to have this structure. There are many things that you can do wrong where that structure could not be as bulletproof as you initially thought. It can get expensive, you have to do separate bookkeeping for that LLC or if you’re going to have multiple LLCs you have to even more bookkeeping. That can get expensive and time-consuming. You could make mistakes, do the wrong things and compromise the business or the accounts and then it won’t protect you from any personal liability. That would summarize the con.
Once again, guys, it just comes down to what you want to do, how big you want to grow, how safe you want to be, and how protected you want to be. I didn’t really focus on these things when I started, and then I got to a point where I had to start focusing on these things. But I made so many mistakes in the past that now I’m kind of on the fence on whether I regret spending the money up front or whether I’m cool spending the money now to go and fix everything before. I think to myself that if I spent the money then, I wouldn’t have had enough money to get where I am today. So even though it is kind of a pain in the butt now to backtrack and restart everything and make sure it’s done correctly, I’m still on the fence. Once again, it just comes down to you and what you want to do long-term. And, I strongly advise that you discuss this with your accountant and attorney—get them in a room with a ton of coffee and map it out.