Rookie Reply: How to Start an LLC for Real Estate Investing

Ashley:
This is Real Estate Rookie Episode 350. My name is Ashley Kehr and I’m here with my co-host, Tony J. Robinson.

Tony:
And welcome to the Real Estate Rookie podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today, we’re talking about liability, we’re talking about lawsuits, we’re talking about how to protect yourself as a real estate investor in all things LLCs.

Ashley:
One of the biggest questions that are asked on the BiggerPockets forums, that are asked in the Real Estate Rookie Facebook group, that is asked on the Rookie at YouTube channel that is submitted to biggerpockets.com/reply is, do I need an LLC? So, this can be because you are starting a business, you are buying a rental property, or maybe you already have property and wondering if you’re not going to be living there as your primary residence, if you need to transfer it into an LLC.
Today, we are going to break down all of the elements and all of the questions you should be asking yourself if you are going to consider opening an LLC and if it’s worth it for you or not.

Tony:
Yeah. We’re going to answer questions like, do you need to have your LLC set up before you submit your offer? What does financing look like for your LLCs? How many should you have? So, all things LLCs about investing in real estate. Now, I just want to preface this episode by saying that neither Ashley nor I are attorneys, so don’t take this as legal advice.
I think still go talk to someone that knows your state, that knows your local laws, they can help you get set up correctly. But we’re just going to talk at a 30,000-foot level, some general principles about LLCs and how they apply to you as a real estate investor.

Ashley:
And I know you guys can’t stand it when we say this, but this is going to be one of those questions where it depends on your own situation, but we are going to help you figure it out if an LLC is right for you or not.

Tony:
Now, I want to give a quick shout out to someone by the username of Casey Intero. Casey left us a five-star review on Apple Podcast and said, “I can’t express how much I adore this podcast. As a seasoned real estate agent and investor, I find myself learning something new every single week. My husband and I eagerly dive into discussions about each episode.
The authenticity and down to earth nature of your guests truly resonates with me. Thank you guys so much.” So, if you guys haven’t yet… guys, 60 seconds, two minutes max for you to go on to Apple Podcast, YouTube, wherever you’re listening, take a few minutes, write that review. It really does help us reach more folks. And when we reach people, we tend to help them, which is what we’re all about here at the Rookie Podcast.

Ashley:
So, one of the things we’re going to talk about are different factors to consider when determining if you need an LLC. The first thing I’m going to say is if your attorney or even your CPA recommends that you have an LLC, then yes, you should probably do it. There are different costs that are associated with having an LLC, and I think that is one of the first determining factors.
Is it cost-effective for you to have an LLC? Because one of the issues that comes up along with should I have an LLC or should I not is should I have an LLC for each property? And that is a whole another question upon itself. But Tony, let’s do a little comparison here, talking about costs. But in New York State to file an LLC, it is $200. And what is it in California?

Tony:
California, if I’m not mistaken, it’s $800 per LLC.

Ashley:
And then, there’re also fees that can accumulate every single year. You have to pay another… for mine, its $25 a year. Do you know what it is for yours, Tony, for California?

Tony:
I don’t know what it is per year, yeah.

Ashley:
Okay. So, that’s just one of the things to consider, but we’re also going to talk about your net worth and why are you considering an LLC because you want that liability protection? Well, very, very sorry to say, but if you have no net worth, you have no assets, when somebody sues you, you have nothing that they can take.
So, maybe you’re renting an apartment, you have no savings, you don’t have a car and you ride your bike, you are in great position to maybe not even need an LLC, and go ahead, and take that risk of getting sued.
But we’re going to talk about these different scenarios, things like that, which will impact if you have a lot of money sitting in your bank account, and somebody sues you, an attorney is going to be more likely to want to take this other person’s case because they see that you have this high net worth, and you have these assets that are able to take instead of somebody who has nothing.
And if you try and sue them, they’re not really going to get anything if they don’t have anything to take. The next thing we’ll talk about, partnering, is if you have a partner for an LLC, you need to think about opening up yourself to liability by partnering with somebody. So, if you have that LLC, you have your company, you have your structure, and you can also do a joint venture agreement too.
What we don’t like to recommend is that you go into a property-owning it with somebody that is in both of your personal names and there is no contract or an agreement put in place. And sometimes having that LLC and then definitely that joint venture agreement can really help with that. But the joint venture agreement is a whole another episode.
And maybe, Tony, we need to have you do a full episode on that because I’ve done more LLCs and Tony has done more joint venture agreements. So, you can listen to this episode, learn all about LLCs, and then we’ll do another one, and we’ll learn all about joint venture agreements, and then you guys can compare, and maybe see one of those are better than actually owning the property in your personal name if you are partnering with someone.
But you can also check out the book, “Real Estate Partnerships,” too. So, you’re buying this property with somebody, you can check out Real Estate Partnerships by myself and Tony Robinson. And you can find that on Amazon or the Bigger Pockets bookstore. Okay. So, I want to let you know that if you do decide to go with an LLC, it’s not just a matter of opening up the LLC, and you are protected, nobody can sue you, yay.
You have this invisible shield around your rental property and yourself. There are rules that you have to follow so that you do not pierce that corporate veil. So, what we’re talking about here is, for example, know what your state laws and regulations are for having an LLC. So, do you have to have a meeting every year that you have to document that you had your meeting minutes documented?
Do you have to file a biennial statement? There’s actually a new law coming out too in January 2024 that is for your LLC, where you have to notify the IRS who the beneficial owners are of your company. And I believe this is 20% or more ownership that somebody has in a company, an LLC, for example. You have to report who those people are and you only have to do it once.
But some of these things, if you do not do this, then this is where you will not be considered in New York, I don’t know if it’s everywhere else, but consider it in good standing. So, to have your LLC in good standing, you have to follow all these rules, you have to file these forms, you have to pay your taxes, file your tax return, things like that. You, more importantly, cannot co-mingle funds.
So, that’s an issue too is make sure there’s no reason for somebody to come after you personally if you’re using the LLC because maybe you are putting some of your personal funds in there or you’re using the business account to pay for personal funds, but you’re not actually recording it as that. So, there are a lot of different ways that you cannot follow the rules and regulations of actually having the LLC in place, which ultimately will make it ineffective, and there is no point in paying that money to get it set up.
Last thing I would touch on is setting it up. Make sure it’s set up correctly. I had an attorney show me how to set up an LLC, and now going forward, I set them up. I also use a company called, I think it’s USA Corp or Corp USA. And they do some of the legwork for me too, such as the publishing requirement. In New York State, you have to publish in two newspapers.
One that’s published weekly, one that’s published daily for six weeks, and it’s just stating that you are opening an LLC in that name, and if anybody does want to sue me, they serve the paperwork to this address or whatever you put down. So, there are companies out there that will do some of the legwork for you.

Tony:
How many people actually read in the newspaper to check for that stuff? That’s crazy.

Ashley:
But you know what people do-do is they read those and then they go and buy domains.

Tony:
I got you. Smart. Yeah.

Ashley:
But as far as like, oh, I’m not looking, and reading, and six weeks into business, you hopefully don’t have anyone suing you yet, but it’s the fact that you’re establishing that this business is being created. And for example, if somebody maybe had some kind of trademark or licensing agreement on that name or something like that that you infringed upon, that’s where they would be notified and they could-

Tony:
And on that note, I don’t want all of our rookies that are listening to hear all this and feel overwhelmed. Ashley knows more about LLCs than I do for sure because I just offload pretty much all of that to my attorney. I’ve never set up an LLC myself. Whenever I need to do something, she just sends me an email and says, “Hey, fill this out, sign this document. I need to get this filed.”
So, if you don’t have either the bandwidth or the desire to know the ins and outs, still good, I think generally aware of what some of those requirements are. But if you don’t want to become an expert in LLCs, that’s fine. Just make sure you’ve got a good attorney on your side to walk you through these things that understand your state and how it works.
Now, and somewhat of a controversial statement, but my thought is that if the entire reason that you’re not buying your first real estate investment is because you’re waiting on getting this LLC set up, and you’ve been kicking the can down the road because you want to get this and check this box, just buy the property. If you find a good deal, don’t not buy it because you haven’t set up your LLC yet.
I would say let’s get that first property, let’s get that momentum going, and then set the LLC up right afterwards, and you can transfer title to your LLC afterwards. But I just see so many people who focus on the busy work of, “What else should I have? Or let me create business cards, let me get my website up and running.” All those are accessory activities to becoming a real estate investor.
The core focus is finding good deals, managing them correctly, and then getting your profits. So, just my two cents is like, hey, if you find a good deal, don’t not buy it just because you haven’t set up your LLC yet.

Ashley:
One thing along those lines, Tony, you made a great point. If you’re ready to jump on a property, when you get that property under contract, you can put your name, Ashley Kehr and/or assigns. So, that is stating that the contract is assignable. I guarantee I can’t even tell you the last time that I purchased property and I knew right away when I was signing, putting my offer out there on the contract was that I did not know what my LLC was.
I haven’t known for a long time which one it would go into. Which partner am I going to partner with, or what entity, am I going to be creating a new entity? And I just put that, I use one LLC as my development company, and I’ll put that LLC, and then and/or assigns as. And as I start to figure things out, and put the pieces together of how this deal is going to play out, that’s when I actually have my attorney change the contract and make sure that the deed is actually to the LLC that I want it to be.
So, let’s get into some of our questions, Tony. Our first question here is from Karina Jackson. If I’m planning to set up properties as LLCs, does my offer have to be from the LLC? I just answered that question. Well, I jumped the gun. What about the financing? I’m seeing comments that make me think I have to have the LLC established prior to applying for the loan. Is that correct?
So that the property is not in my private name. If applying for a mortgage as an LLC, does that change things like interest rate or payment required? So, there’s lots of variables that come into play here. So, when you’re purchasing the property, if you are going to have the property into an LLC instead of your personal name, it doesn’t have to be in the contract right away.
You can put the and/or assigns as. I would be careful if you just put your name and then later on you don’t have that and/or assigns. I’ve run into situations where people say, no, no, no, this is who signed the contract. We’re not going and changing things, like this is how you’re buying it, and we had to fight around it. So, just to be safe, put that and/or assigns as so you can assign it to even another person or to your other entity, whatever that is.
Now, good follow-up question, what about the financing? So, yes, the bank wants to know who is going to be purchasing the property. And so, if you are going for residential long-term, thirty-year fixed, and it needs to be in your personal name, if you go, and change that on the contract before closing, and you close with an LLC on the deed instead of your personal name, that 100% will screw up, and put a halt on your financing and put a halt on your closing of that property.
So, that is something that you cannot do until after you have closed. If you close on the property, then you can go ahead and change it into an LLC if you would like. But please, please, please read your mortgage documents to see what the due on-sale clause states. So, in some instances, they will say you cannot transfer the deed of this property to anyone that if you do, you’ll call the due on sale clause and you’ll be forced to pay home mortgage in full.
The second thing that could be in the due on-sale clause is that you may go ahead and transfer it into an LLC if it remains the same member ownership. So, for example, if I’m purchasing this property as 100% owner, me, Ashley Kehr, then I transfer it into an LLC, that LLC, I have to have 100% ownership still. If I transferred it into an LLC where I’m 80% owner now and Tony is 20%, that would be breaking the due on sale clause and they would say, “Hey, give us our money, you violated our mortgage agreement.”
Okay. Then, there’re also assignable mortgages, where you can assign them to whoever as long as the bank approves them. But that way, you can assign the same terms and everything like that, but they’ll actually do a formal vetting process of that person, which in turn would be your LLC. So, there is also subto where every day now tons of people go ahead and take over other people’s mortgage payments.
So, learn more about doing subto and you could just subto a property to your LLC, I guess. But there are definitely things you should be aware of that could happen and that is that due on sale clause of changing the ownership of the property. So, for myself personally, I had owned property in my personal name, I have mortgages that are in my personal name, and I transferred those properties into an LLC where I’m 100% owner.
And it’s been maybe three years now, and no bank has come to me and said, “We want your money.” Because remember, banks are not in the business of foreclosing on properties, and selling property, or even owning real estate. They want to keep receiving those mortgage payments.

Tony:
Yeah. Just the other part of this question, Ash, is do you have to have the LLC established before applying for the loan? And I’ve talked to a few different lenders and some want to see maybe more mature LLCs to give you the best rates and terms. Some are like, “Hey, just get your LLC set up during the closing period and as long as it’s created before we close, we’re fine with that.”
Typically, I’ve seen out more the hard moneylenders and things of that nature, but what’s your experience been, Ash? Do they typically want to see a fully formed mature LLC before you go under contract or what’s the timeline you’ve usually seen for your LLCs?

Ashley:
Depends on the bank financing. If I am going with a bank to get a loan, they want to see because they want the EIN number right away. That’s with the LLC, they want the name. So, if you’re doing commercial side of lending, they most likely want that. As far as fully formed, so technically, a fully formed LLC is one that has had that six-week publishing criteria established.
And that’s where you’ve done your six weeks in the newspaper after you created it, and you have your affidavit from the newspaper company saying that it’s all completed, and then you submit that to the state and you get your paper like, “Hello, you did the publishing requirement, you’re all set.”

Tony:
And just to clarify really quickly, that’s like a New York thing because we don’t have to do that in California. So, it’s going to vary from state to state. For us, I think as soon as we… I don’t know, whatever paperwork my attorney submits, and then she applies for the EIN, we get that back and we get two docs. We get our articles of organization that gets filed with the state.

Ashley:
Filing receipt.

Tony:
Yeah. And then, we get our EIN letter, and those are the two things we need to be fully formed in California.

Ashley:
Yeah. There’s definitely been a couple of times I’ve been asked to have the publishing requirement, show proof of that if that’s been done, but not all of the time. But I would say you don’t have to have it to actually close on a property. You don’t want to go ahead and put an LLC on a contract though that you don’t actually have that yet.
In New York State, you can look up if that name is actually available. It’s the name availability LLC in New York State, just search that. You can actually look and see, because sometimes even if a name is too similar, they won’t let you have it either. So, I would definitely not put an LLC, but it does take… I could go on right now and within 10 minutes, I could have an LLC and an EIN number to go along with it.
And then, go ahead and apply for a business credit card to go along with it all within an hour or less. So, I think for the loan, I recommend getting the LLC, at least having the name when you are applying for it because the LLC will be the name that’s actually on the loan documents and when you submit your loan application to the bank.

Tony:
So, the last part of Karina’s question here is if applying for a mortgage as an LLC, does that change things like interest rates or the payment structure? My experience has been that typically when you’re going the commercial route, your terms are going to be a little bit shorter.
So, instead of maybe having a 30-year fixed term like you do with a residential loan, your primary residence or a loan that’s in your personal name for an investment property, you might have a ten-year term. So, the length of that contract is a little bit shorter. Interest rates could usually be a point or two higher depending on which lender you’re working with.
Amortization period is going to vary. And I’ve seen some that go up to 30. Some we’ve looked at have been like 20, 25, so we’re in that ballpark. So, it depends, but we are typically seeing shorter-term, slightly higher interest rates when you’re going with the commercial debt through an LLC. What have you seen on your side, Ash?

Ashley:
Yeah. Most often, there has been one bank that I’ve found that will do an LLC on the residential side of lending, but most of the time you have to go to their commercial department, which usually means depending on the size of the bank, but even small banks where you have to go talk to a completely different lender who specializes in the commercial lending and submit a whole different application if you are using an LLC for that commercial side of lending.
And it’s usually only a fixed rate for, I’ve never seen more than 10 years, I’m sure there is out there, but it’s usually five, seven or 10 years that you get that fixed rate, and then it goes variable, or the loan actually becomes due. It’s a balloon payment where you have to go and refinance with the bank or a different bank too. But what they do is even though your interest rate is fixed for that short period of time, it could be amortized over 15, 20, or 25 years.
I haven’t seen 30 yet for the banks that I work with, but that helps keep your payment low, but it’s that interest rate that also is higher than the residential side. So, there is definitely a big difference in financing when using your personal name. You will get better terms as long as you have good credit and things like that than if you’re going with the LLC.
But most often, especially if it’s a new LLC, they’re going to ask you to sign for the LLC and be a personal guarantor on the loan anyways. So, they still are going to run your credit, want your social, and they’re going to put you on the hook for the loan. And then, eventually, you could remove yourself from the loan and have it be a non-recourse loan, where it’s no longer tied to you. If the loan isn’t paid, they can’t come at you personally for the dot.

Tony:
All right. Should we hit question two?

Ashley:
Okay. This question is from Oscar Chavez, is it better to get one LLC for your properties or one LLC per property? Looking long-term to protect myself and my assets, getting mixed opinions, having a meeting next week with my attorney, also live in Texas. Tony, hit us with all Texas laws and regulations on LLCs.

Tony:
Oscar, obviously neither me nor Ashley live in Texas, but again, just giving you the 30,000-foot view. You always want to balance the risk with the cost. To absolutely 100% minimize your risk, you would put every single property into its own LLC. That way if something happens at property A that ends up in a lawsuit and ends up with liability, all of your other properties, B, C, D, E, F, G are protected because it’s two totally separate entities.
Now, like Ashley and I talked about at the top of the show, remember that each new entity you set up creates additional cost, creates additional admin, creates additional just work for you. So, you want to balance like, “Okay, do I really want to spend, if I’m in California, that $800 every single time to set a new property? Do I really want to have to file a separate tax return for every single entity?
Do I really want to have a separate QuickBooks file for every single property?” So, those costs, they do start to add up, especially if you’re talking about buying a single-family residential long-term rental where maybe your cash flow every single year is a thousand to a few thousand bucks. You could potentially eat up the majority of your cash flow just in maintaining your LLC.
So, you’ve got to weigh that cost against like, “Do I want a separate one for each?” Now, again, to Ashley’s point earlier, if you’re a super high net worth individual, and you’re just super concerned about I’ve got $5 million sitting in the bank, and I’m super liquid, and I’m an easy target, then yeah, maybe go down that route.
But I think for most new investors who are starting off, who are probably not coming from a crazy high number for net worth, so maybe instead of doing one LLC per property, maybe it’s like a grouping. Like, hey, I’m going to put five in one LLC or I’m going to put 10 and one LLC, and then from there, you can separate it out.
So, what I’ve done in my business is that we have an LLC for different partnerships and that’s how we’ve grouped our entities. And Ashley, I think you do the same thing, where you have an LLC for each one of your partnerships that you’ve got, and that’s worked well for me.

Ashley:
Yeah. So, it’s not per property. Eventually, I think once it gets to a very high amount of equity available in those partnerships for those properties, then we would add onto another one. For example, in one partnership we are 50/50, we add a bunch of properties in there, and then we started a second LLC where I’m 60 and he’s 40, and then we started putting properties into that one.
But you can definitely distribute them out to different LLCs, but Tony hit it home as to the cost and the management of those LLCs. You pull up your bank account dashboard, and you have all these separate bank accounts now, you have all these different QuickBooks files now, you have to pay a-

Tony:
Bookkeeper.

Ashley:
… bookkeeper for each entity. You have to pay your accountant to file each tax return. And I think this year, it was $550 per an LLC for each of my LLC tax returns, which if you just have one duplex in there. That could be a month or two months cash flow, that $550. So, there’re advantages and disadvantages. If you open up more, you have a more overhead.
You open up less, you may expose yourself to more liability, but your overhead has decreased. So, that’s where you want to weigh that out and figure out a good number that’s comfortable for you too. And you can also get, we talk about this before, if you’ve read our real estate partnerships book, we talk about getting umbrella insurance.
So, if you are getting your personal name, getting umbrella insurance, then you can go ahead and put that over your personal name if you don’t have the LLC. But you can also get umbrella insurance on your LLC too. So, if you do have high equity in your LLC or maybe just do that LLC, you’ve just kept a lot of cash in that business account, you can go ahead and get umbrella policy.
The first partnership I ever had, we did an LLC, and we still have umbrella insurance policy over that just because it very inexpensive and we were so nervous when we first started as to what’s going to happen that we just wanted to protect ourselves as much as possible.
Okay. So, I guess in that situation weighed out. But if it’s going to be your first, second, third, fourth, maybe property, you can start out with that one LLC. Also, depending, maybe if you’re switching markets, if you’re investing in Georgia and you have other properties in Texas, maybe you’re going to split up your entities that way as the Georgia ones go in this LLC, the Texas ones go in this LLC too or by strategy. And I don’t co-mingle my short-term rentals with my long-term rentals. There’s a separate LLC for the short-term rentals and the long-term rentals too.

Tony:
Interesting. Why’d you do it that way, Ash?

Ashley:
Because the short-term rental is active, more active income for me because I don’t have a separate management company that manages the short-term rentals.

Tony:
Interesting. So, what my CPA told me was even if its arbitrage, regular Airbnbs, the fact it’s still considered rental income, so it gets treated the same from a tax perspective as long-term. Did you-

Ashley:
Yeah, it does, but I’m open to more liability on my short-term ones. I’m sorry, that’s what I meant as to I’m more active in it. There’s more actively I could make a mistake. But yeah, so that’s what I mean as to anything that is an active business for me that is not the long-term rentals or even the property management company, those are all separate. Anything my long-term rentals are in, there’s nothing that I have active business operating with them if that makes sense, I guess. But that’s the reason I keep them separate.

Tony:
Just thinking through the different LLCs that I have, I actually have my whiteboard over here. So, we have one for our education, our events side. It’s like all of our coaching program, our events, all the stuff we do. We have one LLC for that. We have one LLC for our cleaning company, one for our property management, one for most of our short-term.
And then, we set one for our commercial, even though that one doesn’t own any assets yet. And then, we also do our flipping through our media and education company, which is weird, but because it’s all active income from a tax perspective, we figured it’d be fine. But those are the big buckets that we have right now.

Ashley:
Yeah. I guess that was misleading for me to use the word active, but more personally involved or more of a business behind it, I guess. Yeah.

Tony:
And just to clarify, so what Ash and I are talking about active versus passive, from a tax perspective, those are treated differently. So, flipping and wholesaling, that’s considered active income, whereas rental income from short-term and long-terms are considered passive, and you’re taxed at a higher rate on your active income.
So, the tax guidance that I’ve been given is that you want to separate your active income and your passive income into separate entities to make sure you can maximize the tax benefits that come with the passive stuff.

Ashley:
Yeah. So, the LLCs that we have are the partnerships with the long-term rentals, and then there’s a property management company that’s its own LLC. There’s a development company that will be the project manager on rehabs. It’s also the LLC that we use when we purchase something before and that LLC does the due diligence, things like that.
It’s more of the acquisitions, I guess, side of it. And then, it will get dumped into whatever LLC I decide it goes into. And then, also the liquor store is its own entity. And that’s another thing too is if you have an active business that’s in one of your properties is that having those two separate LLCs is keeping those separate.
So, the building is an LLC and then the actual business is in an LLC. And then, the only thing is that the short-term rentals run out of that development company. But I think I need to actually create something that’s super focused on that short-term rental management.

Tony:
Yeah. And you can get super ninja with it too. I have a friend who he does short-term rentals and he bought an apartment building with his long-term rental LLC. He then signed a lease with his arbitrage LLC. So, he had a twelve-month lease with his arbitrage client, and that allowed him to get better financing because he had a long-term tenant that was signing this lease, even though he was still short-term renting it out.
But because they were two separate entities, two separate businesses, he was able to spend it that way because if you try and refinance with just your short-term rental income, typically, the rates are going to be a little bit different. It’s harder to get financing, but doing it that way, he was able to get better rates. So, yeah, man, you can go super deep and get super complex in how you structure the entities.

Ashley:
What’s the Augusta Rule loophole too? So, where you can rent out your primary residence for two weeks and not pay taxes on it. And this started because of the big golf tournament in Augusta, Georgia where people would leave and literally rent out their home for two weeks and they don’t pay taxes on that.
And you can also rent to your primary residence to your business to use as office space, a studio or to host a meeting instead of taking your team out to dinner, and you could have it in here. And there’re rules, it has to be of market rent or whatever. You can’t charge $20,000 to host an event for your business for two hours or whatever that is. But there’re so many different ways and that’s why it pays to have a great tax-planning CPA.

Tony:
Actually, I have my next tax session with my CPA in like a week, I think. So, I’m excited for that.

Ashley:
Mine is on the 18, yes, two weeks. Okay. We’re going to jump into our next question. And this one is actually going to be about a business credit card. So, actually getting financing, now that you’ve decided to create your LLC, you have your LLC put together. We’re also going to the last question, I took a peek at it. We are going to talk about insurance too.
So, let’s get into the business credit card first. I love business credit cards because they always have huge signup bonuses with $100,000 bonus points, so I can fly my kids to free with me to conferences. But if you are applying for a business credit card, you will need the LLC’s EIN. So, this question by Russell Breen is anyone know if you apply for a business credit card with your LLC EIN, could that count as debt or a hard inquiry on your personal credit score?
Great question. If you are getting a Capital One business credit card, that credit card will show up on your personal credit report. It will not for Chase, Wells Fargo, a bunch of other ones, but Capital One, I do know it will show up on your personal credit for the business card.

Tony:
I think the inquiry still shows on Chase even though the balance doesn’t, right?

Ashley:
Not for business.

Tony:
Got you. Okay.

Ashley:
It’ll just show for a personal credit card you’re opening up, but not for a business one. For every business credit card that I pull, if I had an inquiry, my credit would just ding-ding-ding because it would be so many inquiries going after it.

Tony:
We had several LLCs we didn’t have credit cards for. So, over the last three months, we’ve been opening up new ones, and I’m starting to lose track with all the different ones. So, I got to build out a Monday board that keeps all my credit cards in one spot so I can keep heads or tails of it. One thing, Ashley, we’ve mentioned a lot on the show that we haven’t defined yet is EIN.
So, when you’re applying for a personal credit card, or a loan, or mortgage or anything like that, you have to put your personal social security number. Same thing happens through your LLC, and your EIN is pretty much like the equivalent of your social security number. So, when you apply for a business credit card, mortgage, et cetera, they always want to see your EIN, and you have to apply for this, is it with the IRS?

Ashley:
Yeah. It’s irs.gov, and so I just Google irs.gov/EIN and it’ll come up. You’ll find in the Google.

Tony:
I’ve never applied for myself, Ash. Like I said, my attorneys always set up my LLCs for me. But you’re saying you can get your EIN in an hour?

Ashley:
Not even, they’ll literally, I’m saying by the time you do your online filing, you fill out everything on the state website, you can go and get your EIN. Once you have the LLC name, you can get your EIN number right away, and then you’ll get a letter that you need to save, and they’ll also email it to you. But the thing that sinks about the EIN letters is you can never get a copy of it.
So, make sure you save those because it was very, very difficult to actually get that original letter again. So, start your Google Drive, your entity name, and then in my entity name, I have a folder that says binder. Because when I first started doing LLCs for the investor I worked with, his attorney would have a physical black binder and it would be like the filing receipt, the articles of organization, the operating agreement, these little tabs.
So, I continuously did that until it was stacks of binders between me and this other investor. And I put it all into Google Drive, but it will say binder, and then we’ll have those folders, the EIN, any biennial statements that have been filed, tax returns, things like that. But you can keep all of these in a folder. And we actually go through this in the Real Estate Rookie boot camp, and we have a new one coming up soon in the end of January.
But we go through and it’s like a whole checklist I give everyone. And so, here’s the different folders that you should have to… like as a memory, okay, even if I’m not creating an LLC today, when I do create an LLC, then almost set check X as a checklist, like here’s the information that I need to save.
Along with the business credit card though, on the business side for Chase, I know on the personal side you can only have five credit cards open that are Chase credit cards. Do you know if that’s true or not for the business side?

Tony:
I don’t know. I only have one Chase business card right now, so I haven’t tried to max it out yet.

Ashley:
Yeah. So, those are just a couple things. You can go to the points guy or Aunt Kara on Instagram, and find all these travel-hacking people that can help you maximize those points with getting the business credit cards too. You guys know me, I like to get freaking the spreadsheets, and I have a spreadsheet tracker that will be like, okay, I need to hit this 5,000 minimum spend on this credit card by this date to get those bonus 100,000 points.

Tony:
I was so upset because we opened a business credit card over the summer and I just never used it. And then, I missed that window for… and it was a super small spend. It was like 5,000 bucks, which you will spend that on whatever, like setting up a property and yeah, totally forgot about it.
And then, when I went back to use a credit card because I hadn’t used it, they ended up reducing my limit down a thousand bucks or something like that. I’m like, “What can I do with that?” So, anyway, I love the idea of tracking it up front to make sure that you’re actually getting those bonuses.

Ashley:
And I think that’s a great point too, Tony, is you’re about the credit limit too. Being a new LLC, you may not get a huge credit limit. So, actually, when we started the property management company, I opened a new credit card for it, and I had two employee cards for the maintenance techs, and the limit I think was like $1,000, which for them doing maintenance and there was a lot of maintenance to get caught up, it was like I was paying it off every week.
And I made one huge payment because I knew that day they were charging a couple of fridges or a stove or something. And so, I made almost a prepayment on whatever. They ended up putting a hold on my account because the payment was so high and it wasn’t making a payment on the due date or anything for the statement. And they put a hold on the account for a week and they were penalizing us for paying our credit card.
And so, eventually, over time, I just had to be super diligent about basically, whatever they spent that day, paying it off until eventually, I think it was probably after a month or something, they increased the limit. But that’s something to be cautious of too and that it is easily, you can always call too and request for them to increase your credit. And I think sometimes you can even do it through their portals too, also.

Tony:
Just real quick, Ash, what’s your favorite business credit card?

Ashley:
The Chase business-

Tony:
The business Ink?

Ashley:
Yes, business Ink. Yeah.

Tony:
That’s my favorite business one. I have the Chase Sapphire Reserve as my personal one. I really love that one as well. Yeah. We recently got an AMEX business credit card, and this is my first time ever having anything American Express. And theirs is a little different where they don’t give you a spending limit. There’s no limit on your credit card, but it fluctuates based on how much you spend and if you spend more, you get a higher limit.
If you spend less, they bring your limit down. So, this is the card where I got the card and I think initially, I was able to spend up to 5,000 bucks or something when I first opened it. And because I hadn’t spent anything, I went to go charge something and then like, “Oh, your limit is only $1,000 now because you haven’t used it in the last 90 days.” So, that I’m not a fan of. So, I do like Chase because it’s just super clear, “Hey, your limit is whatever, X amount.”

Ashley:
Yeah. I do have the AMEX Delta one, which I do really like because with Delta, their points will get you better reward status with Delta so that anytime that I fly, me and anybody that’s flying with me, we’re automatically upgraded to Comfort Plus because of just using my credit card points and it gives me points on Delta, but it’s not like I actually have to spend those points to get the upgrades.
The points, just like the money, I guess if you spend so much in a year or whatever on your Delta credit card, it transfers over and gives you that status where you get that free upgrade every single time you fly, if available, of course. But yeah, a lot of different cool things that you can do with business credit cards. Let’s hop to our last question here and this one is from Jason Krivickas.
Hey, everybody. I have an insurance-related question I was hoping to get some insight on. I’m nearing the end of construction on an out-of-state duplex. I currently have it under an LLC, which I was planning to change once construction is complete, but I’m having a difficult time getting a policy quote with an umbrella over it.
If I put it in my personal name versus leaving it in the LLC, won’t I need an umbrella policy? Thanks in advance. Okay. So, I highly recommend that if you do put it in your personal name that you have an umbrella policy. But if he does choose to leave it in the LLC, you don’t technically need an umbrella policy. So, I think, Tony, first, let’s break down what an umbrella policy is and what it does.

Tony:
Yeah. So, we have an umbrella policy for most of our properties because again, a lot of ours are not in LLCs. And basically, an umbrella policy is exactly like it’s an umbrella where it just covers just you and any liability tied to you. So, I think we’ve got ours for two million bucks worth of liability and it’s relatively inexpensive.
I don’t remember the cost, but I remember it was so cheap, we were like, “Why wouldn’t we do this?” So, basically, now if someone comes to us and maybe they have an issue with this property, even though it’s not in an LLC before they can come after us personally, it would hit our umbrella policy first. So, basically, it’s like blanket liability protection for you.
They can be applied to different scenarios. And I think it also covers us in other instances, like if I got into a car accident, and something happened there or any liability against me personally, my umbrella policy could go against that as well. So, it seems like it was a good bang for your buck option for us.

Ashley:
And I think one of the differences between the actual protection of what an LLC provides and what an umbrella policy provides is that an LLC is saying that someone can’t sue you personally because it was the LLC that was at fault because this property, say someone slips on your sidewalk, and they sue your LLC, which is owned by your property, and your LLC landlord policy that’s on that property would pay out a settlement or whatever.
But you say it’s your only property in that LLC, and you have it mortgaged, there’s not a lot of equity in it, and your insurance company just settles with them, whatever, pays it. But if you have that property in your personal name, and someone goes to sue you, and you have a half a million dollar paid off house that you live in, when someone goes to see you, they can ask for more.
And so, what happens with the LLC is saying, you can’t sue me personally. So, no matter how much I have, you can’t sue me personally because what happened was this LLC was in this LLC’s entity. That’s the good kind of protection the LLC provides you if you do everything correct, just like we talked about in the beginning of the episode.
But if you do own that property in your personal name, you don’t have that LLC to say, no, you can’t sue me personally, even though it’s an investment property. What the umbrella policy does is it will cover up to $2 million, $1 million, whatever your policy is to fight you getting sued, to fight the claim.
So, say somebody is suing because they slipped and fell, the insurance company will pay up to, and this will all be in your agreement, but basically it’s saying, here’s $2 million to help you fight the lawsuit. Whether that’s them, which most likely would be, it was them settling with the person, and just giving them a payout, them paying the attorney fees, the legal fees to settle the lawsuit for you.
So, that’s the big difference is that the umbrella policy isn’t providing you protection, it’s literally just giving you the money to handle the problem and take care of the situation, I guess. And I just want to clarify that because those are two very different types of protection too. So, I guess, Tony, what is your stake on this? Do you think that he should put it in his personal name?
Sorry, Tony, I’m going to take this away real quick because I think one thing is I’m curious about as to why he’s having a difficult time getting a policy, an umbrella policy “on himself.” That’s what I find is hard because I would think no matter what, I would say go talk to insurance brokers first, and go, and find a broker who will go, and shop the insurance to different companies for you and get that umbrella policy. Unless maybe you have a lot of claims history in your past for other things, and maybe that’s why you can’t get the umbrella policy and it’s expensive.

Tony:
I was just going to say, he says I currently have it under an LLC, so I guess I’m just missing what his motivation would be to even pull it out of the LLC. If it’s already there and you’ve already got that protection, why put it back into your personal name and get the umbrella?

Ashley:
Maybe because he’s doing a construction loan or maybe even hard money, private money now, and wants to go and refinance it in his personal name to get that 30-year fixed, that too.

Tony:
Yeah, maybe the better rate. Yeah. To Ashley’s point, I think I just shop around. There’s so many insurance brokers out there, go in BiggerPockets, search in the forums, you’ll find someone, whatever city or market you’re in, see if you can find someone local to that area, get a recommendation. But I’d say you just got to shake some more hands, knock on some more doors, and I’m sure you’ll find someone, Jason.

Ashley:
And 100% to his last question, 100%, I would say if you’re putting a property and personal name, get that umbrella policy. It’s usually very inexpensive. Unless you have a lot of claims that people have sued you in your past, then maybe it isn’t going to be cheap for you, but it’s very inexpensive and it’ll help you sleep at night. So, Tony, speaking of sleeping at night, before we wrap up this week’s episode, how is baby girl, and have you been sleeping at night?

Tony:
Yeah. She’s doing pretty good. Last night, she had her last feed around 11:00. She had her last bottle around 11:00, and I got up this morning at 6:30 and she was still asleep. She’s doing pretty good right now.

Ashley:
Yeah. Yeah. That’s awesome. Well, my son woke up at 10:30. I was passed out and he wanted a drink, I get him his drink, and then me and him stayed up until about midnight watching the storm outside and the snow. So, I did not get a lot of sleep that we started watching Christmas Vacation and we finally fell asleep probably shortly after midnight,

Tony:
But hey, that’s what this time of year is about, right? Cuddling up, watching some movies, staying up late.

Ashley:
Yeah. It was a great little memory of us, I felt like we were in a snow globe. Okay. Well, thank you guys so much for listening to this week’s Rookie reply. If you have a question that you would answered, please go to biggerpockets.com/reply. You can also check out the show description to find out where to see Tony and I on social media.
You can also connect with us there and don’t forget to ask your questions in the BiggerPockets forums too. There are a wealth of knowledge in that community in the forum, so make sure you go network, and connect with other investors, and we’ll see you, you guys, next time.