Rookie Podcast 64: Rookie Reply: How Do I Place Properties Under a Newly Acquired LLC?

Rookie Podcast 64: Rookie Reply: How Do I Place Properties Under a Newly Acquired LLC?

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This week’s question comes from Mantas on the Real Estate Rookie Facebook Group. Mantas is asking: How do I place properties under a newly acquired LLC?

Before you place your properties in an LLC, you’ll need to ask yourself if you need an LLC in the first place. This really depends on your goals as an investor and whether you have a partner or not. Many investors skip the LLC route and put a rental property solely in their name, while other investors that work with partners choose to either start a new LLC or put the new investment property in their current LLC.

Here are some suggestions:

  • Make sure you know the financing options for LLCs vs. buying in your own name
  • Get an umbrella policy if you don’t have an LLC
  • Speak to a trusted attorney or submit LLC paperwork yourself (if not too burdensome)
  • Get commercial financing for your LLC and purchase the house in its name
  • And Much More!

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Listen to the Podcast Here

Read the Transcript Here

Ashley Kehr:
This is Real Estate Rookie, show number 64.

Ashley Kehr:
My name is Ashley Kehr and I am here with my co-host Tony Robinson, and Tony is super jealous because I just got back from Hawaii.

Tony Robinson:
You got the glow going on, the tan, you look real relaxed. That’s how I looked when I came back from Mexico after my honeymoon. You got the vacation glow.

Ashley Kehr:
Yeah. It’s actually sunburn and my skin is peeling, but thank you. Good thing we don’t have the high def cameras on today. So I went out and did the Maui Mastermind with Brandon Turner and Tarl Yarber. That was so much fun. Got to meet a lot of great investors, and next year Tony’s going to come with me, right?

Tony Robinson:
There you go. Yeah. I can’t wait. I’ve never been to Hawaii. We’re hoping that we can go this summer. But while you were in Hawaii, Ashley, I spent 15, 16 hours on Sunday setting up our next Airbnb. So we picked up the U-Haul at seven. We didn’t get back home until almost midnight, and it was one of the longest days that we’ve had, but it was worth it. So putting together Airbnbs in Joshua Tree or Maui, they go hand in hand.

Ashley Kehr:
I saw on Sarah, your wife’s Instagram, that you guys had some neighbors helping you there.

Tony Robinson:
Yeah. We found some free labor. That’s real estate investing 101 whenever you can find free labor [crosstalk 00:01:45].

Ashley Kehr:
Yeah, kids too. Child labor.

Tony Robinson:
That’s the best kind of free labor, is child labor.

Ashley Kehr:
You have to tell them, what did they ask you guys when they first came over?

Tony Robinson:
Well, they thought that … Well, not that they thought, but they thought that we were famous YouTubers because we had our camera because we just started our YouTube channel and we’ve got a cool camera and we’ve got a gimbal, which is the thing that holds the camera. So we look really professional on the outside, but we have no idea how to use it all. So they came over and they were asking us, Oh, do you know the Royal Family?” And we’re like, “Who the heck is that?” “Do you know this family? Do you know that…?” And they’re all these super popular YouTubers that have millions of millions of subscribers. So I think she’s going to be really disappointed when she goes to our channel and sees we only have 1,100 people subscribed to our channel. But it worked out.

Ashley Kehr:
Good. Do you want to read us today’s question? We pulled one from the Facebook group today, instead of Tony and I just picking a topic that we want to talk about. So go ahead. Read us the question.

Tony Robinson:
And I’m excited for today’s question too, because I’m going to learn a lot from you today, Ashley. Because I think our last one was about short-term rentals. So this one will be really a one where I can pick your brain a lot.

Tony Robinson:
Today’s question comes from the Facebook group. And if you guys aren’t in the Facebook group, you should be in it. I think there’s 26,000 people in the Facebook group now. So if you guys just look at Real Estate Rookie on Facebook, you guys will find it. But that’s where we pulled the majority of these questions from. So if you guys have questions that you want us to answer, drop them in there and we’ll maybe feature them on the show here.

Tony Robinson:
But today’s question comes from [Montus Receivus 00:03:20], and Montus’s question is, how do I place properties under a newly acquired LLC? And I think maybe what this person is asking is how do I purchase properties through an LLC, and Ashley I know you’ve got some experience doing that. All of mine have been in personal loans. So give us the good information, Ashley. How do we make this happen?

Ashley Kehr:
Well, I think the first question that everybody has as a new real estate investor is, “Do I buy a property in my own name?” “Do I buy a property in an LLC?” So let’s first talk about the difference because really, it depends, the answer that everybody hates. So if you’re going to purchase a property in your own name, you’re going to be able to get residential financing. You’re going to be able to go to a bank. You’re going to get a long-term, usually you can pick 15, 20, 30 years and you’ll get a fixed interest rate for that amount of time. So for example, you can get 30 years, at right now, probably 3.75% and that’s what you’re locked into. You’re locked into that rate for 30 years, which is a huge advantage because your mortgage payment is going to stay the same for those 30 years, but your rental income will probably increase as you increase your rents over the years, increasing your cashflow.

Ashley Kehr:
If you have an LLC, a lot of banks will not lend to you on the residential side of the property is not in your personal name. I will say that I have found a bank before that did lend to me on the residential side, so they were willing to do a 20 year fixed rate in the LLC but the interest rate was 7.35%. So it was a way higher interest rate. And this was three years ago I think where if I did it on the residential side, I probably could have gotten 4.75. So that was a huge disadvantage. But also, I was getting locked into a rate. Usually you will have to go to the commercial side of a bank where you’re getting a five-year fixed rate and then after that it becomes variable whatever the rates are going forward.

Ashley Kehr:
So it will continue to change, or you can refinance and go to another bank at another five-year fixed, but that’s refinancing every five years to get locked into a rate. So there’s advantages and disadvantages. Commercial side, it’s a lot easier, I think, to get a loan in your LLC, because they’re going to be looking at the rental income. If you have any other rental income in that LLC, they’ll look at that and they’re not going to dig through your life like a residential loan does. So that’s the big difference are the terms that you’re going to be able to get on the residential and the LLC side.

Ashley Kehr:
Now, as far as liability. So you put a property in your residential name, it’s not protected like an LLC is. An LLC, if someone were to sue you, they can only take the assets in that LLC. If someone were to sue you in your residential and when you have the property in your own name, they could actually come after you personally. So come after your primary residence, come after your cars. So a way to get around that is to put in an umbrella policy on the property that’s in your own name. So there still is ways to protect yourself without putting a property in an LLC.

Ashley Kehr:
So you really have to think about what you’re trying to go after. So if you want that long-term fixed rate, then put it into your personal name. One way I really recommend going with a LLC is if you have a partner, getting the partners in an LLC because then you guys are in that together and you’re not personally liable for each other if you guys were to each put it in your own names. So that’s just a real quick one-on-one as to what you should start thinking about when deciding on going with an LLC or putting the property in your personal name.

Tony Robinson:
Now, Ashley, I got a question [inaudible 00:07:22], because you said that the process for getting approved through an LLC for mortgage is typically easier or maybe not easier, but less invasive than getting approved for a personal mortgage. Now walk us through what those steps are. So say, I’ve got a newly created LLC hot off the press, what do I need to do with this now piece of paper that shows that I have this company to get approved for a loan?

Ashley Kehr:
So when you’re putting the property in your personal name, the lender is looking at you. When you’re putting a property on the commercial side, they’re looking at the property. They want to make sure that the property can sustain the mortgage payment with the incoming rental property that it’s going to appraise for what they want it to. So that’s the big difference right there, is that on the residential side, the bank is going to look at every stream of income you have. They’re going to look at all of the expenses you have. On the residential side, if I’m getting a mortgage through there, they want to see the property taxes and the insurance policies for every single property I own. They want to see the profit and loss statement for every LLC. They want to see the rent rolls for every single property.

Ashley Kehr:
On the commercial side, they’re more concerned with the actual building that they’re lending on. So they’ll probably want to see your personal financial statement. They’ll want to see your tax returns, but they’ll want to see the nitty gritty on the property that you’re purchasing. So those are the big differences where they’ll dig into your personal life on the residential side and on the commercial side, they’re really dig into the property that you’re purchasing.

Tony Robinson:
So you said your personal financial statement is one of the things that they’ll look at on the commercial side. For folks that aren’t familiar with that term, what is that?

Ashley Kehr:
So your personal financial statement is basically your balance sheet for you. So it’s going to list your assets and your liabilities. So you’re going to list your primary residence, any vehicles you own, some people will even put jewelry, anything that is an asset to you, that you could sell, make money, any cash you have in the bank, any stock investments, your liabilities, this is debt that you owe. So if you have a mortgage on your primary residence, if you have an auto loan, if you took a loan out against your 401k, those are all of your liabilities, money that you have to pay back. So you take your assets, you subtract it by your liabilities, and that will show what your net worth is and the bank will want to see that. So you would list any other properties you own, any mortgages that you currently have and they’ll want to take a look at that.

Ashley Kehr:
There’s a really good app. It’s called a Personal Capital, I think that’s what it is. And they’ll link your bank accounts to it. You can link your mortgage accounts to it, and it will automatically update. You can link your investment accounts to it so that you can just open the app every morning and say, “Hey, I have $300 more today. My net worth grew.” So it’s really cool to track as you pay down mortgages on your property or any other debt, if you have some and then also to see your investments grow. And I usually go in quarterly and I’ll adjust it so that if my properties have increased in value, I will update what the value of them is.

Tony Robinson:
So Ashley, we’ve talked about what the benefits, the pros and cons of buying under an LLC. We talked about what you’ll need to make it happen. Now, how do I actually find a bank that is willing to do this? Do I just Google commercial lender? How do I go out and find someone to actually give me money to buy this with an LLC?

Ashley Kehr:
Yeah, pretty much any bank that does mortgages, any kind of loan, they’ll have a commercial side to them. But I would start out with calling small local banks. They’re going to be your best bet, especially getting started and they’re going to have very different options. So some banks will maybe even give you a line of credit on the commercial side. I’m actually about to close on one this week where I put up two duplexes and they’re giving me a commercial line of credit on them. It will be a 4.75%. And then you can also, when you talk to them, ask what they have to offer. Just don’t say, “Yeah, I know I want this.” Ask what they have to offer. I went to a bank before and said I wanted to buy this property. What can you do for me?

Ashley Kehr:
And they actually gave me an unsecured loan for 90 days to make a cash offer on a property. So there’s lots of, especially the small banks, there’s so much flexibility that they have, and there’s more flexibility on the commercial side than the residential side too. You can negotiate your rates, your commitment fee. So commercial is very different in that sense too, when you’re getting it in an LLC, is that they will give you a commitment letter saying, “This is what your interest rate is. This is how many years it will be fixed. There might be prepayment penalties. So if you actually pay the property off in five years, you’re going to have to pay us 2% of that balance as a fee for paying it off early.” These are all negotiable in that commitment letter too. So that’s a big plus, where on the residential side, there’s really not any negotiating on a lot of those costs and especially the interest rate.

Tony Robinson:
Let me ask you this last question. If I’m a new investor, should I, and you kind of talked about this at the beginning, but do you feel that it’s absolutely necessary as a first time investor, someone who’s never bought a property before to set up an LLC to buy that first one? Because I feel like that’s a question that people ask a lot. It’s that they spend all this time figuring out the LLC thing when they maybe could have spent that time doing something else. Do you feel that it’s absolutely necessary or maybe on that first deal, can someone just do it in their personal name?

Ashley Kehr:
Yeah, I think then it’s worth exploring and seeing if it’s a good fit for you to do it in your personal name, because you’re definitely going to get better financing and better terms. Especially if you only have a primary residence, you can even get up to 10 loans in your personal name. So actually what some people will do is, the wife will get 10 loans in her name and the husband will get 10 loans in his name and they really max out that benefit. And then you just put the umbrella policy on that property and that will protect your other assets. So definitely make sure you get that umbrella policy if you do do it in your personal name. And any insurance agent you have, they should be able to talk to you about that more and explain it and it’s very inexpensive to have. But I think it’s worth it, putting it in your personal name, unless you have a partner, then I would go the LLC route.

Ashley Kehr:
But if you decide that you feel more comfortable having the LLC, then just talk to an attorney. In New York State, I set up my LLC’s myself. It’s very simple. I don’t know about every state, but talk to an attorney who will actually teach you how to do it. So finding an attorney like that is great. They’ll give you sample documents, so in LLC you want to have an operating agreement. So that’s going to put in how the business will work, if you have a partner who will put in how the partnership works. And if you get an attorney that will send you those documents, just a draft and you fill it in as to how you want, and then you send it back, they say, “Yep, everything in here looks good.” That will save you so much time and money by not waiting on an attorney to do it and by not paying an attorney to do that.

Ashley Kehr:
So if you can get a copy of a lot of the documents and learn how to set up an LLC, it will make your life so much easier and you’ll be able to get things done a lot faster. So definitely recommend learning that. For your very first one, I don’t recommend doing it yourself, but find somebody that will teach you how to do it.

Tony Robinson:
Yeah, that’s good advice. So we set up an LLC last year for some of our short term rental activities, but I’m starting to wholesale this year with a different partner. So we actually just emailed our attorney two days ago to set up an LLC for that. But last time when she set up the first LLC, it was super hands off. She was just like, “Here you go.” But maybe this time around, I might ask if I can peek over her shoulder. That’s good advice.

Ashley Kehr:
Another thing too with LLCs is that they can be expensive to open. California is expensive. Start up costs in New York for an LLC or the filing fee is $225 and they have to pay the publishing cost that ends up usually being around 200. So you can get into an LLC around $500 and then it’s usually $25 fee each year. But in California, isn’t around $800?

Tony Robinson:
Yeah. That’s the quote that she gave us. It was 800 bucks to get [crosstalk 00:16:28].

Ashley Kehr:
And then do you guys have an annual fee for that, do you know?

Tony Robinson:
That’s a good question. I don’t know, actually.

Ashley Kehr:
Because it would be your first year coming up that you’d be paying. So that’s another thing to be conscious of too, is the startup costs for an LLC and then any kind of annual fee that your state may charge too, because that can hurt your bottom line, especially when you had the option to put it into your personal name, you won’t have any of those fees either. And then-

Tony Robinson:
And just from a tax standpoint, like when you do your taxes at the end of the year, it gets more expensive with each LLC that you own. I’m learning that for the first time.

Ashley Kehr:
Yeah. Yeah. That’s a great point because when you have an LLC, especially if you have a partner, that’s a whole separate tax return. Where if you have an LLC and it’s just in your personal name, it could go on your personal tax return, just like it would be if it was in your personal name. But if you have to pay that LLC filing fee, there is a document that needs to be filed with that, that your accountant is going to charge for. So all the little things do add up with an LLC too.

Tony Robinson:
Well, Ash, I have nothing else to add to this. I feel like you hit all the big, important parts, I guess. Anything else? Any other parting words on the LLC question?

Ashley Kehr:
No, I don’t think so. Just one fun thing about an LLC is that you get to create a name and you get a company name. So be creative with that and think about something, if it’s going to be an LLC just on a property where it’s not really going to be a business, so you can have some fun with that. And if it’s going to be a business where you want people to know the name of it and you want a brand, then definitely do that more strategic. And one advice I will give is if you are creating an LLC, so say it’s a property management company and you’re located in this one small town, don’t name it Westfalls Property Management, because you might expand and grow to all these other locations and then your name will be stuck with the one town you started out with.

Tony Robinson:
We’re doing the branding thing, so our first LLC was Alpha Geek Capital, and then for the wholesaling, we’re going with Alpha Geek Acquisitions. So we’re just going to Alpha Geek blank, Alpha Geek blank, kind of like the Virgin Airlines, Virgin Space or whatever, all the crazy businesses that he has now.

Ashley Kehr:
Mine are all named after my kids pretty much.

Tony Robinson:
Ashley, that’s a much more noble thing to do.

Ashley Kehr:
I have Colt and Farmhouse Development, and then I have Remington Place. I always wanted a building and to put a big plaque on it or a big thing that said Remington Place. And then my son, Maverick, he doesn’t have an LLC yet, but after I had him, I had this little side business where I sewed in my basement baby clothes, and I sold them online and I actually did really well, and it was called The Maverick Baby. So he had that, but I got to get an LLC [crosstalk 00:19:38] of his name in it. And then my business partner, one of our LLCs together is my kids’ initials and his dogs’ initials because he doesn’t have kids yet.

Tony Robinson:
Giving the family some love. I’m all about that. Awesome, Ash. You dropped a lot of knowledge today. Like I said, I haven’t purchased a property with an LLC yet, so I feel like I learned a lot today too. And I’m sure the person that asked this question and all of your listeners got a lot of value out of it also.

Ashley Kehr:
It was kind of fun being on the guest side of things, really with you asking the questions and me just having to answer.

Ashley Kehr:
Well, thank you guys so much for joining us today. We will be back next Wednesday. Don’t forget to join the Real Estate Rookie Facebook group and we’ll see you guys next time. I’m Ashley, @wealthfromrentals and he’s Tony Robinson, @tonyjrobinson.

 

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