Should I create an LLC before I buy my first property?
Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes
Should I create an LLC before I buy my first property?
Most Popular Reply
Lender · Charlotte, NC · Member since 2020 · 224 posts · 221 votes
2yHey David,
No you shouldn't. You dont really have any "liability" with 1 property. Just buy a property in your personal name and learn the game first.
40 Replies
For a house hack I would not recommend it-- especially if you want to leverage favorable financing options to mitigate larger down payments, I would work on taking it down as an individual.
Small multifamily/partner deals would definitely warrant an LLC! They can offer some asset protection benefits, but it does come with its own set of considerations, like you mentioned with financing and tax implications (I'm not an attorney and this is not legal advice!)Feel free to bounce ideas around here—we've got a supportive community ready to help out. My first deal was a house hack on a duplex and I did that personally, had no issues at all. If anything I was actually glad that I did it individually as I wrote off the depreciation on my personal taxes. Everything after was through LLCs.
Hope this helps somewhat!- Lender · Charlotte, NC · Member since 2020 · 224 posts · 221 votes2y
Hey David,
No you shouldn't. You dont really have any "liability" with 1 property. Just buy a property in your personal name and learn the game first.
- Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Adam M.:
For a house hack I would not recommend it-- especially if you want to leverage favorable financing options to mitigate larger down payments, I would work on taking it down as an individual.
Small multifamily/partner deals would definitely warrant an LLC! They can offer some asset protection benefits, but it does come with its own set of considerations, like you mentioned with financing and tax implications (I'm not an attorney and this is not legal advice!)Feel free to bounce ideas around here—we've got a supportive community ready to help out. My first deal was a house hack on a duplex and I did that personally, had no issues at all. If anything I was actually glad that I did it individually as I wrote off the depreciation on my personal taxes. Everything after was through LLCs.
Hope this helps somewhat!Thank you for your input!
- Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Jon Puente:
Hey David,
No you shouldn't. You dont really have any "liability" with 1 property. Just buy a property in your personal name and learn the game first.
Thank you for your input!
- Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes2y
It's a distraction from your first deal. Don't worry about it. We have quitclaimed property into llcs and left loans in our personal names without issue. If the mortgage is getting paid, usually banks won't worry about it. Usually creating a llc has net zero or an increase in overall taxes paid, so I don't know what benefit you are imagining from creating one. Have a substantial liability insurance amount and worry about an llc down the road while you are saving up to buy another.
- 2yJake BakerBusiness MemberFlipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 696 votes
You don't really need to set up an LLC to invest in rentals, especially for a house hack. If you plan to house hack, you will want to qualify for a conventional loan for better terms.
If you feel like you will have a long term business plan or have a partner involved, then you should set up an LLC. If not, a simple JV agreement will do.
- Create LLC with the State
- Obtain EIN from irs.gov. Be careful of scam websites.
- Create Operating Agreement
- Open up Business bank accounts
BookkeepingRE - Bookkeeping for Real Estate & Service-Based Businesses52 Reviews - 2yJay ThomasPro MemberReal Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
If you're into house hacking or starting small, an LLC might be more trouble than it's worth. It adds paperwork and costs.As for your concerns, lenders may have reservations, but it varies, so explore different options. Transferring a property to an LLC can be done, but it's crucial to involve a lawyer. For your initial investment, focus on finding a good property without the added complexity of an LLC. Ever thought about an umbrella insurance policy? It provides personal liability protection without the LLC fuss. As your portfolio grows, you can always revisit the LLC route with guidance from a lawyer and accountant.
- Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes2y
Quote from @David Cianci:
Hello, curious to ask if I should create an LLC before I purchase a real estate property.
I will most likely either buy a house hack, small multifamily, or partner deal with my first purchase.
I understand that banks do not like lending to LLC's to start off so maybe I would have to take some personal liability to begin with or get an umbrella insurance policy which I have heard could be an option.
I have also seen that it can be complicated to move a property into an LLC when the property was purchased before the creation of the LLC in terms of the mortgage terms.
I am curious if I could benefit from the taxes benefits from forming an LLC right off the bat or if the annual costs would outweigh them to begin with.
Wanted to reach out to the community and make sure it wasn't a necessity to create an LLC as soon as possible because I would like to make sure I hedge my risk as much as possible in case an emergency would occur at or with a property I purchased and own outright, thanks.
If you don't have a large net worth you don't need it in my opinion. LLC's are great to limit your liability when you have a lot of assets to protect. If most of your assets are ending up in your first property you don't need it. I'm not a lawyer though.
- Real Estate Agent · Omaha, NE · Member since 2021 · 21 posts · 15 votes2y
Forming an LLC before your first real estate purchase, especially a house hack, is probably not necessary unless you already have significant assets to protect. Even if using an LLC banks will underwrite you and your financial situation and require a personal guarantee.
There's no direct tax benefit from buying under an LLC that would outweigh its annual costs for newcomers. FHA loans and similar first-time buyer programs offer better terms than what you'd likely get with an LLC, making them a smarter choice for your first investment, if house hacking.
If you decide to move your property into an LLC later, it's possible through a quit claim deed, but it's crucial to consult an attorney to navigate the mortgage implications and legalities correctly. Note attorneys get paid to tell you the worst case so keep in mind. Starting without an LLC allows you to leverage more accessible financing options, with the flexibility to switch to an LLC structure when it becomes beneficial.
- 2yStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
You can easily incorporate language into your agreement of sale that allows the transfer of the sales contract to an LLC that has not yet been created. This way you can create the LLC once you know you are proceeding with a purchase. The creation process can be completed relatively quickly, and would not delay the property purchase. Just remember to notify the title company of the change in purchaser. I don't see why you would want to go through the hassle and expense of transferring the property into an LLC after the purchase was already completed. While its possible, you will still incur the transactional costs of deed prep and pay the transfer tax in most instances equal to the assessed property value. I see you are in Philadelphia. Philadelphia's transfer tax is greater than 4% between state and county.
Also, don't let the LLC ownership's impact on originating a loan interfere. Most lenders are perfectly fine lending to an LLC. Ultimately the debt will still be recourse meaning you are personally guaranteeing the loan. Anyone who ever says they can't get a loan because the property is owned by an LLC has some personal blemishes that are the root cause, not the LLC ownership. If you have any more detailed questions, reach out. Happy to assist.
- 2yDave SpoonerPro MemberRental Property Investor · Cincinnati, OH · Member since 2020 · 870 posts · 823 votes
Yeah I think in the future when you have more properties it makes sense to have an LLC but not for a single property.
- 2yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
The decision to create an LLC for your real estate investments involves various factors, and it's a choice that should align with your specific goals and risk tolerance. Here are some considerations to help you evaluate whether forming an LLC is the right move for you:
Advantages of Creating an LLC:
Limited Liability Protection
Asset Protection
Potential Tax Benefits
Considering and Difficulties:
Finances: As you pointed out, it may be more difficult to obtain a mortgage for a property held by an LLC. Particularly when it comes to residential properties, most lenders would rather lend to people than LLCs.
Transfer of Property: Your mortgage's due-on-sale clause may be triggered if you subsequently decide to transfer a property that you now own in your name to an LLC. You might need to get the lender's clearance or pay off the current mortgage in order to accomplish this.
Annual Fees: There are expenses associated with running an LLC every year, including possible franchise taxes and state filing fees. Even though these expenses are rather low, it's important to compare them to the advantages the LLC offers.
Umbrella Insurance: An alternative to forming an LLC for asset protection is obtaining a robust umbrella insurance policy. This can provide additional liability coverage beyond what your regular property insurance offers.
Steps to Consider:
Speak with Legal and Financial Experts: Prior to making a choice, get advice from a tax and real estate lawyer. They can offer tailored guidance depending on your unique situation and objectives.
Assess Your Tolerance for Risk: Take into account both the type of properties you intend to invest in and your level of risk tolerance. In case you're involved in riskier tactics, having an LLC might provide you further assurance.
Understand Local Laws: Recognise local laws pertaining to LLCs and property ownership. There can be particular laws or costs in some places when it comes to putting properties under an LLC.
Examine Financing Options: Look into financing choices for properties held by LLCs. Certain investors opt to buy properties on an individual basis, which they subsequently transfer to an LLC when funding is obtained.
Ultimately, whether or not to create an LLC before purchasing a property is a personal decision. It's crucial to carefully evaluate the benefits, drawbacks, and costs associated with forming an LLC and consider how it aligns with your overall investment strategy and goals.
NETWORTH BUILDERS5236 Reviews - Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Todd Rasmussen:
It's a distraction from your first deal. Don't worry about it. We have quitclaimed property into llcs and left loans in our personal names without issue. If the mortgage is getting paid, usually banks won't worry about it. Usually creating a llc has net zero or an increase in overall taxes paid, so I don't know what benefit you are imagining from creating one. Have a substantial liability insurance amount and worry about an llc down the road while you are saving up to buy another.
Hi Todd, I appreciate your input!
- Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Ryan Miller:
Forming an LLC before your first real estate purchase, especially a house hack, is probably not necessary unless you already have significant assets to protect. Even if using an LLC banks will underwrite you and your financial situation and require a personal guarantee.
There's no direct tax benefit from buying under an LLC that would outweigh its annual costs for newcomers. FHA loans and similar first-time buyer programs offer better terms than what you'd likely get with an LLC, making them a smarter choice for your first investment, if house hacking.
If you decide to move your property into an LLC later, it's possible through a quit claim deed, but it's crucial to consult an attorney to navigate the mortgage implications and legalities correctly. Note attorneys get paid to tell you the worst case so keep in mind. Starting without an LLC allows you to leverage more accessible financing options, with the flexibility to switch to an LLC structure when it becomes beneficial.
Hey Ryan, I appreciate your input!
- 2yPatrick DruryBusiness MemberReal Estate Agent · Columbus, OH & Cleveland OH · Member since 2021 · 1k+ posts · 2k+ votes
@David Cianci
If you buy a rental in an LLC you would not be able to get conventional lending you would need a DSCR loan. The down side is this will cost you a higher rate, but the property will be in your LLC. On the flip side, a lot of people also buy rentals in their personal name to get a conventional rate and then quit claim it to their LLC after closing. You can read through the forums on the topic of the due on-sale clause. - Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Stuart Udis:
You can easily incorporate language into your agreement of sale that allows the transfer of the sales contract to an LLC that has not yet been created. This way you can create the LLC once you know you are proceeding with a purchase. The creation process can be completed relatively quickly, and would not delay the property purchase. Just remember to notify the title company of the change in purchaser. I don't see why you would want to go through the hassle and expense of transferring the property into an LLC after the purchase was already completed. While its possible, you will still incur the transactional costs of deed prep and pay the transfer tax in most instances equal to the assessed property value. I see you are in Philadelphia. Philadelphia's transfer tax is greater than 4% between state and county.
Also, don't let the LLC ownership's impact on originating a loan interfere. Most lenders are perfectly fine lending to an LLC. Ultimately the debt will still be recourse meaning you are personally guaranteeing the loan. Anyone who ever says they can't get a loan because the property is owned by an LLC has some personal blemishes that are the root cause, not the LLC ownership. If you have any more detailed questions, reach out. Happy to assist.
Hey Stuart,
I appreciate your input!
I see the hassle of transferring a property you buy into your name to an LLC because I would like mitigate the possible legal risk of some issues that could occur if something happens with a tenant on one of my properties and take advantage of any tax laws with a property inside of an LLC.
Do you believe my risk with tenants and taxes savings would be the same without an LLC?
- Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Dave Spooner:
Yeah I think in the future when you have more properties it makes sense to have an LLC but not for a single property.
Thank you for your input!
- Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Wale Lawal:
The decision to create an LLC for your real estate investments involves various factors, and it's a choice that should align with your specific goals and risk tolerance. Here are some considerations to help you evaluate whether forming an LLC is the right move for you:
Advantages of Creating an LLC:
Limited Liability Protection
Asset Protection
Potential Tax Benefits
Considering and Difficulties:
Finances: As you pointed out, it may be more difficult to obtain a mortgage for a property held by an LLC. Particularly when it comes to residential properties, most lenders would rather lend to people than LLCs.
Transfer of Property: Your mortgage's due-on-sale clause may be triggered if you subsequently decide to transfer a property that you now own in your name to an LLC. You might need to get the lender's clearance or pay off the current mortgage in order to accomplish this.
Annual Fees: There are expenses associated with running an LLC every year, including possible franchise taxes and state filing fees. Even though these expenses are rather low, it's important to compare them to the advantages the LLC offers.
Umbrella Insurance: An alternative to forming an LLC for asset protection is obtaining a robust umbrella insurance policy. This can provide additional liability coverage beyond what your regular property insurance offers.
Steps to Consider:
Speak with Legal and Financial Experts: Prior to making a choice, get advice from a tax and real estate lawyer. They can offer tailored guidance depending on your unique situation and objectives.
Assess Your Tolerance for Risk: Take into account both the type of properties you intend to invest in and your level of risk tolerance. In case you're involved in riskier tactics, having an LLC might provide you further assurance.
Understand Local Laws: Recognise local laws pertaining to LLCs and property ownership. There can be particular laws or costs in some places when it comes to putting properties under an LLC.
Examine Financing Options: Look into financing choices for properties held by LLCs. Certain investors opt to buy properties on an individual basis, which they subsequently transfer to an LLC when funding is obtained.
Ultimately, whether or not to create an LLC before purchasing a property is a personal decision. It's crucial to carefully evaluate the benefits, drawbacks, and costs associated with forming an LLC and consider how it aligns with your overall investment strategy and goals.Hey Wale, I appreciate your input!
Do you believe it would be wiser than to put your second investment property you purchase into an LLC?
- Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes2y
Hey @David Cianci,
Depends on how much asset protection you need. See below my asset protection tier list to decide whats right for you:
Worst:
– No coverage, held in your name.
Bad:
- Relying on insurance. This is the most basic level of protection and it is not very effective, but it is still better than nothing. Insurance companies have many exclusions and they may not cover everything, but they can help to pay for some of the costs of a lawsuit.
Good:
- Using one LLC for all of your rental properties. This is better than relying on insurance because it protects your personal assets from liability. However, if someone sues you and wins, they could take all of your rental properties.
Better:
- Using a separate LLC for each rental property. This is the best level of protection because it isolates each property from the others. If someone sues you and wins, they can only take the LLC that owns the property that was involved in the lawsuit.
Best:
- Using a combination of LLC and land trust to protect your rental properties. These are more complex legal structures that can provide even more protection than a traditional LLC alone.
Here are some of the key things to keep in mind when choosing an asset protection strategy for your rental properties:
- Your risk tolerance: If you are not very worried about being sued, you may not need the best level of protection. However, if you are worried about being sued, you should use the best level of protection that you can afford.
- Your state laws: The laws governing asset protection vary from state to state. You should consult with an attorney in your state to make sure that you are using the best asset protection strategy for your situation.
- Your budget: The cost of asset protection can vary depending on the type of protection that you choose. You should make sure that you can afford the cost of the protection that you choose.
- Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Account Closed:
Hey @David Cianci,
Depends on how much asset protection you need. See below my asset protection tier list to decide whats right for you:
Worst:
– No coverage, held in your name.
Bad:
- Relying on insurance. This is the most basic level of protection and it is not very effective, but it is still better than nothing. Insurance companies have many exclusions and they may not cover everything, but they can help to pay for some of the costs of a lawsuit.
Good:
- Using one LLC for all of your rental properties. This is better than relying on insurance because it protects your personal assets from liability. However, if someone sues you and wins, they could take all of your rental properties.
Better:
- Using a separate LLC for each rental property. This is the best level of protection because it isolates each property from the others. If someone sues you and wins, they can only take the LLC that owns the property that was involved in the lawsuit.
Best:
- Using a combination of LLC and land trust to protect your rental properties. These are more complex legal structures that can provide even more protection than a traditional LLC alone.
Here are some of the key things to keep in mind when choosing an asset protection strategy for your rental properties:
- Your risk tolerance: If you are not very worried about being sued, you may not need the best level of protection. However, if you are worried about being sued, you should use the best level of protection that you can afford.
- Your state laws: The laws governing asset protection vary from state to state. You should consult with an attorney in your state to make sure that you are using the best asset protection strategy for your situation.
- Your budget: The cost of asset protection can vary depending on the type of protection that you choose. You should make sure that you can afford the cost of the protection that you choose.
Hey Zachary, I appreciate your in-depth input. You provided some clarity for me in levels of protection I should consider for myself!
- Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes2y
Quote from @David Cianci:
Quote from @Account Closed:
Hey @David Cianci,
Depends on how much asset protection you need. See below my asset protection tier list to decide whats right for you:
Worst:
– No coverage, held in your name.
Bad:
- Relying on insurance. This is the most basic level of protection and it is not very effective, but it is still better than nothing. Insurance companies have many exclusions and they may not cover everything, but they can help to pay for some of the costs of a lawsuit.
Good:
- Using one LLC for all of your rental properties. This is better than relying on insurance because it protects your personal assets from liability. However, if someone sues you and wins, they could take all of your rental properties.
Better:
- Using a separate LLC for each rental property. This is the best level of protection because it isolates each property from the others. If someone sues you and wins, they can only take the LLC that owns the property that was involved in the lawsuit.
Best:
- Using a combination of LLC and land trust to protect your rental properties. These are more complex legal structures that can provide even more protection than a traditional LLC alone.
Here are some of the key things to keep in mind when choosing an asset protection strategy for your rental properties:
- Your risk tolerance: If you are not very worried about being sued, you may not need the best level of protection. However, if you are worried about being sued, you should use the best level of protection that you can afford.
- Your state laws: The laws governing asset protection vary from state to state. You should consult with an attorney in your state to make sure that you are using the best asset protection strategy for your situation.
- Your budget: The cost of asset protection can vary depending on the type of protection that you choose. You should make sure that you can afford the cost of the protection that you choose.
Hey Zachary, I appreciate your in-depth input. You provided some clarity for me in levels of protection I should consider for myself!
Happy to help!
- 2yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
Quote from @David Cianci:
Quote from @Wale Lawal:
The decision to create an LLC for your real estate investments involves various factors, and it's a choice that should align with your specific goals and risk tolerance. Here are some considerations to help you evaluate whether forming an LLC is the right move for you:
Advantages of Creating an LLC:
Limited Liability Protection
Asset Protection
Potential Tax Benefits
Considering and Difficulties:
Finances: As you pointed out, it may be more difficult to obtain a mortgage for a property held by an LLC. Particularly when it comes to residential properties, most lenders would rather lend to people than LLCs.
Transfer of Property: Your mortgage's due-on-sale clause may be triggered if you subsequently decide to transfer a property that you now own in your name to an LLC. You might need to get the lender's clearance or pay off the current mortgage in order to accomplish this.
Annual Fees: There are expenses associated with running an LLC every year, including possible franchise taxes and state filing fees. Even though these expenses are rather low, it's important to compare them to the advantages the LLC offers.
Umbrella Insurance: An alternative to forming an LLC for asset protection is obtaining a robust umbrella insurance policy. This can provide additional liability coverage beyond what your regular property insurance offers.
Steps to Consider:
Speak with Legal and Financial Experts: Prior to making a choice, get advice from a tax and real estate lawyer. They can offer tailored guidance depending on your unique situation and objectives.
Assess Your Tolerance for Risk: Take into account both the type of properties you intend to invest in and your level of risk tolerance. In case you're involved in riskier tactics, having an LLC might provide you further assurance.
Understand Local Laws: Recognise local laws pertaining to LLCs and property ownership. There can be particular laws or costs in some places when it comes to putting properties under an LLC.
Examine Financing Options: Look into financing choices for properties held by LLCs. Certain investors opt to buy properties on an individual basis, which they subsequently transfer to an LLC when funding is obtained.
Ultimately, whether or not to create an LLC before purchasing a property is a personal decision. It's crucial to carefully evaluate the benefits, drawbacks, and costs associated with forming an LLC and consider how it aligns with your overall investment strategy and goals.Hey Wale, I appreciate your input!
Do you believe it would be wiser than to put your second investment property you purchase into an LLC?
Yes, if you plan to grow a decent-sized rental portfolio. Still talk to your CPA to understand the tax implications.
Goodluck man!
NETWORTH BUILDERS5236 Reviews - Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes2y
Quote from @Jon Puente:
Hey David,
No you shouldn't. You dont really have any "liability" with 1 property. Just buy a property in your personal name and learn the game first.
That seems backwards to me. Learn the game first - THEN buy a(n income) property.
If you want to go the business entity route, then learn that first, as well. Most folks think it's to limit your personal liability, and they're right. The part they typically miss, however, is the "control everything, own nothing" aspect.
The purpose of a business entity structure is to protect you and your personal property (estate) from the liabilities of your real estate investing business. Those who think an umbrella policy is enough miss one important point: if your policy has to pay out, that means someone took you to court, and you lost. At that point, your ENTIRE ESTATE is exposed and subject to discovery in subsequent litigation.
I am not an attorney and this is not legal advice.
My $0.02 ...
- 2yAlan AsriantsBusiness MemberReal Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes
Hey David, I don't think there is too much of a reason to purchase a property under an LLC if it is your first one.
That being said if you are going and buying a 10 unit apartment building, then yes the liability is definitely worth it
Generally your liability is not that high with just one property and if you're just getting started, then you should take advantage of a house hacking strategy and use the lower interest rate and down payment to get into your first deal.
Once you have a few deals under your belt, then you can start looking into LLCs
Hope this help man. Also I am an investor and agent in the area and would be happy to talk anytime!
Alan Asriants - New Century Real Estate 591 Reviews - Cleveland, OH · Member since 2022 · 826 posts · 578 votes2y
David,
I'm in the same boat as you and I want to let you know what my plan is.
I'm buying my first house hack this year in my own personal name. Eventually, my plan is to put the property in its own LLC. Not even really thinking about that because I'm prioritizing taking action and actually buying real estate.
Trying to focus on one thing at a time and the most important thing for me is just buying a property and getting started.Good luck man!
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