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
- Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Alan Asriants:
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!
Hey Alan, appreciate your input!
- Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Benjamin Sulka:
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!
Hey Benjamin, that is a great point you made. I need to simplify my goals and actions to be able to succeed myself.
- Attorney · Washington, DC · Member since 2016 · 5 posts · 1 vote2y
Primary reason to place all rental property into a limited liability entity is to protect your assets from tenant-related liability. Also, as others have mentioned, most institutional lenders do not lend to LLC's and have never given me any good reason for their position, since the owner is always required to assume personal liability via a personal guaranty. I agree that a $2M general liability umbrella policy is the next best thing to an LLC.
NOTE: One "new" negative is that all small LLC's are now subject to the Beneficial Ownership Information Reporting requirements of the Corporate Transparency Act. For entities formed after December 31, 2023 you have 90 days to file these reports and 30 days to file any changes to those BOI Reports. For entities that existed prior to January 1, 2024 the deadline is December 31, 2024. Penalties for failure to timely comply are $500 fine PER DAY and potentially jail time. I am an attorney in NY, DC & MD and this is NOT LEGAL ADVICE.
- Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Harvey S. Jacobs:
Primary reason to place all rental property into a limited liability entity is to protect your assets from tenant-related liability. Also, as others have mentioned, most institutional lenders do not lend to LLC's and have never given me any good reason for their position, since the owner is always required to assume personal liability via a personal guaranty. I agree that a $2M general liability umbrella policy is the next best thing to an LLC.
NOTE: One "new" negative is that all small LLC's are now subject to the Beneficial Ownership Information Reporting requirements of the Corporate Transparency Act. For entities formed after December 31, 2023 you have 90 days to file these reports and 30 days to file any changes to those BOI Reports. For entities that existed prior to January 1, 2024 the deadline is December 31, 2024. Penalties for failure to timely comply are $500 fine PER DAY and potentially jail time. I am an attorney in NY, DC & MD and this is NOT LEGAL ADVICE.
Hey Harvey,
I appreciate you sharing your knowledge as an attorney! Is there a specific reason our government changed the laws around reporting for small LLC's and how does that specifically effect real estate investors like myself in the future?
- Attorney · Washington, DC · Member since 2016 · 5 posts · 1 vote2y
Quote from @Harvey S. Jacobs:
Primary reason to place all rental property into a limited liability entity is to protect your assets from tenant-related liability. Also, as others have mentioned, most institutional lenders do not lend to LLC's and have never given me any good reason for their position, since the owner is always required to assume personal liability via a personal guaranty. I agree that a $2M general liability umbrella policy is the next best thing to an LLC.
NOTE: One "new" negative is that all small LLC's are now subject to the Beneficial Ownership Information Reporting requirements of the Corporate Transparency Act. For entities formed after December 31, 2023 you have 90 days to file these reports and 30 days to file any changes to those BOI Reports. For entities that existed prior to January 1, 2024 the deadline is December 31, 2024. Penalties for failure to timely comply are $500 fine PER DAY and potentially jail time. I am an attorney in NY, DC & MD and this is NOT LEGAL ADVICE.
Law was passed to monitor and prevent money laundering. These Beneficial Ownership Information reports are sent to FINCEN. TITLE Companies are already required to report certain cash transactions in certain geographic areas of the country to FINCEN so they monitor movement of money in certain areas. Originally areas like Dade County Florida (Miami) were monitoring areas. FINCEN greatly expanded these geographic reporting areas over the past couple of years.
- Lender · United States · Member since 2020 · 1k+ posts · 499 votes2y
I'm not an attorney, so take my advice with a grain of salt: a broker who works with investors of all walks of life, big and small, I've noticed most form an LLC once they have two properties or more.
Many will form one if they just have one, but if you're talking about house hacking, keep in mind, conventional lenders don't allow entity closings and they are the only lenders that'll allow you to live on the property.
DSCR/hard money lenders allow you to close in an entity, but you can't live on the property.
- Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Timothy Hero:
I'm not an attorney, so take my advice with a grain of salt: a broker who works with investors of all walks of life, big and small, I've noticed most form an LLC once they have two properties or more.
Many will form one if they just have one, but if you're talking about house hacking, keep in mind, conventional lenders don't allow entity closings and they are the only lenders that'll allow you to live on the property.
DSCR/hard money lenders allow you to close in an entity, but you can't live on the property.
Thank you for sharing your opinion!
- Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Account Closed:
There are no benefits to creating an LLC before you have a property. It is a distraction to keep from buying properties. ;-)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.
It may not have any benefits after you buy a property, depending on how you run it. Yes, it requires work to run an LLC properly.Appreciate you sharing your opinion!
- 2ySean O'KeefePro MemberCPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes
@David Cianci there is a debate among real estate investors whether or not you need an LLC. CPAs and Lawyers will always tell you to get one (and contrary to popular rumors this has nothing to do with getting more $ for filing fees). Not owning your rentals through an LLC exposes you to more risk, even if you have an insurance policy on rentals.
However, as a new investor, you may encounter some challenges and opportunities leveraging the LLC. Here are a few below:
- Generally, buying through your personal name can reduce the interest rate - commercial rates on LLC mortgages are usually higher but you can research this
- Most LLCs on incorporation don’t have any credit so it may be difficult to find. a lender
- If you own the property in your personal name you are exposing yourself to more risk and will want to transfer the property into LLC as soon as you can
- If you own property in your personal name and transfer to LLC the lender may not allow or can call the entire loan
LLC or personal ownership you need insurance.
If you search the forums for this topic using the magnifying glass feature in top right corner of your screen on BiggerPockets you will find a lot of discussion on "Quit Claim" "Buying through LLC", "LLC or not" etc.
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.
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*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
- Investor · Hillsboro, OR · Member since 2016 · 310 posts · 153 votes2y
Get the umbrella policy. Let's say you have a house and a car. You have a liability coverage on both. The umbrella policy covers both of those policies. ( Umbrella) So, if you had a claim/judgement on your car, for example, and the judgement was for an amount higher then the policy limit, the umbrella policy will kick in the rest. example: Car insurance liability coverage is to $300,000. You get a judgement for $500,000. The car insurance would pay for the first $300,000 and then the umbrella policy would cover from $300,000 to $500,000.
Hope that helps.
- Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Sean O'Keefe:
@David Cianci there is a debate among real estate investors whether or not you need an LLC. CPAs and Lawyers will always tell you to get one (and contrary to popular rumors this has nothing to do with getting more $ for filing fees). Not owning your rentals through an LLC exposes you to more risk, even if you have an insurance policy on rentals.
However, as a new investor, you may encounter some challenges and opportunities leveraging the LLC. Here are a few below:
- Generally, buying through your personal name can reduce the interest rate - commercial rates on LLC mortgages are usually higher but you can research this
- Most LLCs on incorporation don’t have any credit so it may be difficult to find. a lender
- If you own the property in your personal name you are exposing yourself to more risk and will want to transfer the property into LLC as soon as you can
- If you own property in your personal name and transfer to LLC the lender may not allow or can call the entire loan
LLC or personal ownership you need insurance.
If you search the forums for this topic using the magnifying glass feature in top right corner of your screen on BiggerPockets you will find a lot of discussion on "Quit Claim" "Buying through LLC", "LLC or not" etc.
.
.
.
*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
Hey Sean, I appreciate your input! Do you believe most lenders while speaking with them prior to getting a loan would be turned off if I told them that I would not like a call for the entire loan in our contract if I move the property into an LLC?
- Investor · Harrisonburg Virginia · Member since 2023 · 40 posts · 23 votes2y
Quote from @Christie Gahan:
Get the umbrella policy. Let's say you have a house and a car. You have a liability coverage on both. The umbrella policy covers both of those policies. ( Umbrella) So, if you had a claim/judgement on your car, for example, and the judgement was for an amount higher then the policy limit, the umbrella policy will kick in the rest. example: Car insurance liability coverage is to $300,000. You get a judgement for $500,000. The car insurance would pay for the first $300,000 and then the umbrella policy would cover from $300,000 to $500,000.
Hope that helps.
Hey Christie, thanks for providing your info, you definitely gave me some clarity!
- 2yAlfath AhmedBusiness MemberReal Estate Agent · Columbus, OH · Member since 2022 · 1k+ posts · 1k+ votes
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.
You should not make an LLC if you are house-hacking. Also, even if you got an LLC for a different loan option you would still need to give your personal guarantee. I first started my journey by house-hacking under my personal name. Then I made an LLC and bought properties under them. I also transferred other assets via quitclaim deed.
Happy to explain the process that I followed on a phone call. I would say to invest in Columbus first thought because Virginia is very expensive.
ReafCo | Ahmed Group 536 Reviews - Member since 2021 · 3 posts · 1 vote1y
Replying to this older topic - we've just put up an article on the BiggerPockets Property Management toolkit about this:
Should I start an LLC for real estate investing?
Hope this is useful - all feedback is welcome!
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