How to set up LLC structure for current/future properties

Question

I have recently acquired my first property. Looking for help/advice on setting up LLC structure for this property and future properties. I want to be able to build business credit so in the future I don't have to provide a personal guarantee. I also want to isolate each property in its own LLC for liability purposes.

Stuart Udis · Answer

@Brad Neihardt Go ahead and create an LLC, nothing wrong with that but don't expect the LLC to eliminate your need to guarantee debt. Lenders will look to you to personally guarantee real estate loans irrespective of whether the property is purchased as an LLC. Utilize a business credit card and fail to make payments? Expect to see this on your personal credit report (normally after 3 months of non payment).

Ned Carey · Answer

@Brad Neihardt several points to clear up some misconceptions.

1) Business credit is not that important in real estate. Loans will be made on your personal credit and the deal.

2) you may never get to the point you won't have to personally guarantee a loan.

3) An LLC for each property is  generally  considered overkill. There is a high cost in both time and dollars due to the complexity you add.

4) if you wanted to hold the property in an LLC you should have bought it in the LLC to start. This is not an insurmountable problem but it can have issues like a due on sale clause of any loan or losing your title insurance.

5) An LLC is the last resort for liability. Running your business properly and knowing and following the laws is first, then comes insurance then comes the LLC. An LLC is a good idea for many, but it is not perfect liability protection.

Josh Lewer · Answer

Congrats on the first property! It really depends on your goals, financing plans, and how hands-on you want to be. Some investors set up a holding company with separate LLCs for each property to isolate liability and stay organized. That said, I had a client who originally used a holding LLC with separate entities but dissolved it because it became too administratively burdensome. They switched to one LLC with one bank account for multiple properties and tracked each property separately in QuickBooks—essentially reviewing each one as its own column in Excel each month.

Stuart Udis · Answer

@Crystal Smith Assuming you do not own real estate in any of these states, can you provide real life examples of your WY, NV or DE entities helping you? The instance where the charging order protections became applicable? The WY or NV case law applying? Ever been in a business dispute where DE was the proper venue and choice of law and the DE Court of Chancery heard the case? Or was it the DE or NV Series LLC accessibility? Many states do not recognize the benefits and many lenders are reluctant to lend to a borrower using a series LLC.

Stuart Udis · Answer

@Brad Neihardt appears to have bought his first property in Cleveland. Without knowing anything about Brad and not wanting to make assumptions, lets replace Brad with "Investor A",  the person most likely to buy residential or small multi-family properties in Cleveland to match the profile of the normal Bigger Pockets member who invests in this market.  @Jake Yuskaitis What is the benefit of the Wyoming Trust and Wyoming LLC?  Is it the charging order protections? Is it the anonymity? Does Investor A have assets worth the pursuit of a plaintiff's attorney if insurance does not cover the harm?

Let's be honest with ourselves, if Investor A finds themself in conflict it's most likely going to be landlord tenant related, a premises liability claim or a payment/performance related dispute.

Landlord/tenant matters notwithstanding premises liability type claims which are discussed below are generally settled in local municipal level courts because the controversy amount is low. If investor A fails to meet the implied warranty of habitability and tenant withholds rent how do the Wyoming trust and LLC help?

If Investor A stiffs a contractor, do you believe the contractor is going resolve the matter in WY? No, the contractor is simply going to place a mechanics lien on Investor A's property clouding title until the property is sold or refinanced.

If it's a premises liability matter and falls outside of general liability coverage, do you really believe the plaintiffs attorney who is likely working on a contingent fee basis cares to pursue the claim against the defendant regardless of whether there are real asset? Why do you believe case law has been established allowing attorneys to collect upwards of 20% of the defaulted debt amount in confession of judgment cases in states that allow the filing? Turning that judgment into cash takes time and is costly.

Never mind the fact the investor now likely has a lousy loss run rate if there are premises liability claims, is reliant on expensive surplus line insurance coverage and when lenders review his entities they see someone who is reckless with claim history, mechanics liens (doesn't pay their bills) ...hardly the person a lender wants to do business with. It's about time real estate investors recognize the true risks and consequences of their actions and operate in a manner that allows for a sustainable business. Most throw money away on useless asset protection systems that aren't relevant and provide no benefit.

Stuart Udis · Answer

@Jake Yuskaitis "What if you buy free and clear"....."You're also not always personally guaranteeing the loan, there are non-recourse loans".... I would say you are going out of your way to find extremes to make your arguments. Even in the non recourse loan which is rare, the borrower still signs and there are always carve outs that vary but at minimum your standard bad boy acts will apply. No lender is giving a loan without the borrower signing.

You say the charging order is last resort but why would the plaintiff who has a valid claim against a property owner who owns real property that's titled to the name of the defendant want to even go there? I will help you out- if the collateral has no equity and the plaintiff has real assets worth the pursuit of a plaintiff's attorney. But first they have to pierce the corporate veil- do you know how difficult that is?  This all goes back to practicality and these strategies offer no benefit and are completely impractical for 99.9% of real estate investors.

Jake Yuskaitis · Answer

i work in lending. i have done plenty of loans with layers of LLCs and it wasn't a problem at all.

you're also not always personally guaranteeing the loan. there are non-recourse loans.

feels like you're going out of your way to find ways where the benefits would be weakened or not apply.

of course no strategy is perfect or 100%. but are you denying there are any benefits?

anonymity can absolutely prevent certain legal action. and the charging order protection is last resort. it's another layer of protection. obviously a solid insurance plan is always a good idea.

Stuart Udis · Answer

Layer all the LLC's you want, you're still personally guaranteeing that loan and your name appears on that signature line. All you are doing is making the potential lenders job more difficult trying to understand the entity structure, beneficial ownership etc. Don't you want a simple loan application and make the underwriting process easy for the lender?

Pay off the mortgage and that mortgage is still recorded. One extra scroll with the mouse pad and there's the mortgage, still public and available to view.  How many investors buy real estate without ever using debt? Most municipalities have licensing and permitting that's required to operate investment real estate, whether it be income producing or for-sale and it's not difficult to obtain the documentation bearing the owner's name. As an investor you are giving immense authority to 3rd parties if you do not want any documentation to bear your name or signature. Is this realistic for the small mom and pop landlord or investor?

Someone hurts themselves at one of your properties, do you believe not knowing the identity of the member behind the LLC will deter the plaintiff's attorney from filing the claim?  What happens when you are deposed or are sent interrogatories?  If the tenant is living in inhabitable conditions, do you believe this will stop them from withholding rent?  Retaining free legal assistance from the local legal aid office? I do not believe there is any deterrence whatsoever.

Charging orders- why go through the trouble when there is an entity that owns real estate and is linked to the conflict? In instances where no insurance is available, why not just seek a judgment against the entity? It's far easier than trying to pierce the entity. Now the title is clouded. Go to refinance or sell and that judgment must get cleared.

I am merely pointing out the lack of practicality when it comes to some of these strategies. Failure to understand procedurally how useless these strategies are leads to a lot of unnecessary costs and time spent chasing down these strategies where time and money is better spent elsewhere.

Stuart Udis · Answer

@Jake Yuskaitis Can you articulate the circumstances or fact pattern where the charging order protections will become relevant? How about the supposed benefits of the anonymity?  Assuming there is a mortgage on the property can't the publicly recorded mortgage be viewed?  Can't you scroll to the signature page of the mortgage?

@Crystal Smith You should be able to explain how these entities protected you without sharing any details about your business, properties you own etc.  Here's an example:

A few years ago a bank draw inspector tripped over some lumber while inspecting the framing of a new construction project I was working on. I learned through the bank that 3rd party inspector injured his ankle. I heard nothing more about this for 9+ months.  The inspector continued to inspect for bank draws and immediately after the final draw I received a letter from a plaintiffs' attorney alleging his injuries. Now it was a lousy case because he waited so long and continued to collect his $275 draw inspection fees. However, I turned over to my carrier the letter along with the contract between my entity and the general contractor, and the insurance certificates and endorsements from the general contractor and the framing contractor who each added my entity as additional insured. My insurance was not utilized, I believe I may have spent 20 minutes reviewing some interrogatories.  You know very little about my business, or the property and I just shared with you how I navigated a conflict. See, its easy.

The problem is so many have these unnecessary entities and cannot articulate why they have them or how they benefit from them.

How to set up LLC structure for current/future properties

Most Popular Reply