Newbie-form an LLC and use a land trust or just form an LLC for rental property?

21 Replies

Hi all,

I live in Indiana. I've got enough money saved up to purchase my first investment property. I'm looking at a simple single family home or possibly a duplex (it would be a buy and hold strategy so basically renting it out). I'd like to have at least two properties by midyear 2015 and continue with that pattern for a few years until I'm able to own a full-on apartment complex.

I've seen different opinions and suggestions regarding whether one should own their property in an LLC or simply in a land trust. Would you advise I simply put the properties in an LLC or utilize a land trust as well? I plan to form an LLC regardless. What would be the benefits and/or disadvantages or having one, the other, or both?

Thanks in advance!!

If you are looking for asset protection, an LLC or land trust will not protect you. Get a good insurance policy.

Joe Gore

I own a boatload of rentals. All in my name. Get good liability insurance.

@Cory Elder  ,

I would just get a good Liability insurance policy. This was also the advise from my CPA to me when I started. It was great advise. By the way, her husband is an attorney and he agreed. Hope this helps you!

Happy Investing!

Yes, but there's so many gurus telling everyone to get an LLC!

@Cory Elder  congratulations on moving toward getting your passive cash flow career started.

Despite the above comments, IMO - there is NO WAY I'd own anything [other than maybe my personal residence] in my name!

I've always been a firm believer in using [multiple] LLC's under a S-Corp to maximize protection and tax benefits.

EVEN if it's a complete waste of the $250 [to pay a professional] to setup the LLC, you only lost $250 plus a few dollars a year to maintain it.

I seriously doubt The Donald has Trump tower in his personal name...

LLCs will not protect your assets like a good insurance policy will.

Joe Gore

To further diversify your risk, you can put groups of properties into separate LLCs. This is a bit of extra paperwork and cost, but creates firewalls between properties so in the case of a lawsuit, the plaintiff can only go after what is in one LLC bucket. You can set a max amount of property value per LLC to insulate yourself. Obviously this only works if you have a lot of separate properties.

@John Blackman,

You are correct but when you sue the owner of the LLC and the LLC, the lawyer will go after everything the owner has, and I know gurus say put a crack head Susan on the LLC to distance yourself, but that trick will not work. Get a good insurance policy.

Joe Gore

So in your opinion is there no utility in bucketing your properties?

And let me be clear, I did not mean to suggest doing this in lieu of an insurance policy.

@Cory Elder @John Blackman my lawyer recommend an LLC, good insurance AND equity stripping (set up a lender LLC to hold interest only mortgages on the property so the properties are technically over leveraged).

Of course you should have good insurance. But to say "not to use an LLC and it provides no protection" I think is irresponsible advice.

An LLC is not perfect protection, however to act as if it offers no protection is just not true.

To protect your assets in order of importance

1) Follow the law and do what is right

2) Be respectful of everyone and when something goes wrong fix it immediately

3) Have good insurance

4) have an LLC

The first three are a must. The 4th is an option. An LLC is not your first line of protection, it is the absolute last. It is no substitute for insurance, insurance comes before an LLC. In fact an LLC without insurance probably won't help at all. (it can be pierced because it is not capitalized properly)

A land trust in most states is not considered a separate entity and offers no asset protection despite what many Gurus say.

Thank you all for your input and guidance. It's really helpful. Great content. Definitely appreciate it.

Sometimes it can be easier to qualify for conventional financing if you buy your property in your name. Perhaps you could just quit-claim it over to your LLC after closing?

You can do that but Skyler Smith forgot to tell you the lender could call the note due.

Joe Gore

I've got 6 SFRs in my name acquired this year with cash. Just cash out financed 3 of them. Was planning on quit-claiming them into LLCs. What are the chances the bank calls the loan?

Anyone have any experience there? Would I have an opportunity to quit-claim them back? Would waiting some period of time make that safer?

The chances are slim but do you have the funds to cash out the lender if they do call the loan due.

Joe Gore

@Richelle T.  Can you elaborate a bit more on the equity stripping concept? I've never heard of that before. I did a quick google search on it. Let me see if I understand this correctly with a simple example: 

I have a single member LLC ("ME, LLC") which purchases a property for $100. ME, LLC gets a loan from the bank for $80. Instead of putting $20 down on the property from ME, LLC to pay for it completely, I create another single member LLC ("CORY, LLC") which I also own 100% of and loan the $20 to ME, LLC so that the property is now owned by ME, LLC but 100% financed ( 80% by the bank and 20% by CORY, LLC). Thus, making it less attractive since the equity interest in the property is reduced.

Is this accurate? Sorry for the oversimplified example, but it's easier for me to process in simple terms.

If this is accurate. what if the tenant places my personal name on the lawsuit? I own both LLCs in this case so that would put my equity interest right back where it would have been without this scenario so how does that add protection? Does it just make things more complex so maybe the other party won't discover it?

@Cory Elder,

I had to laugh at your post if you tried that in real life trying to hide something by saying it is only worth this amount but running it through a dozen LLCs make it look like your property is worth less than it is a good lawyer will spot that and start chipping away until the house of cards falls, and then you did all that for nothing. Get a good insurance policy and forget about all the Guru talk on LLCs.

Joe Gore

@Cory Elder  

I don't know how this would work in tandem with bank financing. I'm talking about you solely being the lender. As in you buy a property with cash but instead of investing directly in the property holding entity, you invest in a lending entity. The lending entity then lends the money to the holding entity and a mortgage is recorded. The lending entity holds an interest only mortgage over your desired term so the lien isn't paid down over that term, ie maintaining the equity stripping. Now, yes you would own both entities but there is no reason for someone to think that you are your own financier. As far as the litigator is concerned, the property is overly leveraged.

I'm not a lawyer and I haven't tried this so I may not know the answer to any questions you may have about the nuances of how it works.  

@Richelle Thomas,

Lawyers would see right through that when they start their due diligence.

Joe Gore

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