What asset value justifies investing in an LLC vs Personal?

Question

Long time lurker, new pro member just about ready to make the leap.

I'm wondering if/when I should invest through an LLC

I keep reading 'When you're just starting out and don't have assets to protect...'

Where would you draw the line and say 'ok I have assets to protect let me invest using an LLC instead of buying in my own name?'

I don't want to think small, I want to dive in with the mentality of a 'big investor' and start out with my I's dotted and T's crossed.

No I'm not using this to slow me down, I'm going to pull the trigger very soon

Thanks in advance for your advice

James Miller · Answer

In TX (where I practice), I advise that the first property goes into an LLC. However, many people have the theory of getting as much of the favorable lending as possible before beginning to take out commercial loans with an LLC. The asset protection side of me cringes at that; but, many people still do it.

The main drawback to the LLC at the beginning is that the interest rates will be higher, and the loan amortizations will be shorter, meaning higher payments and less cash flow. But, I think that it's a small price to pay to sleep better at night.

Each state is different though, so you should talk to a lawyer in the state where the real estate is located to discuss options.

Edward B. · Answer

@Leah Fisch

A properly set up and run LLC offers good protection both inside out and outside in. That is, it protects your personal assets from those in the LLC and can protect the assets in the LLC from your personal liabilities. The latter is somewhat state dependent. Just because you are starting out in RE does not mean that you do not have assets to protect (savings, equity in your home, nice cars, whatever).

To set it up right takes an attorney that knows what they are doing. That could be a couple thousand dollars. I would be leery of online sites that do it for a couple hundred because they probably won't include the proper language to truly protect you. After that it is a couple hundred per year for annual fees, up to $800+ in places like CA. I have no idea what it is in NY.

It really is a personal decision and you need to weigh the costs against the benefits. I believe that if you are running a business it should be done in a business entity. I have owned real estate both in and out of LLCs though. Investing in an LLC presents different challenges. You will not have access to the most favorable financing, among other things. There can be many benefits to owning an LLC though, such as access to business credit, asset protection, a sense of professionalism from those you deal with, etc. A seasoned LLC also has more access to those things. For example, some banks and lending institutions want to see that you have been in business for 2 plus years. So if you plan to be in business for the long run, sooner is better than later.

I know that doesn't really answer your question but no one will be able to do that without knowing more about your specific situation. Even then I would recommending consulting professionals (CPAs, Attorneys, Financial Planners). Don't assume that they are the end all be all though. They are people too and have their own biases. BP is a good place to get specific questions answered and numerous differing opinions on a given situation so that you can decide what is best for you.

Leah Fisch · Answer

So if I plan to purchase all cash then do this under an LLC?

James DeRoest · Answer

When you buy your first property that is free and clear.

A few years ago, our realty lawyer jokingly asked how many mortgages we had. We were just wrapping up our Xth property and the old owner was providing the financing. We replied "This is the first".

The meeting took a whole different tone after that.

What asset value justifies investing in an LLC vs Personal?

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