No LLC- First Investment

10 Replies

Hi BP Members! I'm on the way to getting my first MFR (fingers crossed) and am currently starting attorney review. I was wondering how can I start running things like a business without an LLC? I understand that according to all mortgage documents, you are not allowed to switch title to an LLC. People have done the LLC thing but technically its not allowed. As my primary residence, I was told an LLC may be overkill too and that I should consider just getting a big umbrella insurance policy vs an LLC.
I plan to get more properties in future and was wondering I don't get an LLC, can I run anything separately in my first MFR like an actual business? Can I still get business bank accounts, have expenses go towards my business, etc.?

The seller also owns the property under an LLC? Can I acquire the LLC? Would the lender probably not allow that either?

Yes, you can purchase a property that is owned by a LLC. That shouldn't be a problem.

The advice you were given on getting an umbrella policy is good and you should definitely follow that advice. You might need to get your policy with the same company that you currently have your auto/home insurance through. 

I do recommend that you open bank check and savings accounts that will be used only for your real estate business (even though you're not an entity). You would need to ask the bank on if it'd still be a business account or, since the properties will be in your name anyway, perhaps just opening more checking/savings accounts in your name will likely be fine. Just don't use them for anything but your REI.

You will still be keeping track of expenses for tax time. Categorize as best as you can. Examples of categories:

  • *Mortgage interest paid per year (this is usually on your last mortgage statement of the year)
  • *Repairs
  • *Insurance
  • *Legal fees 
  • *Taxes
  • *Credit card interest (I believe this can be for business in general and not require a formed entity, but double check)
  • *Advertising
  • *Misc.
  • *Utilities
  • *Improvements
  • *Donations

Once you have multiple properties, be sure to use the above categories of expenses for each property. Your tax guy will want to know expenses broken down by the property. And then by categories such as above. That list is probably not full, but what I remember off the top of my head.

Are you going to use your current primary residence somehow for business purpose as in rent part of it out? Or move out and rent it? 

I think a LLC is overkill when people create a new LLC for every property they get. I would be more of the route (if I was strongly pro-LLC) to have a LLC for each state I operate in. So if I have 3 properties in MD and 2 properties in FL, I would have 2 LLCs... one for MD and one for FL.

Nothing wrong with having them in your name either though.

I might recommend, though, that you get a UPS box or a Street Address box from the post office (different format that PO Box, which lets you use the address better). If you rent out properties, you'd probably rather give tenants this address than your personal home address. If you have this, you could also possibly use it as your contact address that will be put on public real property records. Gives you a little more privacy.

Hope this helps start you off!

@Sheila Reyes The purpose of an LLC is to provide liability protection, which can also be obtained through insurance. Your real estate activity should be ran as a "business" whether it is registered under an LLC or not. At the same time, for tax purposes you will be able to deduct the same exact expenses with an LLC or without one.

You can get a business bank account, but it will be under your name. Remember to never commingle your personal finances with your business activity.

Best of luck and let me know if you have any other questions,


Nicole W. Thank you! I am purchasing this 2-family home as my primary residence renting out 1 unit and plan to move out after a year or two and rent out the other unit.

House hacking! I love it. I wish I had thought of that years ago. From my understanding, there is a "due on sale" clause for most mortgages, but lenders don't often enforce it. Meaning if you own the property as a primary residence and you file a quit claim deed and transfer to a new entity the bank can call the note. Which would require a new loan and more closing costs. I could be wrong, I'm not an attorney or a CPA but I think that's how it works... 

Yes, what Matt says is also what I understand. However, according to my own estate-planning attorney, lenders cannot--in most states--activate any due on sale clause if transferring the property into a Trust.

You would not want to acquire someone else's LLC. Who knows what liabilities, debts etc they have caused under it.

Yes, I second what Steven said and missed that specific question.

If a LLC owns a property, you can buy the property just like you'd buy a property owned by a person. You would not (nor want to) acquire the LLC itself.

@Sheila Reyes , there are actually some potential benefits in not buying real estate from an LLC although you can. In may cases you can simply buy the membership interests of the LLC rather than the real estate. When you do that you avoid all real estate closing costs of title etc. But still end up owning the real estate and getting a free LLC in the process.

Lending of course is the issue. However if you buy in cash or if you buy using a lender that is LLC friendly acquiring the membership interests with a loan secured by the asset of the LLC is relatively easy.

@Nicole W. Thank you for your explanation. I am in the similar situation and was not sure what to do after lenders disclosed that loan will be due on transfer. So i will forgo the LLC for now. However I was wondering, how would you get your tenant the rental m1pr form at the end of the year? My landlord has a LLC and I use the LLC information when filing taxes. Thanks

@Patrick I. I'm not sure, that seems to be a Minnesota-specific thing. Perhaps you just find the form online, TurboTax, from your tax guy and send it?

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