Help please! Setting up the business/LLC and bank accounts

14 Replies

Dear BP, Firstly, I would like to share that I am doing my best to learn and don't want to give the impression, as sometimes is the case, that I have not tried to find the answers. I have my HELOC approved. I have the following ‘goals’ or ‘things to do’ before I buy my next property. 1) Need a name for the business (Will be BRRRRing properties) 2) File LLC with state. 3) Get EIN. 4) Write my own ‘Operating Agreement’ 5) Open a business bank account. 6) Buy property. My questions are as follows: a) I am getting overwhelmed with the concept of a holding company and multiple LLC’s to protect me etc. Does anyone have a simple model for their R.E business? b) Should I use an attorney? I know this depends on my comfort level on the matter – I feel like this process is possible but don't want to be naïve. c) With funds in my HELOC, can I simply write a check from my HELOC to my business account for purchasing property through the LLC? I feel like I am getting closer and closer to the deal and believe firmly in the quote from Abraham Lincoln: “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” I appreciate your help and guidance sharpening my axe!

@Jonny Morris

You should wait until you actual identify deals.

Not every situation would benefit from an LLC.

1-4 family properties normally use residential loans (FHA, Conventional), which you can't use with an LLC. You'll only be limited to cash,hard or private money, or commercial loans.

@Jonny Morris

I was in your same position at first. Trying to set up multiple entities before I even had my deal flow/ marketing goals established. Long story short, my business partner and I set up one LLC to buy and hold all properties. We were getting ahead of ourselves by thinking you need one LLC to purchase, rehab, rent, collect rents, property manage and another LLC to hold assets. Our LLC was set up and established a few weeks ago and we have just begun our marketing campaign. Find a portfolio lender in your area, we found one and the rates were OK- 5/5 ARM or 10 year fixed at 5.5%.

I think one LLC is fine until you get up and running, then it may be a good idea to set up a separate LLC to then hold all properties in a different LLC and do the managing in the second. Creating multiple LLC's is easier in a state that allows series LLC's which mine does not, not sure about yours.

I would definitely use an attorney and do it right. If you're thinking about real estate as a lifelong financial investment, than $500 to set up an operating agreement is a must.

@Ken Nyczaj

Morning Ken - appreciate you taking the time to break down your perspective. 

I was hoping to use my cash for down payment/rehab and use a conventional loan. Realizing this will not be possible if I buy through the LLC...

I have seen/heard a situation where people buy in their personal name, conventional loan...and then sell it to their LLC for $1. Is this a strategy?

I haven’t really explored a portfolio lender and am anxious of the unknown at this point. It isn’t a strategy I had considered. 

Finally, looking at some properties there is potential for me to buy with cash - but that would absorb majority of my funds. I don’t want all my cash tied up in one deal. 

Always looking to learn from you masters. Does anyone have any further perspective?

be careful with the transfer to an llc.  The loan documents may have a clause that the loan is due on demand if the property is transferred to a different entity.   

@Tom Bertz .

Thank you for clarifying. That is definitely something I want to avoid. 

Just to clarify: 

a) buy through an LLC I need all cash or portfolio lender?

b) buy in personal name, with conventional lender, not able to protect assets as with LLC?

Does anyone have advice for scenario b) in order to protect myself and assets? 

@Jonny Morris there are lenders out there that will allow the transfer of title from personal name to LLC upon closing. They will approve you for the loan in your personal name and then allow the transfer when you close.

I simply asked for lenders approval on this and let them know that I would still personally guarantee the loan and that I was doing this strictly for asset protection and they were fine with that.

Even if you can’t get approval for it through your lender, I have never heard of a lender actually calling the loan due. It is extremely rare, especially as interest rates are still so low. I guess it all depends whether you are willing to take he chance - a lot of investors do.

@Joshua Davies

More fantastic perspective! Thank you sir. I chatted with a lender a few weeks ago and will run this by him! 

Appreciate the time 

@Jonny Morris no worries, pm me if you need more info or discuss any part of REI.. I was in your situation recently. Cheers!

@Joshua Davies

Very kind offer! Thank you again. 

I’ll ask a few questions of the lender I have connected with but would appreciate the offer to run a few questions by you. 

Unless you already have multiple assets you want to protect, with a lot of equity or a business/profession (e.g. doctor) you need to separate from your real estate activities, you shouldn't concern yourself with an LLC - it will slow you down and eat your cash flow and other resources.

Concentrate on getting your deals done, get some assets, build some equity first, then come back and look into asset protection strategies. And that once you covered your other means of protection - like proper insurance and proper property management.

By then you'll have a better understanding on what an LLC involves, what it gives you and how it works in conjunction with all the rest (financing, insurance, protection, management).

If you decide you proceed with LLC, you should look into Series-LLC - I think Montana supports them. I can send you my notes on the whole asset protection question and all the rabbit holes it opens (due on sale clause, structures, insurance, trusts, etc) - pm me if you want.

@Costin

I would be interested in reading your notes on this matter - thank you very much for the offer.

I just came back to share I spoke with a lender who sees no issues with buying in personal name and actioning a “quit claim deed” to the LLC.

I go back and forth and wonder with the “umbrella insurance” would this likely cover me in the event of a law suit?

My main concern is something happening and my dream of investment being taken through a law suit...

Beware: transferring with a quit claim deed will not transfer/carry your title insurance. Check with your title insurance before doing a quit claim deed.

Transferring mortgaged property from personal name to LLC will trigger your DOS clause. While rare to be acted upon, especially on a performing note, it's nevertheless a possibility - and in a climate of raising interest rates (when the bank might think they can lend that money for higher profit) that probability increases. Will you be in a position to refinance or pay down on a moment notice? Although there are other ways you can deal with this - you can transfer back to yourself if the bank hits you with a notice, and back, and play that game with them. Or use land trusts.

Umbrella insurance will kick in once the regular policy coverage is exhausted. But both will not cover you in all cases.

I'll send you my doc - it touches upon on many of these questions.

Also. One thing that is never spoken about much on this forum.

You are absolutely commingling personal and LLC assets by transferring for $1. It would need to be a fair market value (arms length transaction).

And you’re commingling by funding the house with a personal loan.

So why bother with the LLC? I mean if any attorney straight out of law school will be able to pierce the veil, why set up an LLC? Unless you just like to pay the state and your cpa extra fees, just send them a gift. Otherwise just buy an umbrella insurance policy.

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