Bay City, MI · Member since 2012 · 10 posts · 2 votes
Hi everyone,
I am a new investor in the Tri City area in Michigan. (Bay City, Saginaw, Midland). I am looking into multiple different multi and single family homes to start applying the Brrrr strategy to.
I am wondering, should I start an LLC in order to begin buying property? I have some concerns of "worst case scenarios" imagining a tenant sueing me for something rather than a business that can be liquidated quickly and closed if it went that badly. Newbie worries I assume. Anyway, what are everyone's opinions? Pros and Cons to each? Thanks in advance.
Investor · Boyd, TX · Member since 2014 · 688 posts · 467 votes
8y
I'm sure you will get all the pros from others which is basically just litigation protection.
Cons include expense of creating the LLC, extra CPA fees at tax time, difficulty getting a loan on a property in a new LLC which can really impact the BRRR strategy. Most of all though it is an excuse not to get started.
Investor · Saginaw, MI · Member since 2015 · 13 posts · 2 votes
8y
Hello Mark. That is not a newbie worry at all, that's good business. An LLC protects you and your other assets from just the scenario you brought up. Better safe than sorry is always the way to go. Some investors keep each property under separate LLCs.
Investor · Boyd, TX · Member since 2014 · 688 posts · 467 votes
8y
I'm sure you will get all the pros from others which is basically just litigation protection.
Cons include expense of creating the LLC, extra CPA fees at tax time, difficulty getting a loan on a property in a new LLC which can really impact the BRRR strategy. Most of all though it is an excuse not to get started.
Bay City, MI · Member since 2012 · 10 posts · 2 votes
8y
Very good point. My risk is probably relatively low with only 1-4 tenant which are the properties I'm looking at to start. There are definitely fear related items slowing me down. This is one.
Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes
8y
One of the benefits of an LLC that people often bring up is that there is liability protection if you get sued by your tenant, etc. If this is your only concern, this can generally be accomplished through a good insurance policy.
However, an asset protection talk I attended last year (that was focused on California law, so you will need to check to see how this applies in Michigan) pointed out that if you are sued personally (say you are in a car accident) having property in an LLC can protect it from being seized as damages.
From a federal tax perspective, there are no real differences between having rental property in an LLC or owning it individually.
@Paul Ewing is correct that there are definitely more costs associated with having an LLC.
I would talk to a Michigan CPA and/or attorney to talk about what is right for your situation. There is general advice than can be given to you, but without knowing your personal situation we cannot tailor the advice to you.
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
8y
@Mark Bushong A tenant can not only sue the LLC, but their attorney would most likely name the owner of the LLC (YOU), the property manager, the city, and anyone else they think will give them money as settlement. The hard part for them is to actually prove that you or the LLC is at fault. If they win the suit, they will come after all parties named in the suit. So to answer your question, no you don't need a LLC to start. There are other ways to protect yourself from litigation as well. The fact is that if you only own one property and your net worth is zero, nobody is going to sue you anyway.
Investor · Columbus, OH · Member since 2015 · 625 posts · 601 votes
8y
Everyones situation is different but most people dont need to worry about an LLC for their first investment property. Talk to your insurance agent and get an umbrella liability policy. That should provide all the protection you need from a tennant sueing you type situation to one where you drive your car into a doctors car, or other high earning professional, and he sues you for a year lost wages since they got injured and cant work. Ive talked to lawyers, cpas and insurance guys here in Columbus and that is what I'm hearing as far as what protection I should be looking at as i purchase my first several rentals. Hope this was helpful.
Bay City, MI · Member since 2012 · 10 posts · 2 votes
8y
Great advice everyone. Thank you all for your input. I think I know my next steps. I'm going to speak with a CPA about my personal scenario to see what protections I should be worried about, and if a LLC is right for me. As well as make sure I have a umbrella liability policy. Thank you all again!
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
8y
Here's an article I wrote that explained what I learned about it all as I was researching it for myself back in the day, but well beyond that, there are a million comments with additional information.
Bay City, MI · Member since 2012 · 10 posts · 2 votes
8y
Wow. Thank you Ali! That clears up my concerns. I truly did not know about the due-on-sale trigger. That's a valuable piece of info. I'm moving forward with my investing without an LLC for now and will revisit in the future if I think I need to. Similarly to how you described your properties in the article. Thank you again to everyone who posted advice. This network is truly amazing.
Contractor · San Jose, CA · Member since 2018 · 262 posts · 407 votes
8y
I would definitely set up an LLC for each rental property you own.
I am having my LLC created in Nevada as a holding LLC and I will be opening an LLC in Midland Michigan where one of my rentals is and have the Nevada LLC own it.
if structured properly you can have protection both on the outside and inside.
Happy Investing
Investor · Detroit, MI · Member since 2014 · 360 posts · 354 votes
8y
The LLC will give you anonymity you will most likely be a pass-thru anyway for tax purposes.
In the case of litigation any lawyer worth a dime will be able to break down the barrier of your LLC and you personally. It simply makes it harder. You have to really make sure nothing is in your name. You switch the utilities from tenant to property owner it switched to the LLC. Correspondence with the Govt entities same thing. I had a really good buddy who was still jammed up via lawsuit because though he maintained separate finances the courts viewed him and his brother and the LLC as one in the same because everything in the business was signed by himself or his brother.
The best thing with an LLC is the TIN you receive and after 2-3 years of operation your business can hold debt versus yourself or giving personal guarantees.