Is it a good idea to get an LLC when getting started?

Question

Hey ,

So i am brand new to the world of real estate and recently bought my first two family. I was just wondering if it would be a good idea to get an LLC before i started to get more investment properties?

Thank you!

Erik W. · Answer

@Michael C., hi and welcome to BP!

It depends on why you want an LLC.  Some people like it for asset protection.  Some for anonymity.  Some like both.

The asset protection aspect of it can be dubious.  There are rules to follow for how you run the "company", and there are certain factors that might result in a judge piercing the corporate veil in a lawsuit.  For example, if you were wantonly negligent in repairing a known problem at the property and someone was injured or killed, the law isn't going to allow you to hide behind a legal instrument, especially if you are the sole member and actively involved in day to day operations.  Keep in mind that LLCs were originally devised for groups of investors to pool funds for a business venture and then hire out the day to day running of the business.  Since there was no way they could be 100% involved all the time, the law made a rule saying that if the company gets sued, the non-involved investors are only liable up the amount of their investment.  Rules have changed since then somewhat, but that was the original purpose.

As for anonymity, any property that you have already purchased that you transfer to an LLC later makes it simple for a lawyer to search a database and find out that you owned it at one time, and then find all the other properties that LLC owned. In short, if you're doing an LLC for anonymity purposes, I advise against transferring any existing property into it.  Just start buying new properties in the name of the LLC.  Even then, a competent attorney should be able to figure out who own/runs the company since often times the LLC's registered agent is kept on file with the Secretary of State's office.

To sum up,while LLCs can be useful, you have to know what you're doing regarding your state's requirements, and depending on what kind of situation you find yourself facing, it may or may not help you in the way you think it does.  Step 1: Define your reason for having one.  Step 2: Hire an attorney who specializes in that area to answer your question of whether or not it will achieve your goal.

If you're going to do this right, spending $200 for an hour of professional advice is worth 100 free posts on an open forum.

Darius Ogloza · Answer

I often wonder who is peddling this solution to new investors.

Why would you want to spend a lot of money on consulting lawyers and forming LLC's when you could use those funds to actually invest in real estate?

Unless you have a good reason for using an LLC, you are simply spending money on a novelty that in the end makes it harder for you to borrow money.  Make sure you obtain the proper insurance policies - landlord + personal umbrella - and in 99 out of 100 cases you will be set without additional annual fees and tax filing headaches.

Joe S. · Answer

It’s pretty common for people to do a few deals in their own name before they get an LLC.

Luke Klaiber · Answer

@Michael C. Like most have said above, it tends to be a matter of preference when you’re dealing with a small number of residential properties. There are some asset protection benefits if you're sued, but as others have said, you’ll need to make sure you treat the LLC as a business separate from yourself or risk a judge deciding the protections don’t apply (“piecing the veil” that someone mentioned earlier). Others skip the LLC and opt for a good umbrella policy in addition to homeowners insurance. It’s really whatever helps you sleep easiest at night.

From an income tax standpoint, there’s not really any difference if you’re the only owner. Assuming this is the case, you’d report the income on your personal tax return. By default, a single member LLC is treated as a disregarded entity for tax purposes so there’s not a separate income tax return.

As to LLC costs, assuming you’re buying in Ohio and would use an Ohio LLC, the costs are minimal – about $100 to file with the Sec. of State to set it up, but no ongoing annual costs (at least currently).

Disclaimer: Although I am an attorney, I am not your attorney. This post does not create an attorney-client relationship. This post does not constitute legal advice. You are encouraged to seek legal advice specific to your situation regarding the subject matter of this post.

Jacob Lapp · Answer

@Michael C.

I’m a newbie as well just did my second deal.

I had the same question. You will get a lot of different opinions here.

I think it has more to do with your mindset, how you treat your properties and the type of tenants you are getting.

You are required to get Homeowners insurance and after talking to other vetted investors all lawsuits they had (so far) were covered under there homeowners insurance.

However, there is always the “what if” what if something really terrible happens and they come after everything I have?

Being as I am new you can take this with a grain of salt but personally I don’t have an LLC yet but once I am more established I plan on getting them for each property or partnership.

Drew Leo · Answer

@Michael C.

LLC is a business you will be setting up to run and operate as a business. There are to be members , and accounts in the business, and licenses to operate. In some states it costs $800 annually for the business ID . In the beginning of investing it will be nearly impossible for the LLC to buy property, approved for a loan because no banks would loan to a no history business . It’s the same as loaning money to a 1-old baby: no credit, no job, no income, no history. When one personally owns a property with mortgage and desires to transfer ownership to the LLC , it could face the same scrutiny: mortgage company would not allow the transfer to a no history, no income owner....like a 1-year old baby.

Michael Watson · Answer

@Darius Ogloza accountants. Haha.

I think there's a legitimate fear associated with being sued and losing personal property that new investors don't realize sole proprietorships may not insulate them from.

Also, there is a lack of newbies, that I have come across at least, creating content. Instead it's the people with investment companies who are in a position to need and benefit from the insulation. This may add to the confusion.

Owner anonymity is the worst reason IMO.

Have you ever been in a situation where you wished you had an LLC?

Steve Vaughan · Answer

I have a commercial property = LLC policy.  Especially if using a mortgage.

For residential property, (houses up to 4 units) I hold in my name and carry an umbrella insurance policy.  Act above board and don't gouge security deposits.

Basit Siddiqi · Answer

@Michael C.You should get an LLC if you know the benefits that they provide and you feel like you need those benefits.There are costs associated with organizing an LLC - If the benefits of the LLC out weight the costs of the LLC, get it.If the costs do not out weight the benefits, don't get it.

Drew Leo · Answer

My brother is getting his 2nd apartment and I am a silent investor.  Based on our conversations with attorneys and other investors, the LLC would be more paperwork, moving things around, add the expense of $800 (California) per year when the the cost to gain a much larger umbrella coverage for $200 a year.  This would essentially double our coverage of $1.5 mill to $3mill.  We maintain a side business license and even though it would have cost us zero to use that small business to hold the new 2nd apartment, there would have been a more education on using it to hold property.  He is buying the apartment in cash and in 2 years he will bring in mortgage and liquidate 50% to all the investors with interest.  If bringing in a mortgage...that lender most likely will not discriminate to human owners over an LLC.  If we have the apartment in the LLC's title, the interest rate will likely be higher so he is preparing for the next step: look presentable now.  It may work for us to keep things simple legally and administratively.

Is it a good idea to get an LLC when getting started?

Most Popular Reply