Purchasing investment property in your own name vs starting LLC
Investor · Schaumburg, IL · Member since 2020 · 3 posts · 2 votes
I am 25 and would like to start investing in real estate and building a portfolio. What are the pros and cons to buying property in my name vs starting and LLC and creating my own real estate investment business?
From my experience there could be two reasons why you would consider using LLC or not:
Risk/liability
Tax
Over the years I have noticed many attorneys who want to sell their services and products put fear into investors, especially beginners, about investing only through LLC.
From a tax perspective, I would suggest exploring this conversation with a tax expert.
Former risk/liability perspective here's how I would approach this question:
Let's say you invest inner lower and property with a higher risk of issues, say the cost of the property is $50,000 and you anticipate high potential risk class you're buying the property for cash.
For me, such a scenario that has higher risk I speak to it and no mortgage is a classical case to consider using LLC. I would see the loc as another layer of protection in My overall protection skin such as insurance and maybe even umbrella insurance.
Now let's take another somewhere you. Let's say you're buying a nice middle-class rental for 200,000 and rent it out. And in this case, you actually want to use a mortgage. In order to obtain the amazing mortgages we have here with the Amazing Race, I should say super-low rates, the bank he's not willing to lend to an entity only to an individual.
Now, is there a work-around for such case? The simple answer is yes, you could quitclaim the property from yourself 250. The more complicated answer is if you do quitclaim the property you will be in breach of the mortgage agreement in the bank May exercise the due on sale clause.
The third scenario would be to buy commercial property using commercial lending any such instance buying and financing for an entity is quite common practice.
So, coming back to the beginning of this answer it's all about the type of investment you're looking to do and the risk involved in doing so.
I do want to share my two cents on the matter. Please allow me to say that I've been investing primarily in rental properties for the past almost 20 years. Any my career I've been involved in more than 4,500 transactions buying rental properties in more than 50 US metros. What it sounds like I'm trying to show off, I'm only trying to bring some credibility to my writings.
For the past 10 plus years every time I speak about real estate investing I get asked about llc's. Every single time. And before I answer no matter which room I mean I'm always trying to find out who has a story to share about how the LLC saved his investment or not having one hurt him. I have probably asked this question more than 200 times on 200 different occasions.
Today's date I only have one story but someone told me about their experience, it to keep it short duck couple were sued by a person who cross their front lawn, off the rental property, and broke his leg. The person sue them for $50,000 and their insurance scheduled on $25,000.
The reason I'm telling you this story is to show you that such stories are rear. I'm sure there are stories out there but the fact that I am unable to find such stories, and I'm really really searching for one, tells me there is more motive by attorneys tell us fear stories than the reality actually is. Once again I'm sure there are more stories out there.
Full disclosure I am not an attorney and I hope you will use it's not common sense at least approach legal advice on the matter to make the best decision to your specific situation.
Good luck and Happy Thanksgiving
An LLC costs money to set up, and can lead to ongoing costs such as yearly filing fees, or increased tax prep fees. It can be very challenging to get loans on properties inside an LLC making financing difficult that would otherwise have been a non-issue. Many people end up co-mingling their financing such that if the LLC was ever sued the plaintiff could easily pierce the corporate veil and come after your personal assets which completely negates the reason to ever have an LLC in the first place.
99 out of 100 times, a good umbrella policy is a much better and cheaper option to protect your assets.
From my experience there could be two reasons why you would consider using LLC or not:
Risk/liability
Tax
Over the years I have noticed many attorneys who want to sell their services and products put fear into investors, especially beginners, about investing only through LLC.
From a tax perspective, I would suggest exploring this conversation with a tax expert.
Former risk/liability perspective here's how I would approach this question:
Let's say you invest inner lower and property with a higher risk of issues, say the cost of the property is $50,000 and you anticipate high potential risk class you're buying the property for cash.
For me, such a scenario that has higher risk I speak to it and no mortgage is a classical case to consider using LLC. I would see the loc as another layer of protection in My overall protection skin such as insurance and maybe even umbrella insurance.
Now let's take another somewhere you. Let's say you're buying a nice middle-class rental for 200,000 and rent it out. And in this case, you actually want to use a mortgage. In order to obtain the amazing mortgages we have here with the Amazing Race, I should say super-low rates, the bank he's not willing to lend to an entity only to an individual.
Now, is there a work-around for such case? The simple answer is yes, you could quitclaim the property from yourself 250. The more complicated answer is if you do quitclaim the property you will be in breach of the mortgage agreement in the bank May exercise the due on sale clause.
The third scenario would be to buy commercial property using commercial lending any such instance buying and financing for an entity is quite common practice.
So, coming back to the beginning of this answer it's all about the type of investment you're looking to do and the risk involved in doing so.
I do want to share my two cents on the matter. Please allow me to say that I've been investing primarily in rental properties for the past almost 20 years. Any my career I've been involved in more than 4,500 transactions buying rental properties in more than 50 US metros. What it sounds like I'm trying to show off, I'm only trying to bring some credibility to my writings.
For the past 10 plus years every time I speak about real estate investing I get asked about llc's. Every single time. And before I answer no matter which room I mean I'm always trying to find out who has a story to share about how the LLC saved his investment or not having one hurt him. I have probably asked this question more than 200 times on 200 different occasions.
Today's date I only have one story but someone told me about their experience, it to keep it short duck couple were sued by a person who cross their front lawn, off the rental property, and broke his leg. The person sue them for $50,000 and their insurance scheduled on $25,000.
The reason I'm telling you this story is to show you that such stories are rear. I'm sure there are stories out there but the fact that I am unable to find such stories, and I'm really really searching for one, tells me there is more motive by attorneys tell us fear stories than the reality actually is. Once again I'm sure there are more stories out there.
Full disclosure I am not an attorney and I hope you will use it's not common sense at least approach legal advice on the matter to make the best decision to your specific situation.
Good luck and Happy Thanksgiving
@Ben Zimmerman thank you!
These two previous threads might be useful for you:
https://www.biggerpockets.com/...
https://www.biggerpockets.com/...
https://www.biggerpockets.com/...
https://www.biggerpockets.com/...
Realize that unless you are investing with a non-spousal partner, there are no tax benefits to using a legal entity such as a LLC.
While nothing is foolproof, the LLC provides an extra layer of liability protection. However, it requires you to operate as a business with more expensive commercial loans and keeping everything separate from yourself to maintain your corporate veil.
Its really more a personal choice, and something to discuss with a qualified professional or two. Note: this assumes you are investing in residential properties (1-4 family). Commercial properties (including anything with over 4 residential units) generally carry greater risk/liability so a LLC is generally recommended.
Good luck.