Is an LLC really the BEST option for flipping houses?
Hello everyone,
I am just starting out in the world of real estate investing and I wanted to choose a strategy that both created long-term value for the communities around me and provided for my family. I believe that Flipping/rehabbing homes will be this avenue but I am not sure that buying homes in an LLC is the best option. From what I have learned so far, a lot of people use an LLC but is this really the best option when I don't plan to own the properties for very long?
Thank you for any advice given!
Well, what is your concern?
LLC's don't provide any tax/accounting advantage unless you are investing with a non-spousal partner. some, but not all, hard money lenders will require that you use a LLC.
The main reason is the limited liablity protection. If its cost effective for you, many investors just have one flip per one LLC so they truly get isolate and discard the liability. Some will start a new LLC over few years.
If not a LLC, what are you thinking? Sure you could use your personal name...
Some of my main concerns are the lending and financing options. With an LLC per flip, wouldn't that generally make it much harder to do traditional loans? I would only be able to do hard money or private money. Going down that path I feel would limit me for a year or so until I build my network out enough.
Some other options that I have thought of are an S/C corp or a sole proprietorship. I do have a few partners that are starting out as well though so I am not sure the third option there would really be beneficial in the mid-term.
Use a S or C Corp to hold real property is generally not recommended. the "corp-like" aspects makes it extremely tax inefficient.
Well, if you use a legal entity like a LLC, you will NOT be eligible for a conforming residential loan. Also, I don't you occupying your flip so that knocks all but one conforming loan, the "investment" conventional loan, if you were to take Title personally. With a LLC, you could still get "commercial" loans (basicallly any sort of non-residential loans). You just need to find a commercial lender and stop talking to residential lenders.
Not sure which is your "third option," but if you have non-spousal investment partners, then you'd form a partnership or a LLC (which would be taxed at the Federal level like a partnership).
Does that make more sense now?
I believe so yes. Just to confirm, with an LLC, even though I am buying a residential property to flip, I would still go through a commercial lender to title the property under the LLC and I would still be selling it as a residential property?
The main benefit being, that because it is an LLC I can just dissolve the LLC after closing to eliminate liability later on. But there aren't really any tax or other financial benefits to using the LLC, just the liability coverage.
Correct. You can use a "commercial" loan to purchase a residential property with a company/entity. It doesn't change the fact that its a residential property.
Correct. Unless you are investing with a non-spousal partner, the LLC provides no additional tax/accounting benefit. The extra cost and hassle provides an extra layer of liability protection.
Thank you for the clarification! When you say "investing with a non-spousal partner" would that qualify as an investor from a firm or literally a second party that is involved in the LLC with me?
I think you maybe overthinking this... basically when a sole proprietorship won't do...
Probably right, I think I am overthinking. Thank you for the help David!