Making The First Move. Thoughts?

Question

I'm thinking of making my first few moves which are forming an LLC, creating a website, printing business cards, and attending REIA meetings. My end goal is to rent and own cash flowing properties out of state, however, since I'm new to the industry I thought it would be a good idea to start off wholesaling (about 1-2 hour driving radius) from where I'm located in New York.

My debt to income (DTI) ratio is currently too high due to my student loans which I'm currently paying off. Hence the reason why I think wholesaling is the way to go for my situation. With wholesaling I could develop skills like marketing, negotiating, problem solving, and estimating rehab cost. I wouldn't have to worry about financing deals because of my DTI. Plus, I would have skin in the game which could help build credibility. Twofold, I could build a capital reserve and pay off my student loan debt, which would lower my DTI significantly. Finally, wholesaling presents itself as a nice exit strategy for deals that turns sour long term in regards to buy & hold investments. This all sounds good on paper, but before I could even think about networking, finding deals, and building a buyers list, I would have to consider startup cost and the cost of doing business.

As a result, would it be a good idea to form an LLC as a new real estate investor/wholesaler? Is starting an LLC necessary to conduct business between sellers and buyers? Would I need to talk to an attorney and CPA to better navigate the issue at hand? I'm trying to be an investor not a small business owner, so is forming an LLC even a good idea starting off? If I had to create an LLC, what would that mean for taxes? If the business didn't generate income the first 6 - 12 months, would the business still be taxed regardless of the income made, or the lack there of?

Cameron Braig · Answer

Hi Nate,

Congrats on getting started and welcome to the forum. As you begin to evaluate out of state markets some good metrics to utilize can be; population growth, income growth, job growth, rent growth and job diversification. When you begin to look out of state hopefully these can help in identifying target markets and submarkets. Best of luck.

Greg Scott · Answer

Regarding taxes, most people form LLCs because they are pass-through entities.  In other words, they have no impact on taxes.

Do you need an LLC to protect your assets?  If your DTI is high enough to prevent you from getting loans, what benefit is there for any attorney to try to go after you?  It's not worth their time.  Now if you were Mick Jagger, that might make more sense.  Wholesaling is basically making a profit from selling a contract.  I don't see a whole lot of liability there unless you are doing things illegally, in which case the LLC isn't going to help you anyway.

Nate Narcisse · Answer

Hi @Cameron Braig,Thanks for the tip! I'm definitely going to use those metrics, as I create a marketplace profile for out-of-state markets.

Nate Narcisse · Answer

As an aspiring wholesaler, I don't have any assets to protect. Therefore, getting an LLC wouldn't make sense. I guess when I cross the bridge of renting and owning LTR properties, having an LLC would be more applicable. Nevertheless, thank you @Greg Scott for the awesome advice!