First time investor - Confused about order of operations

Member since 2022 · 14 posts · 8 votes

Hey all,

Is it standard to have your LLC open prior to purchasing a property? When I make offers, am I making an offer representing my LLC or is that detail irrelevant as I would just put the LLC down on the purchase agreement as the buyer? I feel like I have a lot of pieces to the puzzle down, but I'm missing a few corner pieces to feel confident about investing.

Bonus Question: If I live in state A and want to purchase a property in state B, I would still want an LLC in state A correct? Thank you!

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Todd Rasmussen

Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes

@Tim Miller

Hi Tim, @Trevor Marvin lives in CA where he will pay $854 dollars a year to have an LLC. This will outweigh the cost of transferring to an LLC which he could do via quitclaim for a couple hundred dollars.

On a conventional loan, you can transfer ownership to an LLC you control.

https://servicing-guide.fanniemae.com/THE-SERVICING-GUIDE/Part-D-Providing-Solutions-to-a-Borrower/Subpart-D1-Assisting-the-Borrower-with-Property-Related/Chapter-D1-4-Transfers-of-Ownership/Section-D1-4-1-Information-Relating-to-Transfers-of-Owner/D1-4-1-02-Allowable-Exemptions-Due-to-the-Type-of-Transfer/1039972691/What-is-an-exempt-transfer-of-ownership.htm?touchpoint=guide

In regard to having the property in an LLC. Nothing prevents a lawsuit from being brought against you personally. If you personally are making the management decisions regarding the investment property, or personally guarantee loans of the LLC, all of the assets you think are protected are exposed anyways. Corporate entities do not offer significant protection until you have employees acting on your behalf as agents of the corporate entity and the business can obtain financing without personal guarantees. I had the same assumptions about LLC's as you until we talked with a couple civil litigators in depth about asset protection.

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Sebastian Hernandez
Contractor · Morris County, NJ · Member since 2020 · 186 posts · 91 votes
3y
@Trevor Marvin how are you financing the investment? This is key for an answer
3 Reply
Todd Rasmussen
Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
3y
@Trevor Marvin
You don't need an LLC, concentrate on the deals and buy adequate insurance. You can add an LLC down the road. For now you are just causing yourself an unnecessary administrative headache. Are you using hard money that requires the LLC? That's one of a very few scenarios where it's appropriate for you to have an LLC now.
2 Reply
Joe FunariBusiness Member
Real Estate Agent · Keller, TX · Member since 2017 · 850 posts · 825 votes
3y

@Trevor Marvin I would suggest that you actually inform us in these forums the actual states your referring to versus A & B. The reason for this is that you will actually get legitimate info that will help you with your REI goals. For example, if you had mentioned that state B was actually Texas. I would have told you if you had filed an LLC in any other state that in order to do business in Texas you will need to file a foreign corporation application. But the fee is only $750 and here is the link to the state to do the filling yourself https://www.sos.state.tx.us/co...
But if state A was Texas I would recommend you reach out to Copp Law to help answer your questions regarding setting up a real estate LLC: https://www.copplaw.com/
But if considering mutliple states so be it. You will be amazed at how much actual advise from real investors working in the states your considering. No sense in reinventing the wheel. So share away. Hope this helps in your REI journey.
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Trevor Marvin
OP
Member since 2022 · 14 posts · 8 votes
3y
@Joe Funari Ah I see. I am quite new to this and currently in the process of looking at deals in Tennessee from CA. I hadn't considered the different processes regarding LLCs in different states, so right off the bat this is helpful. @Sebastian Hernandez, to answer, I am located in California and am looking for deals in Tennessee as well as North Carolina, Kentucky, etc. and I would be using a conventional loan. This is my first post so I appreciate the comments about adding more detail in for better replies. @Todd Rasmussen , so I would be able to add the property to a created LLC down the line? I'm basically in the deal searching phase of my journey and was under the impression that an LLC was essential for liability and business tax reasons. Thank you all for the replies and help.
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Joe FunariBusiness Member
Real Estate Agent · Keller, TX · Member since 2017 · 850 posts · 825 votes
3y
Quote from @Trevor Marvin:

@Joe Funari Ah I see. I am quite new to this and currently in the process of looking at deals in Tennessee from CA. I hadn't considered the different processes regarding LLCs in different states, so right off the bat this is helpful. @Sebastian Hernandez, to answer, I am located in California and am looking for deals in Tennessee as well as North Carolina, Kentucky, etc. and I would be using a conventional loan. This is my first post so I appreciate the comments about adding more detail in for better replies. @Todd Rasmussen , so I would be able to add the property to a created LLC down the line? I'm basically in the deal searching phase of my journey and was under the impression that an LLC was essential for liability and business tax reasons. Thank you all for the replies and help.

@Trevor Marvin Glad to help. You can do a quick search for foreign corporation or out of state business search for those states your considering to get the fees. But I agree with @Todd Rasmussen that you don't necessary need to start with an LLC. Just make sure you landlord insurance policy has enough liability coverage. But most policies start at $1M in coverage. You can always add more if your worried about liability. But would consider an LLC once you get enough properties with values totaling more than $1M. Save your money you would spend in LLC set up and registration fees in various states initially to buy more real estate. Especially if your exit strategy is buy & hold.

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Trevor Marvin
OP
Member since 2022 · 14 posts · 8 votes
3y
@Joe Funari Awesome. Thank you, Joe. This was an excellent introduction to the BP forum.
1 Reply
Jason Maguire
Investor · Troy, NY · Member since 2020 · 120 posts · 93 votes
3y
You'll see from a lot of other investors on here that purchasing in an LLC won't completely block you from liability.
I'd recommend buying in your personal name, obtaining landlord insurance & if you were that concerned about liability then you could also add an umbrella policy for extra coverage & protection. This is all the protection you should need. (Not legal advice, just my opinion)
It's a common misconception that an LLC is needed for every property, especially for first time investors only dealing with smaller units (1-4 units). I'd see more of a need for an LLC when you actually have a larger portfolio and need more protection in place.
Lastly, most conventional lenders for 1-4 units won't even let you buy in an LLC. You'd have to buy in your personal name & quit claim the deed into your LLC. Once again, just don't think it's worth all that. Best of luck
1 Reply
Trevor Marvin
OP
Member since 2022 · 14 posts · 8 votes
3y
@Jason Maguire Thanks, Jason! Very helpful. I appreciate it. Feels like I know a lot and then I ask questions, and I remember how much I have to learn.
1 Reply
Todd Rasmussen
Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
3y
@Trevor Marvin
Yes, you can transfer property to LLC later, even with conventional loan. Send me your number, we should talk.
1 Reply
Tim Miller
Rental Property Investor · Laurel, MD · Member since 2016 · 378 posts · 382 votes
3y
@Trevor Marvin You can do whatever you like but you have to weigh the risks and costs. If you buy a property in your name, it's going to cost a few grand to transfer it to an LLC and that's only if the mortgage company will allow it.
Some will say it doesn't manner, just put the property in your name and get extra insurance. Now the risk is, if you get sued. Will the insurance pay? Will you have enough insurance to cover the judgement? Having a property in your name means, all of your personal property is at risk. Not just your rental property.
Creating your LLC now has a lot of benefits and some pain. Nothing worth doing is ever easy. Having an LLC helps to keep your personal property (including your W2 pay) safe from a lawsuit. It also allows you to have the LLC address listed somewhere other than your home address. Now you won't have tenants doing a Google search for you and someone knocking on your door.
As for having the LLC in one state and buying property in another, that is not an issue. All you have to do in most states is to Register your LLC as a foreign business entity.
Just for your info, we setup our LLC about 3 months before we even found our first property. For us, it was 100% the right choice to make. Good Luck
1 Reply
Trevor Marvin
OP
Member since 2022 · 14 posts · 8 votes
3y
@Tim Miller Thanks, Tim. Really helpful insight. I'm actually from Annapolis, MD originally, Good to see some Maryland representation!
0 Reply
Todd Rasmussen
Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
3y
@Tim Miller

Hi Tim, @Trevor Marvin lives in CA where he will pay $854 dollars a year to have an LLC. This will outweigh the cost of transferring to an LLC which he could do via quitclaim for a couple hundred dollars.
On a conventional loan, you can transfer ownership to an LLC you control.
https://servicing-guide.fanniemae.com/THE-SERVICING-GUIDE/Part-D-Providing-Solutions-to-a-Borrower/Subpart-D1-Assisting-the-Borrower-with-Property-Related/Chapter-D1-4-Transfers-of-Ownership/Section-D1-4-1-Information-Relating-to-Transfers-of-Owner/D1-4-1-02-Allowable-Exemptions-Due-to-the-Type-of-Transfer/1039972691/What-is-an-exempt-transfer-of-ownership.htm?touchpoint=guide
In regard to having the property in an LLC. Nothing prevents a lawsuit from being brought against you personally. If you personally are making the management decisions regarding the investment property, or personally guarantee loans of the LLC, all of the assets you think are protected are exposed anyways. Corporate entities do not offer significant protection until you have employees acting on your behalf as agents of the corporate entity and the business can obtain financing without personal guarantees. I had the same assumptions about LLC's as you until we talked with a couple civil litigators in depth about asset protection.
3 Reply
Tom GimerBusiness Member
DMV · Member since 2017 · 3k+ posts · 3k+ votes
3y
@Trevor Marvin You can actually leave your options open by properly preparing the purchase and sale agreement...

Where you identify the Buyer: [Individual name] and/or an LLC to be formed for the purpose of this acquisition
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Paul Garwol
Lender · Nationwide · Member since 2022 · 46 posts · 28 votes
3y
From a lending perspective you can form the LLC at any point of the processes. Most investors that are purchasing properties using DSCR financing will vest in their LLC and sign a PG this way it wont report on their personal credit or bring their personal debt and income into the transaction.
2 Reply
Trevor Marvin
OP
Member since 2022 · 14 posts · 8 votes
3y
@Tom Gimer
Thanks Tom!
0 Reply
Avi Kotler
Toms River, NJ · Member since 2018 · 2 posts · 0 votes
3y
@Joe Funari
In Philly, feeding to/from LLC -> personal name can incur transfer tax.
0 Reply
Napoleon DeCiutiis
Real Estate Agent · The Short Term Shop / Florida Emerald and Forgotten Coasts · Member since 2022 · 217 posts · 126 votes
3y
@Trevor Marvin
The best thing you can do is speak to a Real Estate attorney in the State you are purchasing. They will have the exact legal process you need to follow.
1 Reply
David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
3y
@Trevor Marvin,
You'll want to talk to an attorney familiar with the use of business entities to isolate your personal property from the risks of doing business in Real Estate.
Any deal you do will be subject to the laws of the location where the property is located. Your attorney can explain that as well.
If not, I know of one who can. He's an attorney AND a CPA.
0 Reply
Richard Bechtol
Attorney · Member since 2022 · 83 posts · 79 votes
3y
There is a lot of good information here and a lot to think about. So many people point out that they believe insurance is the way to go. While I think insurance is needed and is a strong part of asset protection people tend to forget that business model for insurance companies is to pay as few claims out as possible. With that said I would not rely on just insurance.
Also, another thing to consider is if you are looking to scale and how quickly you are looking to scale. If you are then an LLC may not be the best choice. Since you are in CA there is a tax that you would have to pay on each LLC you own. If you put all your rentals in one LLC you are not really protecting them or compartmentalizing the assets correctly but if you create a new LLC for each property then you are going to pay $800 each time. Something like a Delaware Statutory Trust might be a better vehicle. In addition you could create a separate LLC to manage the properties.
Another issue, that I have seen commented is using a quitclaim deed to transfer to the LLC. One thing to keep in mind is that in certain situations this can hinder your title insurance and if anything ever came back later on about the title you may not be protected.
Last, there have also been some good points made about the anonymity aspect that can be provided with a business structure setup. This is something you just don't get when you own personally.
1 Reply
Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
You would put your LLC as the buyer. There are no such things as order of operations, learn from your mistakes and don't ever think you're going to do it perfect the first time. You put your name instead of your LLC, what's the worst that can happen?
1 Reply
Nathan Williams
Member since 2019 · 172 posts · 93 votes
3y
its easier to get financing personally and then quick deed to your LLC
and then you must consider what value a LLC is actually bringing to the table... its pretty much main purpose is to limit the liability on your investment so if a worst case situation happens the most someone can sue you for is the value of the properties the LLC owns. And for this to work your LLC needs to be ran on paper properly which is a bunch of overhead time and money wise. You may be better off just making sure you have solid property and umbrella insurance.
0 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
3y
Quote from @Trevor Marvin:

Is it standard to have your LLC open prior to purchasing a property?
If I live in state A and want to purchase a property in state B, I would still want an LLC in state A correct?
The #1 LLC question for me is property type. Residential up to 4 units? No. For $10s of dollars a month, insurance will cover you up to like $500k in liability. Commercial property = yes LLC.
#2 is financing. 30yr fixed mortgages won't be available. You'll be stuck with commercial. Higher rate and shorter term, adj rate risk. Where's the asset protection in that?
#3 which state(s)? Some (like CA) are very expensive.
If scaling to a portfolio, an entity may make sense as a holding/mgt co. Different purpose besides blind fear. In CA I'd probably just have a dba. That $800+ annual fee/tax is BS.
1 Reply
Jared HottleBusiness Member
Real Estate Agent · Cedar falls IA Waterloo, IA · Member since 2020 · 902 posts · 549 votes
3y
I find the LLC question to be a surprising hinderance to people. I think it is great you are thinking through the situations and risks involved but I believe deals are the biggest thing you need to focus your time on followed by contractor/lender/PM relationships. I have helped many people put an offer on a property in their name and create and assign the property to their LLC during closing. Very common. Also common to have people buy in their name and assign later or increase their insurance coverage.
[email protected]319-288-5382
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Micah Thornton
Rental Property Investor · Springdale, AR · Member since 2016 · 9 posts · 3 votes
3y
@Trevor Marvin
1. Get your LLC
2. Apply and get an EIN
3. Make offers in the name of your LLC
4. If you purchase a property outside the state where you formed your LLC then you will have to register your LLC as a "foreign entity" in the state where you purchased the property.
2 Reply
Ke Nan Wang
Developer · St. Augustine, FL · Member since 2018 · 311 posts · 384 votes
3y
First of all, please have a clear understanding on the purpose of having a LLC. Having a LLC has a cost. Not just the startup cost but also annual fees. If you just blindly establish a LLC, thinking it's serving a "purpose" because hearsay but it's actually not, then you are just throwing time and money down the drain for no reason.
Generally speaking, in real estate investing, you are spending time and money to establish a business entity for two reasons: tax benefit and protection from liability.
If you just starting out and looking to use real estate as a retirement vehicle, maybe own a handful of properties and gain financial freedom, you can achieve that without having to establish a LLC. A good insurance policy should cover you and it's the most affordable way to do it. In this case, having a LLC serves on purpose: confidentiality of the property ownership, only to a certain extend. However, if you have decided to become a real estate tycoon, and grow your portfolio into hundreds, if not thousands of units, then yes, even it's costing you time and money, but you'd rather setup everything RIGHT in the beginning upfront. Then later on, your operation would be easy and smooth.
If it's ladder case, then find an accountant and an attorney you trust, who specialized in real estate tax laws and asset protection, they should give you the 4.0 answer that would best fit your situation.
Nobody on the internet can give you the perfect answer without being properly trained and licensed in the specialty, being in the practice for years, and knowing your whole situation and your personal goals.
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