LLC before first deal?
Hey BP, I'm prepping to make my first offer but I have a habit of wanting to check every detail which brings up a lot of questions. Should I have an LLC in place before closing my first deal? Thanks for the help!
#5 Medium-Term Rentals Contributor
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#5 Medium-Term Rentals Contributor
- Lender
- Youngstown, OH
Nope. Just good insurance.
Definitely not needed beforehand. I didn't actually create mine until we got our first tenant.
Hi Tae,
I think that the response to your question depends on your situation. If you are closing on the property in an LLC, it would make sense to have the entity set up and operational before you go under contract. If you are considering moving the property into an LLC after you have purchased it in your own name, then you can probably wait. There is a large variation in opinions about LLCs and their ability to effectively protect investors. When properly set up and run in the right way, LLCs can and do offer investors protection and the ability to separate their business assets from personal assets. If you are risk averse, I would recommend having insurance and an LLC as a backup option.
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#2 Mortgage Brokers & Lenders Contributor
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If you want the loan to be in the LLC's name vs personal then yes.
My rule of thumb -
If net wealth < $1M, then $2M umbrella insurance policy
If net wealth > $1M, the $2M umbrella policy and LLC.
P.S. 26 SFHs, 1 LLC, 1 business checking account, 1 spreadsheet, 1 old Ford Ranger, Zillow, apartments.com, 1 cell phone with 30+ #s on speed dial. Simple is good. Life is good.
Quote from @Tae Ross:
Hey BP, I'm prepping to make my first offer but I have a habit of wanting to check every detail which brings up a lot of questions. Should I have an LLC in place before closing my first deal? Thanks for the help!
An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.
Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.
ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.
LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.
Additional thoughts:
1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.
2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.
3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.
4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.
5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.
If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.
Quote from @Nathan Gesner:
Quote from @Tae Ross:
Hey BP, I'm prepping to make my first offer but I have a habit of wanting to check every detail which brings up a lot of questions. Should I have an LLC in place before closing my first deal? Thanks for the help!
An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.
Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.
ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.
LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.
Additional thoughts:
1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.
2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.
3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.
4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.
5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.
If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.Thanks for all the great info!
@Tae Ross, just a side note, if you plan to finance the property via hard money or a DSCR loan, then most lenders will require an LLC establishment.
Quote from @Tae Ross:
Hey BP, I'm prepping to make my first offer but I have a habit of wanting to check every detail which brings up a lot of questions. Should I have an LLC in place before closing my first deal? Thanks for the help!
The answer: NO
But it's not because of what others say. Does it help with asset protection? Not really. How about taxes? Not really. So should I do it? Not really. "But I really want to, it'll make me feel more legit". Then go for it (Hell, I have like 50 LLCs).
Here is why you shouldn't do it before getting a property: You've just tricked your brain into thinking you've accomplished a first step toward your investment goals when you've really done nothing. It's like when people spend weeks "building a team" rather than spending that time "building a portfolio"
If your goal is to have an LLC, then spend the $150-$500 to get one. If your goal is to have rental property -- skip it and focus on the prize.
You don't need an LLC to close your first deal.
If you have a Facebook, join the real estate connections Facebook group for the state of Georgia so you can obtain contacts of resources that will help you. I have multiple entities, but I have never made one myself. I’ve had either an accountant or a lawyer make them for me and counsel me on how to purchase real estate using entities. The cost is not as much as you think. To make an entity, I pay my accountant $200.
I’m actively investing in the Atlanta market. Text me your name and let me know you’re from BiggerPockets so we can connect.
It’s clear you’ve been doing this for a while. 😂
I genuinely appreciate your response the questions. Thank you!!
Short answer: No. You don't purchase car insurance before you buy a car. You don't need asset protection before you have an asset. A tenant isn't going to sue you if you don't have a tenant. Get the property first, then worry about an LLC.
A lot of people suggest not forming an entity and just getting an umbrella policy. The majority of those same people have entities themselves... If you intend to run your real estate investing like a business, why not do it from the start? Forming an LLC will force you to have a separate business checking account, track your expenses/income, talk to a CPA about tax strategies. If you don't do these things, the LLC is just a piece of paper with no legal merit. An umbrella policy isn't going to encourage you to do those things, because the policy will still be in effect whether you run it like a business or not.