Do I need a tax advisor/CPA?

Question

I'm going to invest in real estate starting later this year or next year as prices become more reasonable.  I've begun the process of educating myself and researching these last few months.  My question is do I need a tax advisor or CPA to start out my journey?  Here is my current situation and my short term plans which I feel are realistic and modest.

- I live in the Seattle area. I currently live in an apartment but I've been saving up.
- I have a full-time job, so I only have a limited amount of time for real estate investing (at least initially)
- I have two real estate short term goals. One is to purchase a modestly priced duplex or condo for short term rentals or longer term rentals. The other is getting into tax lien certificates and tax deed certificates.

- In regards to rentals - I am looking both within Washington state and out of state. The latter includes options like Nevada, Texas, and Florida. I'm leaning towards out of state because Washington state is somewhat landlord unfriendly.
- I would prefer duplexes (even house hack) over condos. I would need full service property management if I were to choose short term rentals.
- I'm looking for modest cash flow for the short term as my focus will be more on getting knowledge and experience
- I would start out with a single property for at least a year or two before even considering acquiring other properties

- In regards to tax lien/tax deed certificates. My investment amount in this area would be substantially smaller than rentals. However, I believe there will be increased investment opportunity in tax liens these next few years.
- My goal is to get some tax lien certificate experience in the first year or two - then make a bigger splash later once I get the knowledge and experience
- Initial focus would be purchasing tax lien certificates in Florida

Given my relatively simple aspirations, do I need to get a tax advisor or CPA?  Or is a DIY approach more appropriate?

My concerns are:

- I want to be protected with an LLC. My questions for the tax advisor/CPA would be in which state should I establish an LLC, especially in light of out-of-state investments? Should I have a series LLC? Do I need to consider land trusts? In which state(s) should I establish my LLC(s)? The problem is I'm not exactly sure where I'll start my investing.
- Should I get a self-directed IRA LLC for tax lien investing? Is there other special tax advice I may need for tax lien/tax deed certificate investing?

I want to make sure I have the right structure to protect myself without over-complicating it in the beginning.  I also need some tax advice to ensure I minimize my tax payments.  Thoughts?

Nathan Gesner · Answer

I wouldn't worry so much about this. You're asking for fish recipes when you haven't even bought the fishing pole, bait, learned how to fish, determined if you enjoy fishing, or if you like the taste of fish!

It is far more important to learn how to properly manage a rental and you'll save a lot more money by doing that correctly than you will playing with tax code. Any CPA can get you most tax deductions, and there are a couple books in the BiggerPockets library with good advice on how to improve your tax position. Get 2-3 rentals and 2-3 years under your belt before you worry about saving a few percentage points on taxes.

Nathan Gesner · Answer

LLC is a separate issue, and I also recommend you don't bother with it until you have some experience. I know people with 50+ rentals all privately owned and they are fine.

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.

Dennis Nguyen · Answer

Prices would vary depending on the service that they provide. If they are only going to file your taxes then that would be much cheaper than if they sat down with you and advised you on best strategies, etc. I would do an introductory call first with a CPA and ask for their prices and services they offer. Introductory calls are usually free.

I wouldn't worry too much about a CPA though until you get at least your first property. If you are going to purchase a duplex as an owner-occupied house hack, it would have to be under your name first before you even LLC it... many different things to think through. I'm a real estate here in the Seattle area, feel free to connect if you have any more questions :)

Drew Sygit · Answer

Spend your time networking and learning from seasoned investors that do NOT pay reail prices.

Louis Chan · Answer

Thanks to everyone for their advice!

I'm definitely leaning towards getting a tax advisor/CPA.  I don't want to over-complicate things, but I don't want to proceed without a plan.  I focused a lot on getting the right legal structures, but I also need to focus on a sensible tax mitigation strategy.

Given my situation, how much can I expect to spend on a competent tax advisor/CPA?

Chris Picciurro · Answer

I agree with the above and sent you a connection request.

Eliott Elias · Answer

Hire a CPA early, build with them. Let them guide you in the right path, rather than showing up with 10 properties and no plan.

Ryan Thomson · Answer

@Louis Chan once you buy the properties I would certainly look into meeting with a CPA. They are worth every penny and will probably help you keep more than their actual fee. Not to mention they will save you a lot of time. Which is valuable when you are looking for deals and have big real estate goals.

Do I need a tax advisor/CPA?

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