Final Steps before commiting to my first out of state rental.
Member since 2024 · 33 posts · 43 votes
Final Steps before commiting to my first out of state rental.
Most Popular Reply
Lender · Austin, TX · Member since 2021 · 448 posts · 441 votes
2yQuote from @Miguelli Fernandez:
Been doing a lot of research and prep work and feeling ready to start putting offers. Few questions still.
1. If I use a HELOC or HELOAN from my primary residence to buy a rental, will the mortgage interest be able to offset the rental's income? (I have read it can't be which is why I'm at this point considering just going with a 30 year conventional loan and putting the 15% or 25% for SFH or MFH.
2. I'm based in California but plan to buy rentals in Cleveland Ohio. Where should I form my LLC? California or Ohio? Getting conflicting info.
California LLCs are a nightmare. Most attorneys in California advise against them as they cost about $800/year, and you also have to transfer a property into your personal name before a sale, so they do not help with anonymity.
I suggest an Ohio LLC nested within a Wyoming LLC (set up through a registered agent service). If you are unfamiliar with the process, I would reach out to a lawyer to set you up correctly.
50 Replies
- 2yDustin TuckerBusiness MemberLender · Savoy, TX · Member since 2020 · 195 posts · 80 votes
1st I'm not an attorney, so I can't give advice, but if I was you, I would form my LLC in Nevada or Wyoming, I would want to form my LLC in a state where there is not tax on the LLC. You can register any State's LLC in any other state with a foreign Entity Registration with the state you want to do business in.
If you get a HELOC on your personal residence couldn't you claim the interest on against your personal income taxes?
Also, for purchasing your rental property you can get 80% financing very easily with no Tax Returns via a DSCR loan, depending on your credit, and Down payment, you could see rates from 5.99-8.99%. Personally, I really like the BRRR (Buy, Fix, Rent, Refinance Repeat) model, which is to buy a property fix it up, rent it out and refinance it and do another one. This accomplishes 2 things, 1 you are gaining instant equity, 20-30% each time you complete the process. 2. Financing for 1-4 units is saturated, and there are hundreds of lenders in that market. Once you get into the 5+ unit properties, the lending market evaporates, there are very few lenders in this market and the rates are 1-1.5 higher than in the 1-4 unit market, if you are thinking bigger, the 10+ unit financing is best case 65% LTV, where the 1-4 unit market is 80% LTV for Stabilized rent ready properties, and if you are buying a fixer upper you can usually get 90% of purchase and 100% of rehab. Hope this helps.
- 2yBill HamptonBusiness MemberAccredited Investment Fiduciary, AIF®, Financial Planner, Tax Strategist, Real Estate Investor · Atlanta, GA · Member since 2012 · 2k+ posts · 979 votes
Based on interest tracing rules, the Heloc/Heloan interest would be a deductible expense against rental income.
You don't need an LLC to by a rental.
You will have to pay taxes in Ohio and California on any rental income.
An LLC would be useful for banking, accounting and tax return preparation. Ohio would make the most sense if that's where the property is located.
Wyoming and Nevada LLCs are a waste of money. They do not provide asset protection or anonymity.
Umbrella insurance would be useful for asset protection.
Good luck.
Hampton Tax and Financial Services LLC4.7106 Reviews - Realtor · Cleveland, OH · Member since 2023 · 340 posts · 215 votes2y
Hi, yes, make sure you speak with professionals about this so, you will know you are on the right track and feel free to reach out for any questions. Thanks!
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes2y
Quote from @Miguelli Fernandez:
1. If I use a HELOC or HELOAN from my primary residence to buy a rental, will the mortgage interest be able to offset the rental's income? (I have read it can't be which is why I'm at this point considering just going with a 30 year conventional loan and putting the 15% or 25% for SFH or MFH.You want to borrow money to borrow money. This is bad for at least two reasons:
1. You are 100% leveraged. If your investment turns into a stinker, it can impact the property you borrowed against. This is a house of cards and could destroy you financially. Ask Dave Ramsey.
2. Do the math. Your expenses will include the HELOC loan and the mortgage, plus taxes, insurance, maintenance, etc. What kind of return will you get? 4%, if you are lucky? The juice ain't worth the squeeze.
The DIY Landlord Book4.7247 Reviews - 2yPatrick DruryBusiness MemberReal Estate Agent · Columbus, OH & Cleveland OH · Member since 2021 · 1k+ posts · 2k+ votes
@Miguelli Fernandez
I would focus on getting the first rental in Cleveland before setting up an LLC. If you buy the property in an LLC you would have to go DSCR and the rate will be higher than conventional. - 2yJonathan GreeneBusiness MemberReal Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
I agree with @Nathan Gesner here. You are pulling strong equity out of an existing property to invest very far away, for the first time, and with limited to no contacts in the area. How much are you planning to pull, and are you making a cash purchase with it in Cleveland? I think you are setting your current house up for potential disaster by leveraging it out of state as a new investor.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes2y
Quote from @Miguelli Fernandez:
Been doing a lot of research and prep work and feeling ready to start putting offers. Few questions still.
1. If I use a HELOC or HELOAN from my primary residence to buy a rental, will the mortgage interest be able to offset the rental's income? (I have read it can't be which is why I'm at this point considering just going with a 30 year conventional loan and putting the 15% or 25% for SFH or MFH.
2. I'm based in California but plan to buy rentals in Cleveland Ohio. Where should I form my LLC? California or Ohio? Getting conflicting info.You'll need your LLC to be registered to do business in Ohio. So may as well make it an Ohio LLC as you'd have to register a California LLC as a foreign entity anyway.
- 2ySamuel DioufBusiness MemberReal Estate Agent · Columbus & Cleveland, OH · Member since 2023 · 1k+ posts · 1k+ votes
Using a HELOC is great for buying rehabs cash and then refinancing, but when buying something turnkey I would go the conventional route.
If you want to go conventional, you will have to buy the property first and then transfer it to the LLC later, depending on the financing terms.
Reafco - Samuel Diouf528 Reviews - Member since 2024 · 33 posts · 43 votes2y
Quote from @Bill Hampton:
Based on interest tracing rules, the Heloc/Heloan interest would be a deductible expense against rental income.
You don't need an LLC to by a rental.
You will have to pay taxes in Ohio and California on any rental income.
An LLC would be useful for banking, accounting and tax return preparation. Ohio would make the most sense if that's where the property is located.
Wyoming and Nevada LLCs are a waste of money. They do not provide asset protection or anonymity.
Umbrella insurance would be useful for asset protection.
Good luck.
So it can be deducted even if it’s a 2nd position on my primary and not a first on the rental? At this point, it looks like conventional is the way to go anyway.
In terms of LLC, why wouldn't an Ohio LLC be able to provide asset protection? - CPA and Attorney · San Diego, attorney · Member since 2022 · 302 posts · 219 votes2y
Depending on if you decide to form an LLC or not... California is generally more cumbersome than other states when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don't buy CA property as a CA resident.
Be sure to tell your accountant that you may now need to file non-resident income tax returns in each state where you own property as well. CA taxes residents on worldwide income but may provide a credit for taxes paid to other states.
Most likely the state where the property is located is where lawsuits would be brought if they are something for personal injury like a trip and fall or something of that nature because the “cause of action” arose in that state. So even if you pick a state with stronger protections like WY or NV, the cause of action arose in the state where the tenant fell, so likely that the court where the accident happened would have jurisdiction. Of course, with all things, the answers to all these matters will depend on the circumstances.
California tends to have more laws on the books and requirements and restrictions that it can be a good idea to form a CA LLC for out of state property so that you as a CA resident are covered, and to try to have your contracts fall under the purview of CA courts. It also is helpful to have a California LLC in case you ever sell that property and move into another state so that you do not need to form a new LLC altogether with new operating agreement, just re-register in the new state as a new foreign LLC. Also, the state of formation is likely where internal disputes would be brought among LLC members, so if you and a partner and/or spouse live in CA, you probably want to arbitrate in CA if the two of you had a disagreement. But, that is not always the right answer and you should speak with someone familiar with your personal situation to get advice specific to you.
*This post is informational only and is not to be relied upon. Readers are advised to seek professional advice. This post does not create an attorney-client or CPA-client relationship.
- 2yTravis TimmonsPro MemberRental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votes
You're stacking risk factors here. Out of state, first time, 100% financed, asking tedious and insignificant questions about an LLC...I don't know you, but if you were my friend and asked my advice, I'd tell you not to do this.
And if you do end up doing it, you better get on a plane and spend some real time in Ohio. If you don't engage all 5 senses before offering on a property, you are taking another real chance that could be problematic.
- Member since 2024 · 33 posts · 43 votes2yAgreed on the risk factors which is why I stated leaning towards conventional financing and why I’m asking tedious questions. I appreciate the reply though as the info is just more in my toolbox to mitigate risks moving forward.
Quote from @Travis Timmons:
You're stacking risk factors here. Out of state, first time, 100% financed, asking tedious and insignificant questions about an LLC...I don't know you, but if you were my friend and asked my advice, I'd tell you not to do this.
And if you do end up doing it, you better get on a plane and spend some real time in Ohio. If you don't engage all 5 senses before offering on a property, you are taking another real chance that could be problematic.
- Lender · Austin, TX · Member since 2021 · 448 posts · 441 votes2y
Quote from @Miguelli Fernandez:
Been doing a lot of research and prep work and feeling ready to start putting offers. Few questions still.
1. If I use a HELOC or HELOAN from my primary residence to buy a rental, will the mortgage interest be able to offset the rental's income? (I have read it can't be which is why I'm at this point considering just going with a 30 year conventional loan and putting the 15% or 25% for SFH or MFH.
2. I'm based in California but plan to buy rentals in Cleveland Ohio. Where should I form my LLC? California or Ohio? Getting conflicting info.California LLCs are a nightmare. Most attorneys in California advise against them as they cost about $800/year, and you also have to transfer a property into your personal name before a sale, so they do not help with anonymity.
I suggest an Ohio LLC nested within a Wyoming LLC (set up through a registered agent service). If you are unfamiliar with the process, I would reach out to a lawyer to set you up correctly.
- Member since 2024 · 33 posts · 43 votes2yThank you for this. This is what I needed!
Quote from @Katie Balatbat:
Depending on if you decide to form an LLC or not... California is generally more cumbersome than other states when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don't buy CA property as a CA resident.
Be sure to tell your accountant that you may now need to file non-resident income tax returns in each state where you own property as well. CA taxes residents on worldwide income but may provide a credit for taxes paid to other states.
Most likely the state where the property is located is where lawsuits would be brought if they are something for personal injury like a trip and fall or something of that nature because the “cause of action” arose in that state. So even if you pick a state with stronger protections like WY or NV, the cause of action arose in the state where the tenant fell, so likely that the court where the accident happened would have jurisdiction. Of course, with all things, the answers to all these matters will depend on the circumstances.
California tends to have more laws on the books and requirements and restrictions that it can be a good idea to form a CA LLC for out of state property so that you as a CA resident are covered, and to try to have your contracts fall under the purview of CA courts. It also is helpful to have a California LLC in case you ever sell that property and move into another state so that you do not need to form a new LLC altogether with new operating agreement, just re-register in the new state as a new foreign LLC. Also, the state of formation is likely where internal disputes would be brought among LLC members, so if you and a partner and/or spouse live in CA, you probably want to arbitrate in CA if the two of you had a disagreement. But, that is not always the right answer and you should speak with someone familiar with your personal situation to get advice specific to you.
*This post is informational only and is not to be relied upon. Readers are advised to seek professional advice. This post does not create an attorney-client or CPA-client relationship.
- 2yTravis TimmonsPro MemberRental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votes
Gotcha...I thought that you were going to use HELOC (or home equity loan) as the down payment on a conventional loan resulting in 100% financed property.
I would encourage you to proceed with caution. I own multiple properties over 2000 miles from my primary residence, but it's not as easy as strangers on the internet make it seem. It is still a hands on, dirt in your fingernails, paint on your clothes business. Without the returns you get from a hands on approach, I'd rather invest in the S&P.
Good luck and feel free to message me if you want to chat further. I have absolutely nothing sell and would be happy to help if you think that I can be a resource.
- 2yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Quote from @Miguelli Fernandez:
Been doing a lot of research and prep work and feeling ready to start putting offers. Few questions still.
1. If I use a HELOC or HELOAN from my primary residence to buy a rental, will the mortgage interest be able to offset the rental's income? (I have read it can't be which is why I'm at this point considering just going with a 30 year conventional loan and putting the 15% or 25% for SFH or MFH.
2. I'm based in California but plan to buy rentals in Cleveland Ohio. Where should I form my LLC? California or Ohio? Getting conflicting info.On question 2, why are you forming an LLC? More importantly, what is the goal or expected outcome of forming an LLC?
- 2yRemington LymanBusiness MemberReal Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
Quote from @Miguelli Fernandez:
Been doing a lot of research and prep work and feeling ready to start putting offers. Few questions still.
1. If I use a HELOC or HELOAN from my primary residence to buy a rental, will the mortgage interest be able to offset the rental's income? (I have read it can't be which is why I'm at this point considering just going with a 30 year conventional loan and putting the 15% or 25% for SFH or MFH.
2. I'm based in California but plan to buy rentals in Cleveland Ohio. Where should I form my LLC? California or Ohio? Getting conflicting info.I think this question needs to be answered by talking to your lender, accountant, and attorney
- 2yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
just to pile on to what @Travis Timmons and @Jonathan Greene said - i would not buy a property in Cleveland (or any out of state market) unless you're going to spend significant time there building a team and looking at properties. 50 properties. 100 properties.
just to be direct: the market has shifted. prices and rates are too high for most properties to cash flow. if you buy a random property just to "do a deal," you will lose money.
i say this not to discourage you but to help you. you have to NOT do what these people did.
https://www.biggerpockets.com/forums/12/topics/1133388-losin...
https://www.biggerpockets.com/forums/48/topics/1137397-balti...
https://www.biggerpockets.com/forums/963/topics/1195280-expe...
https://www.biggerpockets.com/forums/48/topics/1160450-run-i...
- Member since 2024 · 33 posts · 43 votes2yAsset protection. Primary residence has about 550k in equity in Southern California.
Quote from @Chris Clothier:
Quote from @Miguelli Fernandez:
Been doing a lot of research and prep work and feeling ready to start putting offers. Few questions still.
1. If I use a HELOC or HELOAN from my primary residence to buy a rental, will the mortgage interest be able to offset the rental's income? (I have read it can't be which is why I'm at this point considering just going with a 30 year conventional loan and putting the 15% or 25% for SFH or MFH.
2. I'm based in California but plan to buy rentals in Cleveland Ohio. Where should I form my LLC? California or Ohio? Getting conflicting info.On question 2, why are you forming an LLC? More importantly, what is the goal or expected outcome of forming an LLC?
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes2yAttorneys (want your money), YouTube gurus (want your eyes), and amateurs (don't know any better) will all insist you set up an LLC for asset protection.
Quote from @Miguelli Fernandez:
Asset protection. Primary residence has about 550k in equity in Southern California.
The truth is, you don't need it. Think about a situation where someone could sue you for significant amounts of money and then think through what really happens:
You file a claim with insurance, and the attorneys take over from there. Insurance is in the business of making money; protecting your pocketbook is a by-product, so they will do what they can to prevent a big payoff. They will get the claim dismissed or settle it outside of court for significantly less than the tenant is claiming. You pay the deductible.
Lawsuit FACTS:
1. 95% of all civil cases are settled outside of court.
2. Half of all plaintiffs received less than $24,000. The median price of all settlements studied was $31,000. This includes medical malpractice and auto accidents, both of which are significantly higher than what you would see with a landlord slip-and-fall or mold injury claim.
3. Your exposure to risk varies based on your honesty, ability to document, and your location (e.g. California carries more risk than Wyoming).
The facts show that risk is negligible. If you want to protect your assets, there are three things you can do for free:
1. Obey the law.
2. Treat everyone honestly and equally.
3. Document everything.The DIY Landlord Book4.7247 Reviews - 2yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Quote from @Miguelli Fernandez:
Asset protection. Primary residence has about 550k in equity in Southern California.Quote from @Chris Clothier:
Quote from @Miguelli Fernandez:
Been doing a lot of research and prep work and feeling ready to start putting offers. Few questions still.
1. If I use a HELOC or HELOAN from my primary residence to buy a rental, will the mortgage interest be able to offset the rental's income? (I have read it can't be which is why I'm at this point considering just going with a 30 year conventional loan and putting the 15% or 25% for SFH or MFH.
2. I'm based in California but plan to buy rentals in Cleveland Ohio. Where should I form my LLC? California or Ohio? Getting conflicting info.On question 2, why are you forming an LLC? More importantly, what is the goal or expected outcome of forming an LLC?
I figured as much and I understand the thought process, but my advice is to not worry about an LLC right now. #1, the likelihood of being in a lawsuit scenario is very small. Don't let fear and fear mongers convince you otherwise. If you want to properly protect yourself, use layered insurance when you start. Have proper policies for each property and a proper personal umbrella policy layered over the top covering your investment properties. These two should easily provide the level of coverage you need to protect the assets you have including your personal property equity. It is also relatively inexpensive compared to LLC formation, upkeep, and yearly registration/possible tax.
The #2 point that makes this a mute discussion is you are not going to be able to move a property underwritten by a GSE (as most mortgages today are) into an LLC legally. God forbid you are sued and you try to present the LLC shield, even if you managed to not slip up and lose the corporate veil through a technicality, if it is shown that you were forbidden from moving the property into an LLC by your signed loan docs, the LLC will be stricken and will go right back to you personally. If you want the highest level of security, properly insure yourself and your investments.
I don't think LLC shields are things you should put as a priority until you grow a sizable portfolio (10-15 plus with $1 million or more in equity).
- Investor · Arroyo Grande, CA · Member since 2014 · 1k+ posts · 1k+ votes2y
Hey Miguelli,
My advice...
1) Do not use a HELOC unless you are doing some sort of value-add activity. A HELOC will almost certainly come with a higher interest rate than a 30-year fixed loan. Yes, it will be interest only so the payment will be smaller, but you still need a plan to pay off that HELOC.
2) Generally, you want to form the LLC in the state that will hold the property.
- 2yJimmy LieuBusiness MemberReal Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes
Quote from @Miguelli Fernandez:
Been doing a lot of research and prep work and feeling ready to start putting offers. Few questions still.
1. If I use a HELOC or HELOAN from my primary residence to buy a rental, will the mortgage interest be able to offset the rental's income? (I have read it can't be which is why I'm at this point considering just going with a 30 year conventional loan and putting the 15% or 25% for SFH or MFH.
2. I'm based in California but plan to buy rentals in Cleveland Ohio. Where should I form my LLC? California or Ohio? Getting conflicting info.Hi Miguelli! If you're investing out-of-state, you should have your core team that you can rely on to answer these questions before making any offers. Your realtor should be able to connect you with their network and help you with these. Happy to connect and answer your questions.
Jimmy Lieu, Red 1 Realty4.9121 Reviews - Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes2y
Quote from @Nicholas L.:
just to pile on to what @Travis Timmons and @Jonathan Greene said - i would not buy a property in Cleveland (or any out of state market) unless you're going to spend significant time there building a team and looking at properties. 50 properties. 100 properties.
just to be direct: the market has shifted. prices and rates are too high for most properties to cash flow. if you buy a random property just to "do a deal," you will lose money.
i say this not to discourage you but to help you. you have to NOT do what these people did.
https://www.biggerpockets.com/forums/12/topics/1133388-losin...
https://www.biggerpockets.com/forums/48/topics/1137397-balti...
https://www.biggerpockets.com/forums/963/topics/1195280-expe...
https://www.biggerpockets.com/forums/48/topics/1160450-run-i...
Your advice sounds practical, but it's really not. How's this dude going to get somebody to show him 100 properties?
- Member since 2024 · 33 posts · 43 votes2y
Quote from @Jimmy Lieu:
Quote from @Miguelli Fernandez:
Been doing a lot of research and prep work and feeling ready to start putting offers. Few questions still.
1. If I use a HELOC or HELOAN from my primary residence to buy a rental, will the mortgage interest be able to offset the rental's income? (I have read it can't be which is why I'm at this point considering just going with a 30 year conventional loan and putting the 15% or 25% for SFH or MFH.
2. I'm based in California but plan to buy rentals in Cleveland Ohio. Where should I form my LLC? California or Ohio? Getting conflicting info.Hi Miguelli! If you're investing out-of-state, you should have your core team that you can rely on to answer these questions before making any offers. Your realtor should be able to connect you with their network and help you with these. Happy to connect and answer your questions.
So far my agent has been great but and getting some deals off market that look decent on paper. However when I choose a property im considering putting and offer on, I run into issues like existing tenant or vacant with repairs needing to be made before rent ready which is essentially what I’m looking for to force the equity myself.
The problem is that I’m unable to find PM or contractors willing to translate what the inspections are showing, what needs to be dealt with, and for how much before closing.How can I make a decision to purchase when I can’t talk to anyone willing to help BEFORE I’m already commited?
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