Advice on creating an LLC before first property.

[Cliff Song]

I am just starting out and have yet to purchase my first investment property. I'm just in the research and preparation phase at the moment. Does anyone have any advice on whether an LLC is a must before purchasing your first investment property?

Thanks!

[Jackson Ebersole]

Hi Cliff,

Here are some things to consider:

Liability Protection: One of the biggest perks of having an LLC is that it helps protect your personal assets. If something goes wrong with the property—like debts or legal issues—your personal stuff is generally safe. This is super important for real estate investors.

Tax Flexibility: An LLC can offer some nice tax benefits. Depending on your situation, you might get to choose how you want to be taxed—like as a sole proprietorship, partnership, or corporation. This can help you manage your tax bills better.

Professional Image: Running your investments through an LLC can make you look more professional to lenders, partners, and tenants. It shows you're serious about your real estate game.

Easier Management: If you plan on owning multiple properties down the line, having an LLC can make managing everything a lot simpler. You can keep all your properties under one roof, so to speak.

Cost Considerations: Keep in mind that setting up an LLC comes with some costs, like filing fees and compliance stuff. Make sure these expenses fit into your investment plans and budget.

In short, while you don't have to set up an LLC before buying your first property, it can definitely offer some solid benefits like liability protection, tax flexibility, and a more professional image. If you're thinking about growing your real estate investments, starting an LLC early on could be a smart move.

Let me know if you'd like to talk about financing options for your first property! Good luck,

Jackson

[Nathan Gesner]

Quote from @Cliff Song:

Here's a metaphor.

You: "What's the best flooring material for my in-home basketball court?"

Me: "You have an indoor basketball court?"

You: "No, but I want to play for the NBA some day, and I'll need a basketball court I can practice on for hours without interruption."

Me: "That's a great goal! How did you do in college ball?"

You: "I've never played college ball. In fact, I didn't play in high school. But I've been watching all the games on ESPN, reading the rules, and even reading some books written by Larry Bird, Michael Jordan, and other great players. I caught the bug, and I'm going all in!"

Me: "So you've never played? You don't know if you have any skills? You don't know if you'll enjoy the sport, but you want to spend $200,000 building an indoor court to practice and go pro???"

[Jonathan Greene]

If you use a DSCR loan, you will need to form an LLC for the loan. If not, you can't buy in an LLC unless you are paying cash or using a local bank who knows you and is willing to use your account as collateral for a new LLC without two years of tax returns. You don't need it. LLC protection is important generally, but not nearly to the psychotic level that people talk about it for the first investment.

[Cliff Song]

@Jackson Ebersole and @Jonathan Greene

Information appreciated!

[Allen Higbee]

Hello Cliff, as I went through this about five years ago before I started investing in properties, the advice that you've been given initially is right on point so from another perspective, but say that you hire yourself as a W-2 employee instead of an owner on your schedule C personal 1040. You can then prove your income not get double taxed on passthrough income. Further you have the insurance and benefits from your company coverages for you and you don't have to pay a dime. If you ever plan on doing this later in your days, you could always do a management company and just expand on that, but I can tell you from my own perspective that LLC – S and being W2 employee under that may limit some of your lending aspects, but it protects you around the world anywhere you go further if it comes to it, you can bankrupt your company, sell the assets and open another company the same way and you're still protected through and through. as my wife is a high earner, it really protects her from civil suits and other things like that or anybody that ever comes to maliciously take what is yours. Just my two cents. Thanks, Allen

[Adrian Pinson]

Quick answer:

1. Set up a WY Holding LLC 123 Holdings LLC

2. Set up another WY LLC under the name of your property street eg., "Main Street Investments, LLC."

3. Set up a Land trust and take title in name. "The 123 Main St Trust"

4.Set up a C-Corp in the state where your property is to avoid being taxed as a dealer and maintain coverage under that state's laws.

Depending whether your property is a flip or a rental would determine how you structure your entities.

This structure would benefit you both tax and liability wise.

[Cliff Song]

Appreciate all the replies. Seems to be competing opinions on whether an LLC or other entity structure set-up is a must for a first time real estate investor.

1. If I purchase properties under my name what steps can I take (other than an LLC) to reduce risk to my personal property excluding the rental itself?

2. How difficult is it to transfer properties under my name to an LLC at a future date? Seems that the 'due on sales clause' is the risk so I'm wondering what other options there are to protect personal liability.

From my research so far, seems like someone starting out has to take on that risk and just purchase under their name since getting a conventional loan is difficult under an LLC.

Thanks!

[Ashish Acharya]

Creating an LLC before purchasing your first investment property isn't essential, but it provides liability protection by separating personal assets from property risks. However, financing can be more challenging, with higher down payments or interest rates for LLC-owned properties. There are no extra tax benefits with an LLC, as it's typically a pass-through or disregarded entity. Many investors start without an LLC and set one up as their portfolio grows.

[Bradley Buxton]

@Cliff Song

You can usually speak to a lawyer who specializes in LLCs without any cost initially. They will be able to tell you what the best options are to protect your assets. There are also other rules you'll need to follow to not pierce the corporate veil. Here in Nevada, there are other protections for property without an LLC.