How to start my business

Question

I want to start investing in real estate, and I am going over all these books to see the type of strategy that I am going to follow. Right now, the one that has been catching my attention the most is the BRRRR method. Today, I own a single-family home where I am currently renting out one room. I am starting my real estate investing journey and have been hitting a wall with the type of entity that I should establish to start my business, such as an LLC.

Dan H. · Answer

I 2nd what @Jonathan Greene indicated.   At current valuations and rates, after the high LTV refi to extract value the properties have huge negative cash flow in virtually every market.  A cash out refi prior to 2022 had mortgage payment almost half of what it would be today.  The lower rates then meant that there could be some level of positive cash flow.

The high valuations and high rates with respect to market rents make BRRRRs a challenge.

good luck

Chris Seveney · Answer

I find it very rare for a company investing in real estate to get business lines of credit. If you are doing fix and flips etc. and have an active business then yes, but owning rentals rarely gets you a business line of credit.

Ashish Acharya · Answer

@Raul Mena To start your real estate business with the BRRRR method, there is no need for an LLC to start your investment. LLC will not impact taxes or finances. It is mostly for legal reasons. This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

John Williams · Answer

Here's how you should allocate your time (and in this order)

1. 99% of time developing your business plan/idea

2. 1% of time thinking about the LLC

Many people get caught up on the purpose/use of an LLC and don't spend enough time thinking about how to make money.

Nathan Gesner · Answer

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's 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 appear 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 primary 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 14 years of 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 expected to be higher, 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 extra, on-going effort to maintain.

Rik Hunter · Answer

@Raul Mena There’s really no need for an LLC at this time, but landlord insurance and/or an umbrella insurance policy may be a good idea to give you extra protection because of those other people living in your home.

My experience was buying duplex and living in one unit and rehabbing the entire building. It was cash-flowing from the start, even with the rent from just one unit. That’s probably much harder to find today unless it needs lots of work like mine did. So, a tri- or quadplex is also a good idea. You still wouldn’t need a LLC here, either.

Raul Mena · Answer

Thank you for the response and the feedback.

Jonathan Greene · Answer

You are reading books, but not interacting with real estate investors at meetups which is why both things you said don't make any sense. BRRRR is not a great strategy in most markets now because inventory to buy is low so you have to pay more which shrinks your mini-renovation to rent ratio due to rates as well.

LLCs are of no use to you now at all unless you are going to run a business through it before investing in real estate for two years. This is classica analysis paralysis fodder. You need to meet more real investors to match the overviews you are getting from books.

John Mason · Answer

When you have a small portfolio not having LLC is okay.

Reason I am moving to LLC is to take advantage of getting Business Line Of Credit later

How to start my business

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