Should I form an LLC?

[Perry Lierman]

I am very new to real estate investing and I am now putting an offer in for my first potential investment property. I have heard that it's a good idea to form an LLC as an added layer of liability protection. Is this true, and if so should I consider this now or wait until I have a few properties I can put into it?

Thank you!

[Savannah Wallace]

Hi Perry,

Congratulations on your first investment! 

Setting up an LLC for your property is something that I strongly recommend for all of my clients to provide them with asset protection.

LLCs can help shield you from personal liability if a tenant were to ever sue as well as offer protection against creditors in case of a personal judgement through charging order protection, when the LLC has been structured appropriately. With the property in an LLC if someone were to sue the property they could only go after the assets in the LLC and not anything else (again assuming you did not guarantee anything personally and the corporate veil has not been pierced).

Also, depending on the structure you can keep your name off the public record as the owner of the property and even as part of the LLC. For my clients I recommend that they place the properties in an LLC that has been formed in the state where the property is located and have the member of that LLC be a Wyoming LLC. This provides for both anonymity as well as charging order protection.

If you took out a loan to purchase the property, depending on the type of loan, you may benefit from a land trust. Depending on the terms of the mortgage, transferring the property to an LLC may be considered a sale, thus triggering the due on sale clause. However, putting it into a land trust first avoids triggering the due on sale clause.

While there are inexpensive DIY options out there, I recommend working with a local attorney to help you set up your LLC. I've had the opportunity to review a number of templates from companies, like LegalZoom, and have found that they often lack the necessary detail and thoroughness required for effective business management. Important sections are frequently omitted, which can create challenges in day-to-day operations and long-term planning.

This lack of comprehensive documentation becomes especially problematic if you ever consider bringing in partners or expanding your team. In my experience, the materials provided by these companies rarely offer sufficient guidance or clarity to support such transitions smoothly.

I recommend working with a local attorney to help craft documents that address all your needs and allow for long-term growth and expansion, or, at the very least, have an attorney review the Operating Agreements you draft on your own or through a DIY company and suggest revisions so that it better suits your needs.