Am I doing the right thing?

14 Replies

hi everyone. i am new and have two questions.

#1

currently have 3 rental properties in houston and plan on buying a 4th in the next month or two. i found this seller during a garage sale and talked him into selling the house. they have already started moving and cleaning stuff out too =)

All my properties are currently under my name (ive heard this is not a good thing to do) and friends/coworkers have suggested me to start up an LLC and put all the rental properties under that entity. am i doing the right thing? or should I just leave everything the way it is?

If I do form an LLC,

is there any advantage to using the name of the LLC as the registered agent (option A) versus using my legal name (option b)? see attachment below.

thanks everyone for their help! god bless america!

Hello fellow violinist! There are advantages and disadvantages to having properties in an LLC. I'd suggest you do a lot more research before you jump on this advice from your friends.

The idea that most people have is that they can put their properties in an LLC and then if there is a lawsuit of some type then their personal assets will be automatically protected. I think this is really only marginally true. It might possible protect you from a spurious lawsuit, but if you are liable in an incident (it can happen, even to people who are careful and have the best intentions...) then any competent lawyer will probably be able to get past the LLC to your personal assets. And if you are at all sloppy about the mechanics of the LLC- separate accounts from your personal, record keeping, etc, then you really have no protection at all.

Another reason for an LLC is to create anonymity as to who actually owns the property. If you have someone (like your lawyer) as your registered agent then it becomes harder for someone to find you. Some folks are really into not having their tenants know who they are. This really only works if you have all your properties under professional management, obviously!

One of the problems is that banks often won't lend to an LLC, and if they do it will be a more expensive commercial loan. If you transfer title to your LLC on a property that has a mortgage then you run the risk of activating the bank's "due on sale" clause. This probably won't happen, but it's worth knowing about.

Your best protection, in my opinion (I am NOT a lawyer- so that's a big disclaimer right there), would be to have an umbrella liability policy that covers you at least up to the extent of your net worth.

I'd suggest finding a lawyer in your area who specializes in real estate and have a consultation with them. It will be worth the expense to know you are on solid ground as you build your portfolio.

Hi Jean!

would it make sense to start an LLC and then turn it into an S corp?

My parents are retired so I was thinking of having them on the payroll to take care of the house when I am gone. That way, I can take any kind of business expense as a deduction.

Thanks

Well you can already deduct any expense related to your rentals on your schedule E. That includes property management of course, which is what you're talking about having your parents doing, basically.

There have been a lot of discussions on these forums on questions similar to yours- you can use the search feature at the top of the page to find the threads. That will give you a better idea. I'd really advise you to talk to an tax accountant with real estate investment experience before you incorporate in any way. The wrong choice can be very expensive, I've been told!

@Melody Chang   

I would advise you to talk to a lawyer and accountant (your tax person). I'm in the same situation as you and I did spoke with my team, both recommended different corporations. The lawyer recommended an LLC and the accountant recommended an S corp due to the income tax. There are defiantly savings to be made with S corp regarding tax, however the lawyer likes more the LLC for protection. It also depends if your properties are paid off or you have a loan, some investors will transfer unpaid properties into trusts so the bank can't call the loan due.

So in the end it all depends on your situation. Talk to your team and you will be able to make the right decision. 

Good luck with the new property. 

Regards

Yavor

@Melody Chang I too would talk to an attorney and CPA to see what will work best for your situation. We kept it simple by purchasing an umbrella policy to cover all of our properties and then think about LLC after we have a few more properties under our belt. Have you looked in series LLC? @David J.  is an attorney and a fellow BP member who is doing really well. He maybe able to give you a few pointers about the series LLC.

As mentioned you'll get the most favorable terms when financing your properties if they are in your personal name .. You can move it into an llc after closing for protection .. This can trigger the due on sale clause ... Read up on the St Germaine act of 1982 if you want to learn a little bit about it and the use of a trust as mentioned above .. Now if u do decide to take the risk of transferring it to an llc ..and later on decide to refi .. Then you would have to transfer title back to your name to once again get favorable terms ... This is usually where llc vs scorp come into play.. Because title transfer can trigger a sale which would cause you to have to pay tax on gains in an scorp .. From my research most states don't consider it a sale as long as there is no consideration (money) involved if it's an llc..
In terms of protection both are usually similar .. However some states llcs aren't very strong ..and they are easy to get around and go after your personal assets (piercing the corporate veil) ..like mentioned above if you are careless, in any state a good attorney will be able to get your personal assets ..

I would put the properties in an llc and have a separate management company ..this way if you have multiple llc's you don't have to do payroll out of each .. They each just pay a mgmt fee and your mgmt company does just one payroll .. I usually see ppl use scorps for the mgmt companies .. Especially if the owner wants to be on payroll..

I am not an attorney .. These are just answers based on my reading and research

Good luck and let us know what you decide to do

Thanks everyone for their reply. @Justin F. @Cuong Le @Yavor Tomov @Jean Bolger

HEre is what I am doing right now for what it's worth...

All 3 properties are paid for and the 4th will be paid for as well.

I am currently collecting somewhere around $2000 from each property.

Would it still make sense to go to LLC then maybe S Corp? I am real cheap when it comes to consulting and that is why I joined this forum lol =)

Any advice is greatly appreciated.

Thanks again

@Melody Chang  

I would advise you to pay the consulting fee. Aseptically in your case when you have all the houses paid for, you have too much equity to be cheap. And can cost you way more if something goes the wrong way.     

If your houses rent for 2k each they must have a FMV of at least 150-200k. If that is the case with 4 properties you will have 600-800k equity in these things. It would cost you less than one months rent on one property to paper up a legitimate entity formation and insurance package to protect your equity.

Consider one llc for the management if you manage yourself and another llc for the properties at a minimum. Maybe 2 for that much equity.

Why risk it. I would consult an attorney in your sate for the specifics.

thanks @David Jackson you are right, but I am confused.


I manage them myself. I dont think there is much to it. Am I missing something? These are just single family homes/condos.

bump

formed llc and plan on moving it into an S corp. hope yall can see what I am doing =)

what are you confused about ..

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