Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
Hello Everyone!
So we are trying to start getting our ducks in a row before we start shopping for our first property. I don't want my wife and I to fall in love with a deal and jump on it before we have everything ready. I am going to give a list of the things on our "To Do List." Can you please let me know what I am leaving out? Also, my main question is on an LLC. Is this the best way to go about protecting yourself? My wife and I are actually partnering with her cousin and his wife. The four of us together are going to try and buy at least 1 property per year. Is the llc the best way to go about our protection? How much approximately does that cost to set up?
To-Do List:
1. Talk with our lawyer about the LLC (what else should we cover in this meeting?)
2. Bank-Preapproval (shouldn't be a problem)
3. Speak with our accountant about our upcoming plans.
4. Work with our insurance agent (wife's aunt is an agent)
5. Contact a Realtor (I know a few)
So what else am I missing here? Excited for this new venture and can't wait to get started, but I am already feeling the nerves!
It sounds like you have quite a thorough plan. The short answer is, yes, an LLC can help to protect yourself. Is it the best way to do that? I don't know. I depends on what you're hoping to protect against.
You probably want to talk to an asset protection and tax attorney. An LLC can be sued just like any actual person. The attack could come from a tenant, a past owner, a future owner, the government, a fellow partner...almost anywhere. You have to know what you're protecting against. The more you worry, the more complicated it becomes. That translates into time and money, so be reasonable. Remember what Mark Twain said, "You can make a thing foolproof, but you can't make it damned foolproof".
Frankly, based on what you've said, I'd send the wife out shopping right now with one caveat, she should not "fall in love" with anything but you, sir. NEVER fall in love with a deal. That said, get started with your business. You're ducks are better aligned than most of us. If you're serious about wanting to get started, then take a break from preparing.
Where are you looking for your investment property? Particularly, in what state? Each state has its own Department of Corporations with there own costs and rules. You already plan to talk to an attorney, so do that. You'll get everything you can think of and a lot more.
You'll do well to get started while you continue to prepare. You can always put your property into an LLC, corporation, land trust, whatever later. Congratulations on being so organized and well prepared.
Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
12y
Understand that if you plan to use bank financing they will not make a loan to your LLC if your LLC is the entity buying the home. You really dont need and LLC, the best protection is having enough insurance. You will get insurance when you purchase but then you might consider getting an umbrella policy with your insurance provider.
To form an LLC is around $325 and then you will have a yearly tax return filed at an average of $300-$500 and then yearly LLC renewal fee of $325. You might find its more of a cash flow drain then anything.
Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
12y
So an umbrella policy would cover us if we were to ever be sued or anything else? I just don't want my personal home at risk. Since we are doing a partnership, would you just recommend keeping the property in the 4 of our names?
It sounds like you have quite a thorough plan. The short answer is, yes, an LLC can help to protect yourself. Is it the best way to do that? I don't know. I depends on what you're hoping to protect against.
You probably want to talk to an asset protection and tax attorney. An LLC can be sued just like any actual person. The attack could come from a tenant, a past owner, a future owner, the government, a fellow partner...almost anywhere. You have to know what you're protecting against. The more you worry, the more complicated it becomes. That translates into time and money, so be reasonable. Remember what Mark Twain said, "You can make a thing foolproof, but you can't make it damned foolproof".
Frankly, based on what you've said, I'd send the wife out shopping right now with one caveat, she should not "fall in love" with anything but you, sir. NEVER fall in love with a deal. That said, get started with your business. You're ducks are better aligned than most of us. If you're serious about wanting to get started, then take a break from preparing.
Where are you looking for your investment property? Particularly, in what state? Each state has its own Department of Corporations with there own costs and rules. You already plan to talk to an attorney, so do that. You'll get everything you can think of and a lot more.
You'll do well to get started while you continue to prepare. You can always put your property into an LLC, corporation, land trust, whatever later. Congratulations on being so organized and well prepared.
Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
12y
Thanks for all of the input @tom mole. We are in Illinois, just across the river from St. Louis Missouri. We have been watching a property for a couple of months, and it has been on the market for almost 2 years. Not sure if thats good or bad, but its interesting. What exactly is a land trust? LLC is something that gets hammered into your brain in business school, but it sounds like it might not really be the way to go with real estate.
Investor · Sunland, CA · Member since 2013 · 260 posts · 240 votes
12y
An LLC should help to prevent your personal assets from being used to satisfy a judgement against your investment property and can help differentiate your personal property from business property should the business ever dissolve. A corporation may be an even better idea in some cases. You really need to sit down with your tax and asset protection attorney to go over your specific concerns. I do applaud you for having the foresight to do so.
Investor · Sunland, CA · Member since 2013 · 260 posts · 240 votes
12y
An LLC is an excellent entity for many things in real estate. It's just not the only thing. Your CPA can probably tell you why to incorporate instead of using an LLC for tax reasons. Your asset protection attorney probably would want you to set up a structured combinations of entities, but only once you have enough assets to protect.
Right now you are looking for one property. Insurance should cover most casualties you're likely to face at this point, as @Curt Davis indicated. Insurance is limited however and often another form of asset protection is warranted. How likely is the threat of you getting sued?
A land trust is an entity that can, among other things, obscure the identities of the actual owners. This can be important to protect you from frivolous lawsuits. Only the trustee needs to be identified in public records. A good asset protection guy can delve into the pros and cons for your situation.
The main thing is getting started. Talk about your deal. What are the particulars? Why do you think it has been on the market for 2 years? What makes it look like a good deal at this point?
Investor · Sunland, CA · Member since 2013 · 260 posts · 240 votes
12y
@DJ Cummins, check out Randy Hughes at Land Trusts Made Simple. I've seen him in person and asked a lot of questions. He knows his stuff. I'd like to hear what you think of Mr. Land Trust.
Tulsa, OK · Member since 2014 · 31 posts · 4 votes
12y
I'm not sure I agree with Tom, who seems to be pushing you towards an LLC. I don't think an LLC does you much good here. I'd do more research and probably seek a professional's opinion, but my thoughts are:
1. Google "Piercing the Corporate Veil". If these real estate LLCs that are controlled by a few people don't pierce the corporate veil, I don't know what does (especially given point 2).
2. Your LLC wont get a loan. You'll have to get the loan in your names and then Quit Claim Deed the loan to your LLC. The problem with this is that the bank can call your loan (because they weren't willing to lend to the LLC). I don't know the chance of your loan getting called, but it can happen. Additionally, to me - this process of going from your name to the LLC's name feels risky for piecing the corporate veil.
3. Fees - there are filing fees, tax return fees, renewal fees, plus you're probably paying a CPA and/or attorney extra for this work. In Illinois this could wipe away virtually all of your profits.
There are many options - LLC, LLP, S-Corp, C-Corp, Land Trusts, basic partnerships, etc... I really don't know which is best when weighing the pros and cons.
My insurance agent was pretty adamant that an umbrella policy would cover a lot, but I am far from an expert in insurance.
Disclaimer: I am NOT a lawyer and this is NOT legal advice. However, I am pretty well researched in these things (former CPA) and weighing pros and cons on this topic myself.
Realtor · Springfield, MO · Member since 2014 · 26 posts · 3 votes
12y
I can tell you from my personal experience (in other businesses, not real estate) I like the protection of an LLC. That said, I am not a lawyer, and my businesses were not even remotely close to real estate. I had two business and and a high volume of customers and chemical use. My reasoning for forming an LLC for BOTH businesses was that if one got sued and for some reason I lost, the other business would not be affected, and business could continue. I was told that LLC's have been around long enough that case law has been established and that they were treated roughly the same as Corps. I was also told to NEVER mix personal funds and the LLC's funds, as that could pierce the corporate veil.
They are also exceedingly expensive. It cost me roughly $2,000.00 per LLC filing, plus the servicing fee, ( I am in Missouri) plus the $50.00 filing charge with the state.
I can tell you that I will personally not do business without the protection, but I might just be overly cautious.
I am not sure if this helps at all but it might so I thought I would post. Good luck!
Cleveland, OH · Member since 2011 · 400 posts · 223 votes
12y
Doing business through an LLC keeps your personal name and assets from being targeted by disgruntled vendors, contractors, or tenants.
Here's a simple example: you own a house in your personal name, and put the gas bill in your name temporarily until you have a tenant. The $40 bill from the gas company gets mailed to the house's address and not your own, and you never see it. Months pass, and all of a sudden you're notified that your credit score dropped by 50 points because the gas company has sent the balance to collections. This generally doesn't happen if you do business through an LLC, as your personal credit is not to be affected for commercial debts.
Doing business through an LLC keeps your personal name and assets from being targeted by disgruntled vendors, contractors, or tenants.
Here's a simple example: you own a house in your personal name, and put the gas bill in your name temporarily until you have a tenant. The $40 bill from the gas company gets mailed to the house's address and not your own, and you never see it. Months pass, and all of a sudden you're notified that your credit score dropped by 50 points because the gas company has sent the balance to collections. This generally doesn't happen if you do business through an LLC, as your personal credit is not to be affected for commercial debts.
That example may be true, but is it worth the $2,000 fees (as stated above) to have the gas bill in an LLC's name? The only way the LLC could be worth it (in my opinion) is if it protects you from the large liabilities that come from being a landlord. My non-professional, semi-educated thought is that it does not. If you buy in your name, QCD to the LLC how is the corporate veil not pierced?
You're probably right on smaller matters, but to me the corporate veil is there for the large matters.
@Christian Carson, your title says lawyer, do you have an opinion on the large legal risks being protected by an LLC?
Doing business through an LLC keeps your personal name and assets from being targeted by disgruntled vendors, contractors, or tenants.
Here's a simple example: you own a house in your personal name, and put the gas bill in your name temporarily until you have a tenant. The $40 bill from the gas company gets mailed to the house's address and not your own, and you never see it. Months pass, and all of a sudden you're notified that your credit score dropped by 50 points because the gas company has sent the balance to collections. This generally doesn't happen if you do business through an LLC, as your personal credit is not to be affected for commercial debts.
That example may be true, but is it worth the $2,000 fees (as stated above) to have the gas bill in an LLC's name? The only way the LLC could be worth it (in my opinion) is if it protects you from the large liabilities that come from being a landlord. My non-professional, semi-educated thought is that it does not. If you buy in your name, QCD to the LLC how is the corporate veil not pierced?
You're probably right on smaller matters, but to me the corporate veil is there for the large matters.
@Christian Carson, your title says lawyer, do you have an opinion on the large legal risks being protected by an LLC?
JV,
If a lawyer is charging $2,000 for a single-member LLC, it sounds an awful like he doesn't want that type of business.
The ultimate liability protection from an LLC is for black-swan events which force you to walk away from the house. There are other uses for them, though -- to present a professional face to the world for marketing, for ease of bookkeeping, and for the aforementioned ancillary disputes, to keep your personal name off the public record.
You are right that an LLC will show the world that you could be a real business, and most people will throw up an LLC, so they will feel like a real business but just remember there is always a personal name behind all LLCs.
Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
12y
thank you all for the input! i am sure i will be back on here with many other questions! I will update this thread with what my lawyer says when we meet. Should be within the next month or so.
Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
12y
I think the concern should be changed from the Asset Protection to the Partnership Planning. People will go around day after day arguing the pros/cons of Asset Protection and the veil and everything else. Where there's a Lawyer there's a way.
The top focus should be you are investing with family. Provisions need to be drawn up some how (LLC, LLP, Partnership Papers, et al) to make sure that everyone is on the same page and business doesn't influence family. You don't want to have a thanksgiving dinner where the family explodes about business.
On the other hand, I love really complicated Tax Entity/Asset Protection structures, and plans. Enjoy the rabbit hole!
Investor · Colorado Springs, CO · Member since 2013 · 80 posts · 26 votes
12y
One thing that has not been addressed in the comments so far is the fact that you said that you have or will form a "partnership" with your wife, her cousin and his wife.
If that is what you are planning, then at the same time you form your partnership and the agreement to run it you can get advice whether or not to form an LLC also or to incorporate, etc. from the same person who is forming your partnership agreement.
Real Estate Investor · Flower Mound, TX · Member since 2014 · 59 posts · 31 votes
12y
Awesome that you can ask a straightforward question and get so many different opinions. The reality is that some parts of all these suggestions are correct, and ultimately is a decision that is more predicated on YOUR specific situation. Curt had the most relevant advice IMO. The biggest determinant in to LLC or to not LLC is usually how you plan to finance the property/properties. FNMA = no LLC. Local banks can/will provide loans to an LLC. Additionally, there are some loan prodicts (blanket loans for example) that will almost always be to an entity and not to the individual.
Joe is right that good insurance is great protection, but an LLC can make sense if financing cooperates. Also, with there being multiple individuals involved (yikes), the LLC can help with that. You can restructure the LLC without having to refinance the property, for example, if someone wants out.
You are right that an LLC will show the world that you could be a real business, and most people will throw up an LLC, so they will feel like a real business but just remember there is always a personal name behind all LLCs.
Joe Gore
True enough. If you're using an LLC to commit fraud or do something otherwise illegal or unethical, you can bet that the injured party will find their way to your door. But assuming that most of us on BP are honorable, the LLC does its job of absorbing first-wave legal attacks like disputed debts or personnel-related claims--in other words, situations that are the results of circumstance or bad luck.
Rental Property Investor · Gambrills, MD · Member since 2014 · 372 posts · 88 votes
12y
We recently bought our first investment property as part of a group (my wife and I own two rental homes now). Because we are doing so as part of a group that includes four people, we chose to use an LLC to purchase the home. This allows us to have a robust LLC agreement that clearly spells out the details of how the business is managed, who makes decisions, who can bind the LLC, when and how profit distributions are made to the members (the term for owners of an LLC), what happens if a member dies or divorces, whether a member can sell, transfer, or otherwise pledge his or her interest in the LLC, how the business is funded, and more. All of these things were at least as important to us as the asset protection aspects of operating through an LLC.
That said, there are some downsides. Because the property is owned by an LLC, we cannot finance it using a residential mortgage. Instead, we need to find a commercial mortgage lender who will lend on single-family residential properties. That can be somewhat of a challenge, and is something you definitely need to consider. We're using cash to buy and renovate the property (and future properties), but plan to finance them on the back end after the renovation is complete to recoup most (if not all) of our initial cash investment. If you're planning to buy using financing, this could be a bigger concern for you. Another issue relates to property insurance. There are fewer property insurers who are willing to write property insurance policies on single-family residential rentals owned by an LLC. There are still options, but in our experience, they were more expensive than the property insurance we hold on the two rental homes that my wife and I own in our own names.
As others have mentioned, if you are planning to rely on the asset protection provided by an LLC, it is important to maintain the corporate formalities. You can't just draft the agreement, sign the paperwork, and then forget about it. You need to appoint officers (or managers) (in some states), hold meetings of the members (usually at least annually), keep minutes of the meetings, have a separate bank account, avoid mixing personal and business funds, and more. These requirements are not rocket science, but they are procedural requirements where mistakes could void all of the protection you gained by forming the LLC in the first place.
As for the cost of forming an LLC, $2000 seems very high. I drafted the LLC agreement myself (one of the other members and I are both lawyers), but it shouldn't take someone more than a couple of hours using a good model (of which there are several). The type of lawyer you need for this isn't one that should be charging $500-1000 an hour, in my opinion. The annual cost of the LLC will vary from state-to-state, and you should check with the relevant state agency to see what that might be.
Note: I am a lawyer, but this is not legal advice, it is only general discussion of my experience. No client relationship exists between me and anyone else by reason of this discussion.
I see you are following my posting so that mean you are trying to learn something, please jump right in and ask a question someone will try to help you if you want to learn, but if you just want to bash someone, BP is not for you.
Homeowner · Pittsburgh, PA · Member since 2014 · 854 posts · 511 votes
12y
@Account Closed
Based on my research and wonderful responses from the BP community, I am in the LLC AND Insurance camp. I am not in favor of the "forget the LLC" advice that you give without bothering to ask for more details.
Personally, I tend to learn from people that respond "it depends" opposed to someone who jumps from thread to thread offering blanket statements regardless of specifics.
And clicking on a thread that is trending is a far cry from following your posts.
Now if you would excuse me, I am heading to @Jay Hinrichs for a pothead party.
