To LLC, or not to LLC, that is the question

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To LLC, or not to LLC, that is the question

DJ Cummins
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!

Any and all advice is appreciated!!
DJ Cummins

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Tom MolePro Member
Investor · Sunland, CA · Member since 2013 · 260 posts · 240 votes
12y

Hi @DJ Cummins,

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.

All the best.

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  • Kimberly H.
    Residential Real Estate Broker · Chicago Suburbs, IL · Member since 2013 · 1k+ posts · 594 votes
    12y

    @DJ Cummins If the plan is to buy one property a year, and since you're in Illinois, you may consider using a Series LLC structure. If you search this site for "LLC" you'll see a lot of other threads discussing the pros and cons of LLCs.

    1Reply
  • Rick H.Pro Member
    Investor · Joliet, IL · Member since 2013 · 59 posts · 32 votes
    12y

    I think it mostly depends on where you're at.

    If you are just starting out and trying to build a business, you have to take calculated risks in order to succeed. Not forming an LLC and utilizing conventional financing to maximize profitability may be a worthwhile risk for you (as long as you have good insurance).

    Later, after you have firmly established yourself, and presumably have more assets to protect, it probably makes sense to be more conservative and invest more in asset protection.

    1Reply
  • Brandon G.
    Contractor · Garland, TX · Member since 2014 · 186 posts · 9 votes
    12y

    @DJ Cummins Also consider an LLC with an S-corp tax election (or simply an S-corp) as a potential tax savings strategy. For me, this completely rules out the idea of flipping in my personal name. Of course, talk to your CPA about it before making a decision.

    1Reply
  • Sean Brooks
    Bear, DE · Member since 2014 · 178 posts · 65 votes
    12y

    @DJ

    Everyone has provided some good advice but as a Realtor some issues I refer them to a lawyer and advice my clients to speak with that person. That's for my protection and theirs. 

    Your doing right you have a meeting with a lawyer. If he's a real estate attorney or lawyer that specializes in asset protection he will ask you what you attempting to achieve. Since your just starting off, you might not have much to protect and there's some advantages as far as loan qualifications that you may want to just purchase in your own name. 

    An LLC is talked about heavily in business school to protect your personal assets but in this situation it may or may not be the best. What they do not discuss is that if your found liable criminally that it can not protect you. It's also used as a means of not paying taxes the way an individual pays. A good lawyer will be able to structure your business the way you like to protect against all attacks.

    I forgot to mention when thinking about forming an LLC you need to know the following:

    • Number of members in the LLC
    • Terms of the operation agreement if there will be more than one member, such as: will all owners be managers with authority to bind the LLC, etc..
    • Percentage interest for each member, if there will be more than one
    • Name and address of LLC, cannot be a P. O. Box

    You need a few people in your corner when dealing with Real Estate 

    Lawyer --- any contract used should come from a lawyer working in that state and location.

    Accountant - Make sure you pay the proper taxes 

    Realtor - Assistance with locating and selling properties

    Contractor - A person that will provide you estimate cost and do the repairs 

    Maintenance person - if you can handle, you need someone that will fix tenant issues 

    Property Management - I believe in outsourcing this function so the tenant does not know the owner - collect rent, sending late notice, renewing or not renewing the lease, etc. 

    Also read this article on BG - http://www.biggerpockets.com/renewsblog/2014/09/02...

    2Reply
  • Frankie Woods
    Investor · Arlington, VA · Member since 2012 · 1k+ posts · 491 votes
    12y

    Great question and even better discussion!  This is awesome!

    1Reply
  • Rob K.
    Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
    12y

    There's been lots of talk on this forum (and others) about getting financing when holding a house in an LLC. I got a loan in April for a house in an LLC and it was fairly easy. I know others who have done it as well. The terms that I got were 80% LTV, 4.75% ammortized over 25 years, and a balloon due after five years. I don't like balloon payments, but with commercial financing, that was the best I could find. The closing costs were pretty cheap - around $1,600 on a $102K mortgage.

    1Reply
  • DJ Cummins
    OP
    Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
    12y

    Wow. This has been a lot to take in. Thank you so much to everyone who has responded with their advice. We are having a meeting tomorrow night to try and get all of our ducks in a row and get meetings set up with the RE atty, and our accountant. I am sure that i will be posting a lot more often on here, because free advice from those who are successful in this business is priceless. Thank you all so much!
    DJ Cummins

    0Reply
  • Stephen Chittenden
    Rental Property Investor · Gambrills, MD · Member since 2014 · 372 posts · 88 votes
    12y
    Originally posted by @Rob K.:

    There's been lots of talk on this forum (and others) about getting financing when holding a house in an LLC. I got a loan in April for a house in an LLC and it was fairly easy. I know others who have done it as well. The terms that I got were 80% LTV, 4.75% ammortized over 25 years, and a balloon due after five years. I don't like balloon payments, but with commercial financing, that was the best I could find. The closing costs were pretty cheap - around $1,600 on a $102K mortgage.

     Rob,

    Would you mind sharing who that was through?  Was it a local bank? Those are nice terms.

    0Reply
  • Jay V.
    Tulsa, OK · Member since 2014 · 31 posts · 4 votes
    12y
    Originally posted by @DJ Cummins:

    Wow. This has been a lot to take in. Thank you so much to everyone who has responded with their advice. We are having a meeting tomorrow night to try and get all of our ducks in a row and get meetings set up with the RE atty, and our accountant. I am sure that i will be posting a lot more often on here, because free advice from those who are successful in this business is priceless. Thank you all so much!
    DJ Cummins

    While I disagree with some of the opinions on here, there are good points. I'd assume (and recommend) that you're drawing up an agreement, using proper asset planning, thinking about taxes, etc... whether you go with an LLC or not. I'd also look at your insurance options whether you LLC or not. Ultimately, you should have proper planning whether you go with an LLC or not and it sounds like you're on that path.

    My opinion was and still is that the value of an LLC for smaller investment groups is really only in protecting you from those black swan type events, which in my opinion it wouldn't do because the corporate veil is pierced. Obviously, others that are likely more experienced than I am think differently. I only plan on utilizing an LLC if I get pretty big where the cost could be bearable for whatever benefit you may receive ("big" isn't defined yet, but a ways away).

    Either way, now you've heard the arguments on both sides.  You're doing the right thing in speaking with a real estate attorney - if you trust him/her you should probably follow their advice.

    Best of Luck

    0Reply
  • Stephen Chittenden
    Rental Property Investor · Gambrills, MD · Member since 2014 · 372 posts · 88 votes
    12y

    I'm curious, why do you think the corporate veil would be pierced? Also, the cost of an LLC isn't necessarily very high (depending upon your state) especially compared to a partnership.

    0Reply
  • Paul Granneman
    Investor · Colorado Springs, CO · Member since 2013 · 80 posts · 26 votes
    12y

    I am inclined to believe much the same way as @J V. Most of what you would want an LLC to protect you from, it will not. The things that it will protect you from are so remote most of the time that you have to balance risk vs reward.

    Most people here are imagining that an LLC provides this teflon coating against money seekers in every shape and form. If you look at the history of the typical Real Estate based LLC, you will see that it is not very effective at sheltering the owner from litigation of this type.

    Your best course of action DJ is to do exactly as you are: sit down and talk with everyone in your group and then consult several professionals as to available courses of action. Good Lcuk!

    0Reply
  • Dale Hensley
    Real Estate Investor · Fishers, IN · Member since 2014 · 35 posts · 30 votes
    12y

    I'm surprised at the costs mentioned on setting up an LLC. In Indiana, it costs under $100 to file the LLC with the state and you are established. All you need is a basic articles of incorporation. There is a fee of about $30 every 2 years to file the business entity report to show you are still in business but that's it for the setup. I hold everything in differnt LLC's and do business with each of them. My renovation company is it's own LLC that does business with by real estate company. I have a small sign company that gets paid from the real estate company to produce marketing and signage. It does make things a little more complicated at tax time because I have to file separate schedule C's on each business but it works out and also keeps me from having as high of profit to pay earned income on the real estate side.

    Since you have your wife and 2 others coming in, I think you will need to look heavily into an LLP. I have a good friend who is a commercial property investor with his two brothers and they are setup in an LLP. They do multi-million dollar deals daily. The main protection comes from having good insurance and doing the right thing instead of taking shortcuts. My renovation company doesn't do very much of the actual labor anymore. It works mostly as a general contractor that subs out the work to other contractors but I still have a large business insurance plan and am licensed, insured and bonded which only costs me $900 a year.

    On another note, we do our property purchases under a trust as I have been led to understand that it is one of the best ways to separate the property from my personal assets. Just make sure you have a very trustworthy trustee involved.

    Good luck. This is a fun business. Our first flip went awesome. We didn't make as much as I wanted to, but we still had a net profit of $27k. It can work very well if you do a good evaluation on the property and make your money when you buy the property.

    1Reply
  • Frankie Woods
    Investor · Arlington, VA · Member since 2012 · 1k+ posts · 491 votes
    12y

    @DJ Cummins  's post  http://www.biggerpockets.com/renewsblog/2014/09/02....  Excellent read and solid advice on LLCs.  BTW, I agree with what he says, and it corresponds with a lot of what has already been mentioned on this thread.

    1Reply
  • DJ Cummins
    OP
    Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
    12y

    quick question--how do you make the @Frankie Woods work? i can't ever do that to mention someone else? :)

    1Reply
  • Frankie Woods
    Investor · Arlington, VA · Member since 2012 · 1k+ posts · 491 votes
    12y

    You start typing @Frankie  ...  and the name will appear below the "post a reply" box.  Opposite the "post reply" button to the left

    0Reply
  • Mark Korte
    Alton, IL · Member since 2014 · 1 post · 0 votes
    12y

    An LLC is good if it is blind and bears no state tax. I also consider how I handle the pass through. I like holding title in trust but management is done through the LLC. WYoffer an advantage in allowing income to be ROI which eliminates self employment tax. You plan can be as simple or diverse as you desire and is necessary to protect yourself and your investment while you plan your taxes as opposed to letting the taxes happen.

    0Reply
  • Val Ruggeberg
    Real Estate Investor · El Cerrito, CA · Member since 2011 · 5 posts · 3 votes
    12y

    DJ,

    this thread has some awesome advice! When I started investing in real estate, the first thing I did was to file for an LLC, got my EIN, then opened a business checking/savings account; 6 months later I applied for a business Visa; today I have 3 business cards with over $25,000 in credit (the limits keep getting increased annually) which I use for my business expenses, repairs, etc., so that I don't use my personal credit for my business. I also get points for free rewards from these credit cards!

    For asset protection, I have been advised to put only one or two investment properties in each LLC instead of lumping all of them in one LLC.

    1Reply
  • Casey York
    New York City, NY · Member since 2014 · 8 posts · 1 vote
    12y

    DJ,

    It's great that you're talking to a lawyer. Questions to discuss include taxes, the asset protection provided by an LLC, land trust, etc., and the "pierce the corporate veil" (which often relates to the way the owner conducted the business affairs). It might not be a bad idea to print out/pull up this discussion and have it with you. Re the partnership with family, I've heard many stories (think pre-nup) of people who went in with friends and family and then unexpected events cause disappointment. Would you enter this deal with them if they were unrelated? This is more of a personal choice (for some people, it works out very well), but things to consider in making that choice are what happens if one couple later wants out, what if family dynamics changes, etc. A good agreement at the outset with everyone on board could help avoid unexpected conflict later. Here's a run-down of some of the things in an LLC agreement (http://ow.ly/B6NbO) but again, talk with an attorney. Finally, good luck!!

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