LLC? How much in the bank?

Question

How's everyone doing,

So I've done some research on how to best protect my personal finances when starting my investment career and so far I think I've come to the conclusion that an LLC is the best answer. What are your guy's thoughts?

Also, when looking to get a loan, lets say a 200k loan, how much would you say should the LLC have in the bank account for a loan such as FHA?

Thanks everyone

Andres.

Jeff James · Answer

I think I need to print off @Gayla Kemp 's post for future reference as my plan is virtually identical to her description but there were some details that I had no idea about.  Thanks for the info.

Gayla Kemp · Answer

One thing that I forgot to include is that you need to get a Fed ID number.  My lawyer or CPA did this for me.

Gayla

Gayla Kemp · Answer

I agree with James.  I run fully under an LLC so here is how it is structured.  I am married but we decided to do a single member LLC.  Like I told my husband, he would get 1/2 of what I owned if we got a divorce so there was nothing to worry about.  At some point, when we get more houses, we may get an LLC for him just to limit how many we have in an LLC.  I am the only one that can sign contract and closing documents.

1. Single member LLC advantage - does not require any yearly tax filings but do have to file yearly state name registration renewals to renew the LLC name and keep it in good status.  For taxes, all the income/expenses just roll down into my personal 1040.

3. Operating agreement - Lawyer created it and told me to sign all documents for the LLC as a manager.

4. Get a checking account in the LLC name.  I did add my husband to the checking account as a check signer but that is the only place his name is on anything.

5. Find a local small bank, no "big" name bank, call around and ask them if they will do a loan in the name of an LLC.  You may have to call several to find one.  I did not find a credit union that I could use either, they wanted loans in your name only, not the LLC.  Find out what their loan requirement are as they might vary.  My bank that I am using, know the banker thru my daily job, gives me loans at 5% interest based on 360/365 days, 20% down, amortized over 15, balloon at 5 years.  At 5 years I will be able to refinance with no money down.  Might not be the best but another bank was just about the same but they had different closing fees.  LLC will only be able to get a commercial loan, there are no loans like you would be able to get personally since LLC's are a company.

6. You will have to provide the bank with a personal financial statement, they have blank ones for you to complete.  They will check your credit scores but that is all they do.  They will ask for prior year tax returns.

7. Call insurance and get the insurance in the name of the LLC.  There are some insurance companies that will not do this so you need to verify this with them.  I would also suggest getting a couple of different quotes because there can be several hundreds of dollars different.

8. Decide if you are going to be active or passive in the LLC.  This makes a difference on your taxes.  I am passive, only own the properties and have a rental manger handle everything else, rents, evictions, repairs, etc.  I did this because I work a full time job and also to reduce exposure of talking with renters.

If you do this, your personal name will not be on anything and limits the exposure.  I was guided by a CPA, Banker and Lawyer when I did my start up.  CPA also told me to not leave too much money in that bank account, so I transfer "draws" out each month and only try to keep as much as I initially invested in the company with in that account, mine being $500.

Hope this helps.  Best of luck!

Gayla

James Syed · Answer

@Andres Moreno

Welcome to BP.

Holding a title under an LLC is a great idea. Here are the steps you could take.

1. Form a series LLC

2. Open a bank account under LLC name

3. Contact a portfolio / commercial lender (can't get Freddie Mac or Fannie Mae fixed rate loans)

4. Get pre approved (make sure to inform the lender that you would be holding title under your LLC)

5. Once under contract, contact an insurance agent and you should be able to get insurance for your LLC and make sure your name is also covered under insurance policy just in case someone goes after you.

Hope it helps.

Jesse Waters · Answer

Andres,

Here's what I did.  My business partner and I set up a LLC to operate our properties.  We had to apply for the loans using our personal credit & take the properties in our names at closing.  After closing we transferred (grant deed) the properties over to the LLC.  We still have the loans in our name but the money runs through the LLC & we have been generating corporate tax returns that will help us when we go for financing on larger commercial loans.

Hope that helps.

Andres Moreno · Answer

Thanks for that reply. I guess I could have better explained. I do plan on getting a small multi-family and occupy one of the units.

Did not know about an LLC not being able to get an FHA loan. I need to do more research.

Which way of the LLC conversation do you fall? Would someone that chooses to hold property on their personal name need (or should) to carry high insurance?

Again, thanks for the reply.

Brett Russell · Answer

@Andres Moreno

First off, you're not going to be able to get an FHA loan in the name of an LLC.  Even if you get it in your name and then deed to an LLC, you would be responsible for the loan personally AND you have to owner occupy the property.  If it's a small multifamily, then you are in business.  Otherwise, you can't really use FHA for an investment property.

As to your first question, you'll find very divided opinions on LLCs here.  Some people agree with your assessment that separating investment and personal assets is a very good idea.  Others say it just creates unnecessary expense and complexity and that you are better off holding properties in your personal name and having a large umbrella insurance policy.