LLC Question

18 Replies

I have been reading through the forum posts on LLCs and I am still unclear on a few points.

1- Should I use an LLC for my first property or wait untill I have a few and enough equity/cash flo to worry about? (That said I would start off with a landlord insurance policy and a PM will be doing the day to day management)

2- I have read several posts stating that banks will not lend to an LLC that is just starting out anyway which leads me to think waiting may be my best option...?

Thank you in advance for any clarity you can provide!

The only thing an LLC does for you is offer legal protection. It has no effect on your taxes. You may even be able to get equivalent protection with an insurance policy and no LLC, at least while you are starting off. This is just my opinion - I am not a CPA or an attorney.

@Sebastian Gast That's not entirely true. Operating in a LLC can effect your taxes. The owner of a LLC can elect to be taxed as an S-Corp, in which case owner distributions are considered dividends not subject to self-employment taxes. A tax disadvantage of a LLC is that members are taxed on their distributed share of income even if they haven't taken the distribution. While LLCs are pass-through entities for tax purposes, those two items above will potentially effect a member's taxes.

@David Johansen I do agree with Sebastian in that you are better off just obtaining a solid umbrella insurance policy. LLCs are usually more expensive and can create accounting and legal headaches. Insurance and loans will be more costly when covering and loaning to a LLC. You are right in thinking that eventually you will need a LLC, but in the beginning, it makes more since to just purchase an umbrella insurance policy.

Thank you both for your replies.

@Brandon Hall  thank you for confirming that for me! With the small cash flow at the beginning I don't want to spend anything I don't need to so I can save that cash flow for future purchases. Thanks again!

@James Wise  Thank you! I will be using residential financing for as many as I can. From what I understand that limit is 10.

@David Johansen   - couple of points here:

1. It's not that the banks won't lend to an LLC. Fannie and Freddie conforming notes, in other words those common residential 30-year mortgages that are sold on the secondary market about 3 seconds following origination, are mandated to be originated to an individual. In fact, they were meant for owner-occupants, but new investors like them due to the long amortization and lower interest rates. If that's your game plan, then you have no choice - you must deed the property in your name.

Furthermore, if you think that you are going to transfer ownership interest to a single member LLC following the purchase, you need to realize that you'll be triggering the Due on Sale and Acceleration in your note. There's been an awful lot of discussion of it here, and I don't want to restate...

2. Now - an LLC is an asset protection tool first and foremost. While you can elect to be taxed as an S Corp within an LLC, this is above your pay grade at this time. And as an asset protection tool, the question is - do you have considerable assets to protect? If not, why bother...so goes the thinking :)

Good luck!

@Ben Leybovich   Thank you for your comments. Yes those issues are as you so aptly put above my paygrade:) That is so good to know as now I can focus on the things I should be focused on. Thank you again!

The S-Corp structure will often help from a tax standpoint, but only if you are generating business income (like flips).  If you are just holding for rental income then it won't help you much.  Keep it simple at first and I agree that a good umbrella policy is a must!

It depends on what your trying to do.  If your doing rehab/sell, or buy and hold rental and this is where things get ...interesting.  

An entity (LLC, S-Corp, etc) is designed for asset protection. This is also the reason banks don't like to finance to an entity. They want the ability to come after you and your personal assets in case of a default on the loan. However, there is a very serious side to carrying property in only your name and it is for the same reason. I have posted about these reasons a few times already.

The real risk is that you are exposing your personal assets (house, cars, bank accounts, etc) in any legal action against you or your investment property.  Any lawsuit that comes about, everything you own is now up for grabs to satisfy a judgment.  If you operate an entity, and keep each property in its own entity, you confine the judgement to only the assets in the entity that is sued.  This way your personal assets can not be taken to fulfill a judgement against an entity and vice-versa.

Yes there are tax implications, financing implications, and legal implications to every variable there is.  I highly recommend that you spend a little time and get a free consultation or even pay for legal advice from a business lawyer that is knowledgeable with real estate transactions/investors to determine a plan of action.  This will help you decide when you need to form an entity, how to structure it, and how to move property into and out of your entity to provide you legal protections for your personal assets.

It is highly recommended that each property be owned by a separate entity (LLC, S-Corp).

As for banks not wanting to lend to a new LLC, this can be overcome by personally guaranteeing the mortgage.

Thanks to all posters. This  information has been very helpful.

Originally posted by @Ben Leybovich :

@David Johansen   - couple of points here:

1. It's not that the banks won't lend to an LLC. Fannie and Freddie conforming notes, in other words those common residential 30-year mortgages that are sold on the secondary market about 3 seconds following origination, are mandated to be originated to an individual. In fact, they were meant for owner-occupants, but new investors like them due to the long amortization and lower interest rates. If that's your game plan, then you have no choice - you must deed the property in your name.

Furthermore, if you think that you are going to transfer ownership interest to a single member LLC following the purchase, you need to realize that you'll be triggering the Due on Sale and Acceleration in your note. There's been an awful lot of discussion of it here, and I don't want to restate...

2. Now - an LLC is an asset protection tool first and foremost. While you can elect to be taxed as an S Corp within an LLC, this is above your pay grade at this time. And as an asset protection tool, the question is - do you have considerable assets to protect? If not, why bother...so goes the thinking :)

Good luck!

Ben, Thanks for bringing up the 'Due on Sale' clause. So are you saying as soon as I deed my rental properties into my new LLC the bank could come knocking at my door asking for full payment? I should add, I'm doing this research because I am planning to open an LLC as the parent 'property mngt' LLC and then have my three rentals in another LLC. Perhaps only three properties doesn't rate LLC structure this way but I am planning for future growth. Thanks in advance for your reply.

Originally posted by @Michael Smith :
Originally posted by @Ben Leybovich:

@David Johansen   - couple of points here:

1. It's not that the banks won't lend to an LLC. Fannie and Freddie conforming notes, in other words those common residential 30-year mortgages that are sold on the secondary market about 3 seconds following origination, are mandated to be originated to an individual. In fact, they were meant for owner-occupants, but new investors like them due to the long amortization and lower interest rates. If that's your game plan, then you have no choice - you must deed the property in your name.

Furthermore, if you think that you are going to transfer ownership interest to a single member LLC following the purchase, you need to realize that you'll be triggering the Due on Sale and Acceleration in your note. There's been an awful lot of discussion of it here, and I don't want to restate...

2. Now - an LLC is an asset protection tool first and foremost. While you can elect to be taxed as an S Corp within an LLC, this is above your pay grade at this time. And as an asset protection tool, the question is - do you have considerable assets to protect? If not, why bother...so goes the thinking :)

Good luck!

Ben, Thanks for bringing up the 'Due on Sale' clause. So are you saying as soon as I deed my rental properties into my new LLC the bank could come knocking at my door asking for full payment? I should add, I'm doing this research because I am planning to open an LLC as the parent 'property mngt' LLC and then have my three rentals in another LLC. Perhaps only three properties doesn't rate LLC structure this way but I am planning for future growth. Thanks in advance for your reply.

Michael, If I have my rental properties under LLC, can I withdrawn money from that account anytime for personal use?

Emmanuel, I don't think I am qualified to answer this. I'm not an attorney and I don't have my LLC set up yet. However, if I had to guess, a person would not want to use these funds for personal use because this would blend the lines between the person and the LLC. There are 3 ways to pull out money: salary, guaranteed payments, and distributions.

@David Johansen , you have gotten some very good advice here and some stupid advice. First setting up a corporate entity is in large part about asset protection. The size of your personal assets should be considered as a factor in deciding what to do. There are very real considerations that affect your taxes. A sub S is generally better for flipping while most favor an LLC for pure renting. If you buy million dollar properties then use a different corporation for each entity, if you buy $50K houses or even $30K houses getting a separate LLC for each one would be stupid. It would be like setting up a new plate and fork for every raisin you ate. Just overkill and the accounting and corporate formalities would be a nightmare. If you decide to do a corporate form ask your accountant and learn all you can about keeping the corporate formalities. It is important. Which ever way you go get good insurance. Good luck. Oh look up other threads on this, there are a lot.

Originally posted by @David Johansen :

I have been reading through the forum posts on LLCs and I am still unclear on a few points.

1- Should I use an LLC for my first property or wait untill I have a few and enough equity/cash flo to worry about? (That said I would start off with a landlord insurance policy and a PM will be doing the day to day management)

2- I have read several posts stating that banks will not lend to an LLC that is just starting out anyway which leads me to think waiting may be my best option...?

Thank you in advance for any clarity you can provide!

Form an LLC for the property. The $$$ you will spend is peanuts.

(:))

When you get bigger, then you can worry about splitting hairs.

Originally posted by @Michael Smith :
Originally posted by @Ben Leybovich:

@David Johansen   - couple of points here:

1. It's not that the banks won't lend to an LLC. Fannie and Freddie conforming notes, in other words those common residential 30-year mortgages that are sold on the secondary market about 3 seconds following origination, are mandated to be originated to an individual. In fact, they were meant for owner-occupants, but new investors like them due to the long amortization and lower interest rates. If that's your game plan, then you have no choice - you must deed the property in your name.

Furthermore, if you think that you are going to transfer ownership interest to a single member LLC following the purchase, you need to realize that you'll be triggering the Due on Sale and Acceleration in your note. There's been an awful lot of discussion of it here, and I don't want to restate...

2. Now - an LLC is an asset protection tool first and foremost. While you can elect to be taxed as an S Corp within an LLC, this is above your pay grade at this time. And as an asset protection tool, the question is - do you have considerable assets to protect? If not, why bother...so goes the thinking :)

Good luck!

Ben, Thanks for bringing up the 'Due on Sale' clause. So are you saying as soon as I deed my rental properties into my new LLC the bank could come knocking at my door asking for full payment? I should add, I'm doing this research because I am planning to open an LLC as the parent 'property mngt' LLC and then have my three rentals in another LLC. Perhaps only three properties doesn't rate LLC structure this way but I am planning for future growth. Thanks in advance for your reply.

 Does the bank have the right - yes! Will they - it's happened before!!!!

Clear it with the lender before you go. Some banks are OK with single-member LLC, others are not...

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