LLC

21 Replies

Hello everyone,

I have been reading books by Robert Kiyosaki lately, and he talks a lot about creating your own LLC to protect you assets.

Should one create an LLC before purchasing property, or after?

Any advice on LLC's is appreciated!

Thanks.

-Hermilo Garcia

@Hermilo Garcia  

what is the value of the assets you are trying to protect? Reading your profile it looks that you are just beginner and trying to acquire your first property. If that is the case you probably don't need to worry about the LLC at this point.

Also, keep in mind that if you use financing - you will have to acquire property in your name, most lender will not allow you to buy it in the LLC.

At this point my recommendation to you will be to save as much as you can to put towards that first investment and as you grow it and learn more then you can look into LLC.

Medium logo 19 1Dmitriy Fomichenko, Sense Financial | [email protected] | (949) 228‑9393 | https://www.sensefinancial.com/free-consultation/ | CA Agent # 01876563

I was very curious about the same thing as I finished some of Robert Kiyosaki's books as well. The books make it seem like you're putting so much at risk without having some asset protection Corporation handling your assets but never goes much into the why and how of transferring between the individual and the corporation and how ownership works. 

After some consideration, I personally decided that when I purchase my first property through financing I would not worry about LLC - yet.

JuAt for future reference legal zoom had great deals on starting up llc's. Hope this helps.

I always create them before, make the offers in the name of the LLC, and then move them in and out of the LLC to finance them. Also, when I sell a property or wholesale it to another investor, I don't sell the property...I sell the LLC.

I think a lot of it comes down to the state you are operating in...and the cost of the LLC. In Michigan, it costs $50 to register, and $25/year to keep it in good standing. For those in states like Texas and California, those numbers are not typos.

Can you expand a little on how you go about selling the LLC, Joe? Are there any legal restrictions/differences between selling the LLC vs. the property?

What I'm most curious about is how does one go about refinancing a house that's in an LLC?

@Non Phan You simply sell the LLC. It's like selling any other business. When you sell it, the assets go along with it. Our LLC's that own the properties do nothing but own the properties. They were established exclusively for that purpose only...sometimes, the day before we make the offer on the property.

Some lenders will grant funding for the LLC, but usually it is either a cash deal or you have to Quit Claim it out of the LLC for funding, then right back in afterwards. The title is held in the LLC for legal and tax purpose, but the mortgage is usually in the personal name of one of (or all of) the partners.

Originally posted by @Joe Villeneuve :

@Non Phan You simply sell the LLC. It's like selling any other business. When you sell it, the assets go along with it. Our LLC's that own the properties do nothing but own the properties. They were established exclusively for that purpose only...sometimes, the day before we make the offer on the property.

Some lenders will grant funding for the LLC, but usually it is either a cash deal or you have to Quit Claim it out of the LLC for funding, then right back in afterwards. The title is held in the LLC for legal and tax purpose, but the mortgage is usually in the personal name of one of (or all of) the partners.

Can you talk a little about the "tax purposes"? I was talking with a CPA yesterday and he mentioned that there aren't any benefits of having the LLC own the property.

@Joe Villeneuve when you say that you move a property in and out of the LLC for financing, does that mean you are just quit-claiming it from your name to the LLC (or vice versa)?

This is something I have been trying to wrap my head around because I don't want to hold a property in my name, but it's difficult to find financing for an LLC vs. myself.

Originally posted by @Emily B. :

@Joe Villeneuve when you say that you move a property in and out of the LLC for financing, does that mean you are just quit-claiming it from your name to the LLC (or vice versa)?

This is something I have been trying to wrap my head around because I don't want to hold a property in my name, but it's difficult to find financing for an LLC vs. myself.

 Yes....but, this strategy depends on the lender.  The details are what makes it work.  The concept I've mentioned here is just that.

@Joe Villeneuve  can you share an example of how this might work? Or has worked for you?

@Hermilo Garcia If you are half way serious about being an investor.... get a LLC going. Become a business not a landlord. Your mindset from day one should be thinking big. Over time your entity becomes seasoned and it becomes a living almost breathing machine. Your credibility gets established and you are no longer Mr. and Mrs. home owner. Once you get the LLC filing taxes for a few years and have income... banks will loan to it, this is personal experience. I personally had multiple portfolio loans in my entitiy... the banks will still financially look at you the controller...

These are my thoughts that I have acted on and no professional has influenced me.  

Frank

[email protected] | CA Agent # 01957844


Can you talk a little about the "tax purposes"? I was talking with a CPA yesterday and he mentioned that there aren't any benefits of having the LLC own the property.

 ---@John Matthews

Hi, I am an accountant that is interested in doing my first investment deal this year...

However, I think I can answer your question regarding your CPA's comment.

The purpose of an LLC is more for LEGAL liability, than for tax deduction, because you can typically deduct most of the same expenses whether you organize an LLC or operate in your own name.

So buying property through and LLC should give your more legal protection, but it doesn't necessarily provide more tax benefits, since all income passes through to you and you are taxed at the same income tax rate.

Hope that helps.

@Dmitriy Fomichenko  Thank you very much for the advice! 

You are correct. At the moment I am looking to buy my first property, and am in the works of saving money for a down payment.

Thank you once again. Have a great day!

@Non Phan  Thank you for your response!

That is definitely my plan. Eventually I would like to own my own LLC, and invest through it.

So, I assume you created your LLC before purchasing your first property?

Originally posted by @Emily B. :

@Joe Villeneuve can you share an example of how this might work? Or has worked for you?

Sure @emily. We form an LLC. It could be the day before, or years before. The key is it is when it is formed, the only purpose is to make offers and to hold ONE property. We have a program for doing this we instituted to make it easy too. Standard docs and distribution breakdowns based on the "type of partner" each member of the LLC is, and what their roles are within the LLC.

There are essentially 3 Partners:

1 - Cash Partner:  Responsible for putting cash into the deal at the beginning.
2 - Credit Partner:  Responsible for getting any leveraged financing...specifically the refinancing to get all the cash back that the Cash Partner put in.
3 - Management Partner - Responsible for everything else, from the finding and analyzing the deal, through closing, to managing the project to the exit strategy.

All three partners are on the Articles for the LLC from the start. Since the Credit Partner is a part of it from the start, when financing (refi) is required in 2 or 6 months, the title is quit claimed to them before application for financing...and right back into the LLC before the "ink is dry". The financing is in the name of the credit partner, but the title is in the name of the LLC. As long as the credit Partner remains a member of the LLC that holds the title, all is well with the world...in the eyes of the lender.

Thanks for the example, @Joe Villeneuve  it helps to see how that breaks down.

Great discussion, thanks all!

For those of you who out-of-state investors did you:

  • use a lawyer/firm in your state of residence to form the LLC?
  • use a lawyer/firm in your state of residence to form the LLC?
  • simply do it yourself instead using a lawyer/firm?

And the most important follow up question, of course, is why?

I appreciate your help -- thanks!

@Joe Villeneuve :

I always create them before, make the offers in the name of the LLC, and then move them in and out of the LLC to finance them. Also, when I sell a property or wholesale it to another investor, I don't sell the property...I sell the LLC.

Hi Joe,

I find this strategy very interesting for a few reasons. First as a newbie to wholesaling properties, I like the idea of making offers in the LLC's name as opposed to my own for credibility proposes. Second, the cost to register an LLC in the state of Arkansas is only $50.

But I'm curious to know if there is a limitation on how many or how often one can register different LLC's? Also, do you and your partners use a primary LLC or Corporation to represent your organization and simply create additional LLC's on a deal by deal basis?

Originally posted by @Joseph Jones :
@Joe Villeneuve:

I always create them before, make the offers in the name of the LLC, and then move them in and out of the LLC to finance them. Also, when I sell a property or wholesale it to another investor, I don't sell the property...I sell the LLC.

Hi Joe,

I find this strategy very interesting for a few reasons. First as a newbie to wholesaling properties, I like the idea of making offers in the LLC's name as opposed to my own for credibility proposes. Second, the cost to register an LLC in the state of Arkansas is only $50.

Q: But I'm curious to know if there is a limitation on how many or how often one can register different LLC's?

A: Not in Michigan. In Michigan, it also costs only $50 to start an LLC, and $25/year to renew.

Q: Also, do you and your partners use a primary LLC or Corporation to represent your organization and simply create additional LLC's on a deal by deal basis?
A:  Both.  We have a primary which we use as or "member" in each individual LLC that owns the property.  One LLC per property.  One Property per LLC.   

This is a timely topic for me as I'm looking to create an LLC for my next property and ultimately role my others into an LLC. In Maryland, creating and renewing an LLC is more expensive, closer to $300.

@Joe Villeneuve  - The information you provided is very helpful.  I do have some additional questions.  

If you create a separate LLC for each property, do you have a single Operating LLC where all the Rent/Expenses go through? Do you just have the renters write checks to the Operating LLC? I'm trying to avoid having separate bank accounts for the LLCs.

From a tax perspective: Do you allocate the operating LLC's Income/Expenses to the appropriate Property LLC when you file 1065s? Likewise, you would depreciate the asset in the Property LLC as a part of the 1065 filing, correct? Trying to understand the technique or strategy to reconcile income/expenses for tax purposes.

Thanks for the help!

@Greg Pfister  Yes to all.  As far as multiple bank accounts are concerned, the separation of funds and accounting from a legal (liability) perspective outweighs any minor inconvenience keeping multiple accounts.  The multiple accounts actually helps you keep your books straight, makes it easy when you have partners, and with debit cards and EFT's, I don't have any checks to write...ever.

As far as the paper trail is concerned, look at it like this. There's a big funnel. You do the accounting for each LLC, the "bottom lines", overflow into the funnel, and come out as one stream at the bottom. This also means if you have partners, you can have different partnerships with each LLC that holds the properties. The splits are done on the LLC accounts, then each "bottom line" funnels its way to the individual partners.

The explanation is more work than the actual process.

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