Newbie with LLC question

10 Replies

I know this has been discuss many times on the forum, but here is my question.

Does trying to buy a property under an LLC make it harder to get a traditional mortgage and get insurance. I am preparing to start house flipping and I am considering starting an LLC. Are there any reasons why I should or should not create an LLC.

Thanks,

Tristan 

LLC is only necessary with buy and hold properties (rentals) to protect personal assets against any potential tenant legal actions. LLC is not necessary on wholesale or buy fix and flip properties. But this is just educational information. Consult your CPA for more detail information.

@Rodney Marcantel I disagree with your assessment that an LLC is not needed for a fix and flip or wholesale deal. It's not just tenants that sue. If a contractor, a potential buyer, even a curious neighborhood kid gets hurt on the property, you can be sued just as if it were a tenant. If a buyer discovers undisclosed property issues, you can be a lawsuit target. While many lawsuits never get as far as the LLC, minimizing the risk on wholesale & flip deals is just as important as buy and hold deals.

@Tristan C. Titling your property in an LLC will cause issues with a traditional residential mortgage, as @James Wise  described. However, for Hard Money lenders or getting a Commercial loan on a residential property from the bank, the LLC is not an issue, and many will actually prefer you to have one. You will almost always have to sign a personal guarantee on the loan though.

Medium dayton rei networkDarrin Carey, Dayton Real Estate Investing Network | [email protected] | (937) 458‑3303 | http://www.DaytonCapitalPartners.com

Originally posted by @Darrin Carey :

@Rodney Marcantel I disagree with your assessment that an LLC is not needed for a fix and flip or wholesale deal. It's not just tenants that sue. If a contractor, a potential buyer, even a curious neighborhood kid gets hurt on the property, you can be sued just as if it were a tenant. If a buyer discovers undisclosed property issues, you can be a lawsuit target. While many lawsuits never get as far as the LLC, minimizing the risk on wholesale & flip deals is just as important as buy and hold deals.

My assessment @Darrin Carey was just quick input. I agree with your details on possible legal avenues for being sued as a landlord. Like you said, "many lawsuits never get as far as the LLC" is reason enough to not require an LLC for flips. And I would suspect that if you're not disclosing property issues, you shouldn't be in the business anyway.

I always disclose known issues, even seemingly insignificant ones. I also point out potential problems that should be addressed that are not an issue yet.

However, the unknown can be problematic. A friend of my bought and flipped a property, and all was good. First spring rain after the sale, and the basement was 4' deep in water. The neighbors said it happens every year in the spring. The "nice older couple" he bought the house from, failed to mention it, or put it on the disclosure form. Fortunately, the buyers were happy with his offer to fix it. It cost him quite a bit, but saved a potentially long and expensive lawsuit.

Medium dayton rei networkDarrin Carey, Dayton Real Estate Investing Network | [email protected] | (937) 458‑3303 | http://www.DaytonCapitalPartners.com

Thanks you all for you advice, it has been very helpful.

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