Do l have to establish a corporate identity, get an LLC before I even do my first project?

20 Replies

Before I found this site I went to one of those 3 day workshops run by an investing guru. I was told by a so called mentor that I shouldn't even start doing deals at all until I got an LLC setup. Of course he would help me do that for a very high fee $1500. So is it true I need to setup an LLC before I start doing deals? Since I found this site I've realized bigger pockets offers pretty much the same thing and more for free. So glad I found this site.

It's not necessary to set up an LLC to invest in real estate. If you have a business partner(s), it's a good idea but if its just you, you should understand why you want to set up an LLC before you go and do it and not just because somebody told you to.

Google how to set up LLC in your state. Should only cost you a couple hundred dollars. A corp. is always a good idea for liability protection. Also for tax reasons a corp. can save you money due to the fact that corps get taxed on profit (after expenses) where as the individual is taxed pre-expenses. Of course these advantages vary from state to state. Always seek advise from a qualified attorney/professional in your region which will know your specific benefits to these areas. It would be wise to seek this advise due to the headaches it can save you and the information it can provide you for your future. A couple hundred now can save you thousands in the future.

"Action always beats inaction!"

-Rich Dad Poor Dad

No. I did my first deal with my personal name, even though the real estate gurus may not agree.  At the beginning, it may not be that critical.  Get the deal done first. You can always fix it later.

For reference, most home buyers (not necessarily investors) do buy the properties under personal names.

Oh I understand why I need it. It's to protect myself against possible lawsuits. Right now I don't really have the money to do it. I plan on doing it as soon as I close my first deal.

I have another question I keep seeing the term, holding costs in regards to flipping houses. What does that mean exactly?

No, you don't need an LLC to get started -- and $1500 is absurd. An LLC can even cause you problems in some scenarios (lending, etc). You may eventually want to create some type of business entity, but what type will depend on the kind of investing you're doing. If you don't have any significant assets, it's really just a waste of time right now . Holding costs just means what it will cost you own a property for the time that you have(hold) it : taxes, utilities, insurance, interest on your loan if you have one- that sort of thing.

Welcome to BP!

What's the first thing that is built when building a house? Its foundation. Without a proper foundation the structure is likely to collapse. As novice myself take my advise with a grain of salt (or anyone that has not yet proven themselves reliable to you). Don't invest just to invest. Educate Educate Educate! Investing without education is just gambling. I guess the question you need to find out is what it takes to transfer the title into an LLC. What fees may go along with that? It may cost the same as the formation of your LLC which would mean that the cost is doubled. Anyone know these answers?

Thank you all for the info it has really been helpful. I'm so glad I found this site before I wasted anymore money with the other thing. 

You were not talking to a RE guru, you were talking to somebody trying to sell you a LLC that was marked up 1000%.

I sell insurance and have over 2700 investor clients with portfolios ranging from one rental house to apartment schedules approaching $500M. Most small investors operate under their own name because lenders are easier to deal with that way. A umbrella policy for $200-300 protects you. At a certain point you will grow and an LLC or multiple LLC's make sense but this person is trying to take your money. Run away.

Originally posted by @Elizabeth Atkinson :

Thank you all for the info it has really been helpful. I'm so glad I found this site before I wasted anymore money with the other thing. 

Make you a deal, no more guru classes and you can just send me a 1/3 of what I save you! Don't worry about getting sued with single family homes, buy a decent home in good shape, keep it in good shape, follow the landlord laws, be consistent and fair and get insurance, lots of insurance. To lose in a suit you must be negligent, it's hard to be if you just follow this recipe and read here on BP. Good luck :) 

I really like the people I've met here. Everybody is so friendly and helpful. People here are genuine. Everybody helps everybody which is the way it should be. I believe in Karma. I believe you get back what you put out:)

One thing I would love to do is find someone to partner with maybe someone who is more experienced. I noticed that is something that you can do on this site. I think it's always better when you have two people to bounce ideas off of each other.

I am a neophyte investor as well and I, too, attended one of those guru clinics and had the wherewithal to say no thank to the $35K mastery program. Glad you did the same.

Yesterday, I met with a attorney that specializes in RE. I went to him with the intent of creating an LLC so that I can get cracking. At the end of our discussion, he would not setup up the LLC (more like strongly advised against it). His advice was to identify my first opportunity. If that opportunity is going to be a flip, do it in my name. If the opportunity is going to be a rental, then come back to setup the LLC. Mind you, I had already placed my checkbook on the table. As @Aaron Keams

 stated, Educate Educate Educate. BP is a great resource, the forum search features will come in handy during your quest for RE knowledge. I managed to impress the lawyer mentioned above with my "knowledge" at the juncture.  Thanks @BP.

An LLC may not make sense for rental....depends on cash flow. I had an LLC holding 1 rental in CA, and even though I have a decent cash flow (no mortgage), it did not really make sense holding one rental in an LLC. I see it more beneficial if your cash flow is $15k+ annually and/or if it's an apartment complex. Not sure about other states but in CA every LLC is subject to an $800 annual minimum tax. I have a pretty good umbrella coverage so and LLC is not really beneficial for me.

On the other hand, I see using an LLC for flipping could be much beneficial for a few reasons:

1. Your profit is likely to be higher and the expense of an LLC becomes less significant.

2. Your exposure on a flip may be much greater, hence your asset protection is more important.

I created my own LLC, it cost me around $200-$300. It's not hard, anyone can do it and our great friend Google can help figuring out how to do it in a particular state...:)

Jean, I see you're in Colorado. I moved to Texas from there to be closer to family. I lived in Colorado Springs for 20 years. I sold real estate there for 5 years. What part of Colorado do you live in?

@Elizabeth Atkinson I'm  the Denver/Aurora area. From what I've heard, Texas is a good place to start investing - the Colorado market is crazy right now!

Elizabeth Atkinson I would recommend an LLC for properties you're going to hold and here's why. Me and my partner both have no debt, we own cars, a house, and cash in our personal names. So if we got sued by a tenant or someone on the property of our rentals they have all of our personal equity to go after. That is why we hold our buy and holds in an LLC so they can't touch our personal property. Now, if you are flipping, you don't need an LLC just do it in your personal name.

Holding costs are costs you incur when holding the property. Utilities mortgage insurance taxes are all holding costs.

@Devan Mcclish the flaw with your argument for an LLC and asset protection is that you either aren't explaining or don't understand the fact that tort lawsuits (negligence) are the most common lawsuits against a landlord. This is important because when it comes to tort law there is no asset protection. If you had an employee and they were found guilty of some fraudulent act and you were sued your LLC would likely be the limit of your exposure. How many investors set up an LLC because they were told the LLC would protect their assets? It's almost to the extent of being a flat out lie & fraud in some cases with these gurus charging thousands of dollars to set up complicated legal entities when an investor has two or three properties or even more and less than $1M net worth. Look at your own net worth. Compare the cost of liability insurance to cover your net worth to the amount you spend on setting up and maintaining your LLC(s). Are there cases where an LLC is a good idea? Sure... Asset protection for a single investor with a few hundred thousand (and less in most cases) in net worth? No...

I know right now, I don't want anything to do with rentals. Its more trouble than it's worth to me. I want to stick with just flipping houses. I know some people like rentals  and that's cool,  but for me I don't want the hassle of dealing with renters.

Can I specialize in flipping houses? I know I won't make as much money as if I was doing rentals too but it's worth it to me not to have to deal with all the grief connected with being a landlord.

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