Start LLC or no?

Question

Hello BP,     I am starting out in Real Estate and I was wondering for my first purchase into my portfolio should I buy under my own name, or an LLC?

I know down the road this would be beneficial for tax purposes, but for your first buy would it be to any benefit. If there is any resources I can look at that would be helpful. Otherwise when the time comes closer to purchase I would have to get an CPA to help me out with this question.

Thank you all in advance, have a wonderful day!

Bryan O. · Answer

There are many reason why and why not to use an LLC. Unless you have reasons that are specifically addressed by an LLC I'd just go for good insurance and an umbrella policy. It costs nearly nothing. Your LLC will likely not provide any tax benefits, but will hurt cash flow because commercial loans for entities tend to be 5/20 instead of fixed 30, plus slightly higher interest.

Joe Splitrock · Answer

LLC would actually cost you more money because of annual fees and extra time spend on taxes. With the conventional loan and little assets to protect, the LLC doesn't really make sense for you at this point. You can always transfer into an LLC down the road when it makes more sense. It is great you are asking questions. When I first got into rental properties, the first thing I did is got an LLC, which I had to dissolve after I realized it was useless to me. Just trying to save others the learning experience I went through.

Joe Splitrock · Answer

What tax benefit are you talking about? You pay taxes on your income minus depreciation, mortgage interest and other expenses. This happens regardless of an LLC. It offers you no shelter from those taxes. What type of financing are you getting on the duplex? Assuming a conventional mortgage, you cannot buy it in an LLC. Asset protection is fine, but what assets do you have? Assuming the duplex is financed, it is owned by the bank so nobody can take it from you. You may have other assets but a better protection option would be a large umbrella policy on your insurance.  Most people starting out want an LLC but don't understand the benefits or I should say lack-there-of for small operators.

Alexander Felice · Answer

if it's just a few small single family houses I wouldn't bother.

no tax benefits, MUCH harder to lock in financing, increased initial cost.

Steve Vaughan · Answer

I don't put little houses into LLCs. Only 5+ unit commercial apts.  What type of asset will you be buying @Tyler Witkowski? For houses I just have good insurance.  Tougher to obtain financing and hazard insurance mixing residential property inside a business entity.  Check with your lender and insurance  provider.

A probable misnomer is that LLCs have tax benefits. For the most part, they just pass-through to your personal 1040. For what purpose will you have a house in an LLC?  Anonymity? Asset protection?  These answers will help others try and answer this discussed ad-infinitum topic for you specifically.

Getting too sophisticated with little houses sometimes just causes a lot of administrative and tax reporting headaches at the state and federal level.

Tyler Witkowski · Answer

Thats what I'm thinking I'll have to do after all of your answers. Thank you again Joe for saving me, thats why I love this site! I get to learn from others mistakes and then once I make my own, which I AM going to do, I can save others from doing the same. Im sorry you went down that road and wasted time and money for nothing, besides learning something new.

Matthew Kreitzer · Answer

There are more ownership structures than an LLC. Far too many businessmen turn immediately to an LLC without first discussing their goals and risk aversion with a local attorney. I would recommend reaching out to a Business Attorney in your local area prior to deciding on what formation structure you want. An LLC may not be the best option for you.

Tyler Witkowski · Answer

Thank you again friend, I will put that book into my reading list.

Tyler Witkowski · Answer

I thought you get the benefit of only paying taxes on the actual income you earn, after all expenses of the property are paid for. I didn't know that you can do that regardless of being under a LLC or not.I would be getting a conventional loan and my only assets that I have are cars at this point, which in my eyes are not an asset.

I dont fully understand what having an LLC would benefit me so this has helped me out a lot so far. Thank you @Joe Splitrock. Just trying to put all the puzzle pieces together.

Joe Splitrock · Answer

@Tyler Witkowski I would recommend you read the NOLO book Every Landlords Tax Deduction Guide. Understanding tax structure of rental properties is key before purchasing one. You should also meet with a CPA but they can get expensive. I got this book at my local public library and even after years in the business I learned some things. Good luck!

Start LLC or no?

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