Should I setup entity enterprise before starting out in REI?

Question

Hi,

I am new in this field. However, I been in construction, sub-contractor, in particular, flooring and remodeling for 16 years. Looking to transition from physical labor and earned income to more of the passive income. Love Real Estate and the potential it has to offer. Just came out of the Rich Dad's/ Legacy Education 3-day seminar where they tried to sell me really expensive packages. I didn't buy into it. However, they talked about Asset Protection and how we have to buy real estate on the LLC rather than on your own name. Just wondering if anybody can help with the advice of whether I would first have to set up the LLCs or just start out by buying on my own name? Also, which route is best to take to start out in real estate investing if I have $70,000 of my own money and credit score is 705. Any guidance would be appreciated.

Percy N. · Answer

@Cody Zimmer, that is correct.

At a very high level.....

You can limit liability via insurance and get easier loans if you keep things in your personal name

OR

You can limit liability via an entity (e.g. LLC) BUT getting loans becomes much harder since Fannie Mae and Freddie Mac do not make loans to LLC (except delayed financing).

There are other reasons one might need an entity, so talk to your attorney and CPA to determine which option is best for you.

I buy in my LLC but I am also a cash buyer.

Ryan Garoogian · Answer

I am also going the route of purchasing personally and obtaining umbrella insurance to cover my investment and personal assets/liabilities. Once I build up enough cash reserves from my first investment property and my current excess from my wages I will most likely go the LLC route and begin controlling my assets instead of owning with my next investment. One key benefit in my mind with the entity route is controlling not owning assets which is the protection piece you are looking to obtain. It will come at a cost of fees and some time though.

Now umbrella insurance and liability insurance on the property is definitely an obtain and increasing the policy increases your protection but one thing that is always unknown is how much a claim will be.

I am not a legal professional and this is not legal advice just personal opinion.

Cody Zimmer · Answer

@Percy N. - That's very helpful, thank you!  I have cash to buy with, but I'm hoping to BRRR, and refi to get my cash out so I can buy again.  So maybe the insurance policy is a better bet for me?

Cody Zimmer · Answer

@Percy N. Right, I understand the goal is to limit liability.  I just thought that an LLC was doing that through a corporation, whereas when you mentioned policy - it sounded like you were doing that through insurance.  I'm pretty new to this and I just want to make sure I understand the vehicles you're talking about.  Thanks!

Percy N. · Answer

@Cody Zimmer, yes, the main reason people create entities is to minimize liability.

Cody Zimmer · Answer

"Liability policy" makes me think of insurance - is this what you're talking about?

Percy N. · Answer

@Tom Kairys, one thing newbies miss is that it is much harder to get financing in the name of your entity vs. your personal name.

You can get an umbrella liability policy and buy in your personal name, or buy in your personal name and then transfer to your LLC (risk the due on sale clause).

All of these options have been extensively discussed on the forums and accessible via a few searches.

Joseph Catalano · Answer

Always use an entity, that said the best entity for real estate is an LLC.  There is no reason not to use an entity. The tax benefits alone are tremendous if used correctly.  Contact your attorney and your accountant and set it up prior to purchasing any property.

Chris T. · Answer

Welcome @Tom Kairys

No, you do not need to set up LLC or companies to start in REI.

You have construction background, which is very valuable in this industry. There seems to be a number of contractors and subs, that just go MIA. If you were to set up a RE contracting business, and go from there, you can build a great network.

What are you looking to do?

I'm in downers grove so if you want to exchange ideas or meet for coffee, shoot me a PM.

Should I setup entity enterprise before starting out in REI?

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