LLC, Co. , None or when

[Account Closed]

Hey BP!

Currently own a 3-Family home. I'm looking to expand and I'm curious on opinions if I should create an LLC or Co. before purchasing my next property. Which option would leave me the most protected and also give me the best tax benefits? To get an idea of my goals which may have an effect I'd like to close on 2 more multi-families within the next six months. After doing so I'd like to expand to small apartment buildings. Probably starting in the 10-15 unit range. Any advice is greatly appreciated!

[Ricardo R.]

@Account Closed that's such as back and forth debate, with no one size fits all answer. In terms of protection a property under an LLC with S corp option would most likely give you both the best legal protection as well a give you the best tax advantages, coupled with strong property insurance and possibly umbrella insurance. However, as to whether you need an LLC right now on a single property it's really up to you but, probably not, you could probably get away with strong insurance. The other issue is that you will most likely have higher loan rates and higher down payment requirements (at least 25%) if you try to buy a property under an LLC additionally you may still have to personally guarantee it to the lender under your own name especially if the LLC is not 'seasoned' or over 2 years old. Another issue with the LLC is that, it's not very fluid, in that you may run into hurdles down the road when you try to refinance - but it does give you protection.

On the apartment building side, I am currently closing on an 11 unit and in that case I would highly recommend the LLC / S corp structure for protection, liability and anonymity - it's just a higher risk investment.

Some people may buy a property under their own name for the lower rates and down payment requirements and then turn around and place the LLC on title... if you do that you will most likely break the due on sale clause and the lender could, call the entire loan amount due, not likely, but they would have every right to and you would then be SOL.

I personally think that the best of both options is to buy the properties (1-4 units) under your name now and bolster up on property and umbrella insurance and then get a solid lease. If you did decide you still wanted more protection you could place the lease under an LLC, in that the property is under your name but the Tenant is dealing with and interacting with the LLC which is on the Lease, in essence if they sue due to any management mishaps they would be suing the managing LLC and it would give you some protection of which if they got through that then you would fall back on your second line of protection, your insurance - this would also let your LLC season and position it to buy property in the future. Once you get your 5+ unit, then you could form your LLC (if you haven't done so already) and buy it under the LLC, let it season and then turn around and refinance your earlier properties down the the road into the LLC, at that point you would have more to loose (more properties) and it may be a smart idea then. Even then, you would have to give some thought on whether you want just one LLC that buys and manages or two separate entities - one that buys the property and is on title and the other that manages and is on leases; the thought being that the LLC on title is a 'sleeper' in that it's sole purpose is to be on title and protect the property and the managing LLC is the one that interacts with the Tenant and is the one that will be sued and has nothing to loose - similar to you hiring a property management company to encapsulate yourself. I'm not an attorney but, I have had the same questions before and have gone back and forth with attorneys and accountants to come to my preference now, I hope this helps.

Alex