Real Estate Investor · Houston, TX · Member since 2010 · 9 posts · 5 votes
I'm currently looking for my first flip and have received conflicting advice from some of the local investors I've spoken to. Some say it is better to get your feet wet and go through the first flip from start to finish before setting up an LLC while others say to set it up beforehand.
I will personally be investing $75K into the venture and my father is willing to invest an additional $100K in exchange for 30% of the profits.
I think we'd be better off getting the LLC taken care of before purchasing our first property in order to protect our personal assets, but others have said it isn't a big deal if we have insurance and use contracts to properly protect ourselves with contractors, etc.
I'd really like to hear the opinions of experienced BP members and I would appreciate any advice!
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Mo,
From my experience and info given to me over the years from many asset protection advisors, attorneys, CPA's, etc, you should not be flipping properties in your personal name! You open yourself up to personal liability if anything should go wrong (during rehab, someone gets hurt above and beyond your insurance coverage, and most importantly, after you have sold it, the buyer could come back at you and sue for something). Better for you to get your entity sued which holds very little to no assets, than your personal self!
Also, for tax purposes, I have been instructed in my case to flip using a S-Corp, and hold my long term rentals in LLC's.
This is not legal or accounting advice, just third hand info from my experiences.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Mo,
From my experience and info given to me over the years from many asset protection advisors, attorneys, CPA's, etc, you should not be flipping properties in your personal name! You open yourself up to personal liability if anything should go wrong (during rehab, someone gets hurt above and beyond your insurance coverage, and most importantly, after you have sold it, the buyer could come back at you and sue for something). Better for you to get your entity sued which holds very little to no assets, than your personal self!
Also, for tax purposes, I have been instructed in my case to flip using a S-Corp, and hold my long term rentals in LLC's.
This is not legal or accounting advice, just third hand info from my experiences.
Real Estate Agent · Cedar Creek, TX · Member since 2010 · 161 posts · 63 votes
15y
I started my LLC before I bought my first property just to give myself a layer of protection against personal liability. However, make sure you get good advice about how to operate your LLC, you want to make sure that you run it like a company or it can be pierced in a lawsuit.
I like Will am not an attorney so take my advice with a grain of salt.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
Personally, I think you can make an argument either way, especially if you don't have many personal assets to protect should something go terribly wrong.
That said, I err on the side of others who have responded already, and would recommend taking the plunge to set up the LLC.
My brother will be purchasing his first rehab investment property next month, and my advice to him was to set up the LLC, meet briefly with an accountant and an attorney (just to have people to call in the case it's necessary) and apply for a business credit card and business bank account to ensure that he's segregating his money for better accountant and to support his future tax returns.
Real Estate Investor · Houston, TX · Member since 2010 · 9 posts · 5 votes
15y
Thanks J Scott!
You make an excellent point about business credit and that is something I'm looking into as well. Do you have any suggestions on which business credit card(s) to apply for? I know Advanta was a good one but they went out of business.
Commercial Real Estate Broker · IL · Member since 2009 · 16 posts · 2 votes
15y
You don't want to be personally liable in worse case scenario. Also, as longs as you file your LLC documents properly every year and you make sure you get the proper asset protection you'll be fine. Make sure you look into manager manage and charging order. you thank me if you dont already no about it.
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
15y
The LLC also sets up an operating agreement. This agreement provides more than asset protection it also protects the members. It is also best to consider the many things that can happen ahead of time to limit the amount of grief that can come about when members later disagree with how a specific situation should be handled.
Sounds like you and your father are on very good terms, but business can have a way of putting strains out relationships and it is always good to minimize possible friction.
Real Estate Investor · Lynnwood, WA · Member since 2010 · 6 posts · 2 votes
15y
I just wanted to add my 2 cents in thanking everyone for the good advice. Can anyone make a recommendation for an REI savy person to help set up an inexspensive S-corp in the Seattle area?
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
Dave,
Generally you'll want to talk to either/both a CPA and/or attorney to get your first LLC set up. If you don't gave significant personal assets, you can probably skip the attorney at first, as most CPAs will likely know the very basics of asset protection and will obviously know the tax side of things.
A CPA who owns property and/or works with real estate investors is your best choice...
Real Estate Investor · Atlanta, GA · Member since 2010 · 53 posts · 4 votes
15y
So if you were to buy the house via a conventional mortgage and put it in your name to achieve better financing, would you then deed it over to LLC before you flipped it?
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Originally posted by Dave Eddy:
I just wanted to add my 2 cents in thanking everyone for the good advice. Can anyone make a recommendation for an REI savy person to help set up an inexspensive S-corp in the Seattle area?
You can also talk with Nationwide Incorporators. Mike is the owner and can set you up an entity in any state. he has set up numerous entities for me and i like his services. I have no affiliation with this company and receive nothing for mentioning the company.
Real Estate Investor · Lawrenceville, GA · Member since 2011 · 48 posts · 8 votes
15y
I started my LLC before I closed on my first deal as well. The reason why I did so was because I knew that it was something that I was going to do sometime or another so I just got it out that way and it made me feel as if I have got a accomplishment out of the way.
Specialist · Cleveland, OH · Member since 2011 · 1k+ posts · 852 votes
15y
Hi Mo,
If you are gonna take title, I would have your LLC open. If you are gonna flip the contract, you can wait. Keep in mind that the amount of contribution on your LLC is a direct reflection of the percentage of equity you have in the entity.
Good luck!!! :D
Accountant · Hyattsville, MD · Member since 2011 · 120 posts · 44 votes
15y
Originally posted by djotham:
So if you were to buy the house via a conventional mortgage and put it in your name to achieve better financing, would you then deed it over to LLC before you flipped it?
Yes, this is one way of getting around the issue of not being able to finance in the name of an LLC. Watch out for the due on sale clause although that rarely happens which says that the lender can demand full repayment of the loan because the deem the transfer a sale.
Real Estate Investor · Lynnwood, WA · Member since 2010 · 6 posts · 2 votes
15y
Originally posted by J Scott:
Dave,
Generally you'll want to talk to either/both a CPA and/or attorney to get your first LLC set up. If you don't gave significant personal assets, you can probably skip the attorney at first, as most CPAs will likely know the very basics of asset protection and will obviously know the tax side of things.
A CPA who owns property and/or works with real estate investors is your best choice...
J Scott, Thanks for your advise. As you can see by my post, I haven't been around BP in a while.
Lexington, KY · Member since 2009 · 2k+ posts · 1k+ votes
15y
I am a fan of setting up the LLC as soon as possible as well. Aside from the legal and tax reasons already discussed, you can start getting the business name out and marketing the business. I am trying to build a company, not just a personal portfolio, so I want my company name to be recognized and respected in my local area...so why not go ahead and get that started?
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Originally posted by Frank Maturo:
I set up my LLC then buy...and I can do the purchase in the name of the LLC as well.
This brings up a good point that if you have your entity set up at the start, you can then make offers on potential acquisitions in the name of your entity and not with your personal name.
I also agree with James in that building a name for your business (your entity) is also important.
Real Estate Investor · Baltimore, MD · Member since 2011 · 34 posts · 5 votes
15y
Personally, I wouldn't set up an LLC until after your first flip, UNLESS your first flip was an REO, in which case I would create a shell LLC such as "123 Man St. LLC," sell that LLC, then use the money made from this assignment to create a legitimate entity to structure your business and open up a separate bank account.
Sorry for the run on sentence, but that is exactly how I've done it...Good luck to you!
Lexington, KY · Member since 2009 · 2k+ posts · 1k+ votes
15y
Originally posted by Dan Schwartz:
Personally, I wouldn't set up an LLC until after your first flip, UNLESS your first flip was an REO, in which case I would create a shell LLC such as "123 Man St. LLC," sell that LLC, then use the money made from this assignment to create a legitimate entity to structure your business and open up a separate bank account.
Dan, can you provide a little more insight as to why toy would wait?
Sorry for the run on sentence, but that is exactly how I've done it...Good luck to you!
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
15y
Originally posted by Ebere Okoye:
Originally posted by djotham:
So if you were to buy the house via a conventional mortgage and put it in your name to achieve better financing, would you then deed it over to LLC before you flipped it?
Yes, this is one way of getting around the issue of not being able to finance in the name of an LLC. Watch out for the due on sale clause although that rarely happens which says that the lender can demand full repayment of the loan because the deem the transfer a sale.
I would suggest deeding the property into the LLC as part of the attorney's closing package. Just buy the house via a conventional mortgage and tell your closing attorney that you want the house in an LLC for personal protection purposes. Then instruct your closing attorney to prepare a deed from your name into the LLC. The bank will see the deed (actually both deeds) and sometimes they will balk. If the underwriter balks, have your attorney write a one line sentence on the attorney firm's letterhead saying that the transfer to the LLC is for his client's protection. No worry about DOS since the bank agreed to the deed. Besides... we're talking about a flip.
The worst thing that can happen is the underwriter/bank refuses to do it. Then you could just record the deed outside of closing.