Pasadena, CA · Member since 2018 · 25 posts · 1 vote
Hi, I am new to real estate and looking to buy an investment property with two partners. We want the property to be titled in the name of LLC, for legal protection and also for personal reasons.
1) What is the best state for LLC? The partners from California and North Carolina. I also heard California is not the most business friendly.
2) Does the LLC need to be set up first before we can start putting in offers? What happens if we form a LLC but we can't find a good deal to buy, then do we still need to file the income tax return for the LLC and issue K1 for every partners?
Sorry, I have no expertise on LLCs outside my state.
Make sure if you offer before an entity exists you give yourself enough time to have it created. Even creating a new LLC as a copy from a previous one... people still take time to read it, maybe have their own attorney review it, then sign it around and then you file with the state...most approve quick if there are no issues that pop up. I'd imagine out of state could easily add more time/complications with time zones and such.
I just went through this and there was an error in our OA and then the attorney was sick for 4 days so you have to plan for the worst case scenario.
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
8y
This is not tax or legal advice, this is what I do as a CA investor who buys rental props in KC: Setup a CA LLC with all 3 partners and buy the property in that. You can only get commercial lending in you are closing in a LLC. If you live in CA you are doing biz in CA - so you have to register your LLC in CA and pay the $800 a year. You LLC will issue each member a K-1 at the end of the year. You LLC operating agreement dictates the percent ownership of every member. Good luck!
I don't know the full situation here and there are several different ways you can go so I'll refrain from giving advice but if you are going to be managing the entity from CA, you will likely be "doing business" in CA, and therefore will likely be subject to the $800 minimum tax and need to file as a foreign LLC in CA if you form it elsewhere.
If you will be needing loans, it will be much harder to get one loaned to the LLC but not impossible. Be careful of triggering due on sale clauses if you receive funding as an individual and then transfer it to the LLC.
If you have the LLC formed and don't find a property right away you will still need to file a tax return but it won't have much on it. You will also need to pay the $800 minimum tax to CA, if you're subject to that.
*This post does not constitute legal advice and is not to be relied upon. It does not create an attorney-client or CPA-client relationship. Readers are advised to seek professional advice.
People offer all the time before the entity taking title exists. It is not at all uncommon for offers to be submitted in the name of "Joe Smith and/or assigns"... you just want to make darn sure that if you're Joe Smith, that your partners are going to actually deliver their capital or that you have the ability to close some other way if they don't. Otherwise you risk your earnest month, your reputation and maybe a lawsuit.
@Lee Ripma glad to hear you are investing in the same market. Were you able to find great deals recently in KS MO? We'd love to do it through LLC but i feel the hefty CA tax plus other fees is going to take up a big chunk of the cashflow which was already tight ($100-$200 per month per my calculation).
@Katie L. thanks for all the great information. It would be ideal if we can combine conventional lending and LLC. Looks like it has to be one or the other.
@Tyler Mullen interesting to hear that you can actually submit an offer before LLC. I can't wait to talk to my realtor about doing this. Many thanks for the great advice.
I also read that it is better to set up the LLC in the state where the properties are in. How are the laws in KC MO for LLCs? Is it as good as Neveda or Delaware? Thanks again.
Sorry, I have no expertise on LLCs outside my state.
Make sure if you offer before an entity exists you give yourself enough time to have it created. Even creating a new LLC as a copy from a previous one... people still take time to read it, maybe have their own attorney review it, then sign it around and then you file with the state...most approve quick if there are no issues that pop up. I'd imagine out of state could easily add more time/complications with time zones and such.
I just went through this and there was an error in our OA and then the attorney was sick for 4 days so you have to plan for the worst case scenario.
Flipper/Rehabber · Kansas City, MO · Member since 2011 · 2k+ posts · 712 votes
8y
Not an attorney - but if you set up a CA LLC, but use it to buy property in MO - then you would also need to register the same LLC as a foreign entity to buy property and sell it with the title company - plus pay taxes in Missouri. Many of our out of state investors set up an LLC, just for the MO properties in MO - its really really cheap.
Pasadena, CA · Member since 2018 · 25 posts · 1 vote
8y
@Tyler Mullen thanks a lot for the heads up. Do you mind sharing which contingency or dates for which I should request for longer time? Would it make any difference if it is a cash purchase? I am assuming we can cashout refinance in a year or two.
@Kim Tucker I was also leaning towards setting LLC in MO however I do have to pay the CA franchise tax as well. Thanks for your input.
Investor · Kirkland, WA · Member since 2017 · 310 posts · 271 votes
8y
What time you need to allow yourself and your team will be specific to each property under consideration and the specifics of the deal, the more entities involved, the more localities involved, if you’ve never done something before compared to if you’ve done it 500 times like a 203 loan app, or if you’re buying out of town and have no team in place yet then it’s going to take more time to do things like find an inspector or contractor.
Part of setting yourself up for success and setting up your process is being realistic and setting dates that are workable for both sides. If I’m going to bake cookies from scratch I know I can’t do it in 10 minutes, so why pretend on a contract that I can?
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
8y
What kind of properties are you planning to buy? LLCs can be overkill for a lot of them, and it can jack with your financing. Also, CA isn't the most business-friendly, no, but since you are a resident of CA they are still going to charge you the $800/year LLC fee regardless of what state the LLC is setup in.
For question #2, I'd first be curious what kind of properties you're planning to buy to know if the LLC is worth it from the start. Setting something up like that before you are actually doing anything tends to be putting the horse before the cart.
Pasadena, CA · Member since 2018 · 25 posts · 1 vote
8y
@Ali BooneTotally agree with you Ali. The reason of using LLC is to avoid adding anything to my personal debt due to an upcoming home purchase in CA. Our debt to income ratio is already high and my banker suggested putting investment in LLC to avoid impact to future home loan.
In terms of properties, we r open to both SFR and MFR. but we really want to keep it under $200k starting out. Looking for a safe 10% CoC return - which seems quite difficult if I am to look in good schools areas in KC out of MLS.
I am also considering doing a LLC for myself first. Only when we find a deal, I would then add partners in as new members and every one wires money in when an offer is likely to happen. I wonder if this could work.
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
8y
@Li Tolentino I'm not sure we are looking at the same type of deals in KCMO. I am buying value add small to medium MF properties. Sounds like you're looking at SFH in good school districts that are ready to go? Feel free to share a bit more about exactly what you are looking for in the KC market.
My understanding is that once you form an LLC you can't add members, that happens at formation. I think you could hold title with multiple LLC as TIC. As others have said, my advice would be to focus on deals and don't go crazy with entity formation and spending money on LLCs. My understanding is that you will always have to pay the 800/year franchise tax if you live in CA even if your entity is in another state that is cheap. CA will know about your LLC when you file taxes. I hear of folks doing it other ways and trying to skirt this. The legal advice that I have gotten is that if you live in CA they are taking that 800/year so I just go ahead and have my LLCs in CA. Others should do whatever they want in regard to this, that is just what I do based on my understanding of the laws!