Should I get my LLC?

Question

Should I get my LLC before buying my first rental property? I have read that you should get it before buying your first property and others said that is not necessary. I am afraid of getting the LLC and having to pay taxes if I don't have a property.

Jim Cummings · Answer

@Ronny Perez. I'm sure there are many positive attributes of LLCs - one negative to consider is most Mortgage Lenders will not lend to an LLC.

You will have to get a commercial loan, with attendant higher interest rates, shorter amortization period, etc,. These factors may affect the viability & profitability of the transaction.

Some advocate buying in your personal name and then transfer to an LLC, which opens you up to Due-On-Sale Clauses.

Not saying it's not a viable strategy - just ensure you understand the benefits and shortfalls of an LLC.

I would think for most of us "small scale" investors, buying in your Personal Name and a substantial Umbrella Policy might be the best alternative.

Ned Carey · Answer

@Ronny Perez it is not such a simple question but you won't pay any taxes if you don't  make any money in the LLC.  the exceptions is any taxes required by the state just to keep the company active. In MD that is $300 a year.

Generally LLCs don't really affect the amount of taxes you pay. They are there for Liability protection. They don't offer as much protection as you might expect. But I wouldn't nor an attorney I know would own a property without an entity like an LLC.

An LLC is easy to create and can be created when you buy your first property.  LLCs do take time and cost to run and will make financing harder and more expensive.

Aaron K. · Answer

@Ronny Perez do the math but don't force yourself into something just because the numbers work.  Location will be the most important factor followed closely by the numbers.  Have a target ROI but make sure it is realistic for where you are investing and you will do just fine.

Aaron K. · Answer

It is not absolutely necessary, and even less so if you have few assets to protect.  Some people need the liability protection others are good with what their liability insurance provides.  In your case it will probably come down to personal preference.

Account Closed · Answer

@Ronny Perez Just my experience, in the past I have been able to make offers in my name, or an LLC to be formed.  If the offer is accepted and the purchase is moving forward I can create an LLC.  If the deal doesnt work out no LLC is formed.

Ryan Blake · Answer

@Ronny Perez I agree with everything @Aaron Klatt said. The good news for you is that living in Texas it costs $300 to file for the LLC paperwork which is one of the highest in the country. However, once you file, there is no renewal or annual fee in Texas. The requirement is to file your LLC taxes by May 15th. It isn’t that difficult and if you have no income or expenses it is a very short document. You can file for an LLC yourself using the Secretary of State office website. Please do some research about series LLCs. In Texas, all you have to do is add the wording into the regular filing and the fees are all the same. This is important if you are using a buy and hold strategy as it can keep all your assets in separate series. Just read through the Secretary of State website to make sure you understand how to handle it and keep each series individual. Series LLCs are relatively new and as far as I know have not been tested in court yet. They still only require one tax filing for the whole group so you don’t have to file a return for each series. You also can create each series at will and file with the state for an EID for each series. Again, do some research before you file.

Brendan M. · Answer

I always look at how close to a deal someone actually is. Have you found a deal? Do you have your down payment yet? Are you preapproved for financing? Things of that nature. I always have the entity formed and ready before I write an offer. But not usually before I find the deal (unless it's for business credit building purposes).

Finding a deal and figuring out the financing portion of the deal would definitely be my priority over entity formation.

Should I get my LLC?

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