LLC or personal name for all-cash offer?

Question

Hi All,

My partner and I are getting ready to purchase our first investment property as an all-cash offer. I want to know if we should put our names on the contract or put an LLC name on the contract? We plan to rehab the property and sell it (flip). I've read a few blogs on BP and it's not clear to me for all cash offer (LLC or our names)?

Any guidance is helpful. :)

Patricia Steiner · Answer

I wouldn't do it any other way nor would my clients.  Here's why:

"An LLC for real estate is an established legal entity that allows investors to purchase and own real estate in such a way that protects them from personal liability. This means that the investor buys and sells real estate, as well as conducts other business, in the name of the LLC, rather than as an individual. In case any outside entities or individuals make a claim, the individuals behind the entity are able to avoid personal liability. In addition, property owners are allowed to establish individual LLCs for each separate property, meaning that they can avoid cross-liability between properties." (End; Fortunebuilders)

An example. Let's say someone is injured on the property and they decide to sue for the moon.  The LLC removes all of your personal property and assets from the mix. If a judgement was awarded, only the assets held in the LLC could be attached.

There is no reason to commingle your personal and business assets.  The potential liability is too great.  As for the tax implication, it's a non-event:

"When the IRS “disregards” an LLC, it means that, although the LLC and it's owner are separate entities (for liability purposes), the IRS “disregards” them and just taxes the LLC however its owner is taxed. The IRS treats the owner and the LLC as one and the same." (End, LLCUniversity)

Some of my clients place each investment property into a separate LLC and others "group" them based on some criteria.  Since this is a flip, you can use the LLC over and over again - rather than securing a new LLC each time you acquire a property.

Hope this helps...

Scott Smith · Answer

Hi @Alicia Collins,

That's a great question. Let me hit this simply from the asset protection side of things. When meeting with clients the first order is to discuss (A) their personal assets, (B) break down their current investments portfolio and other business ventures before discussing any (C) future goals. Each of these variables will dramatically change the advice for the individual asking this question. I often break it down into the "five pillars" of protecting your assets.

1st pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur.

2nd pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

3rd pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property they can’t touch you or the other properties. You should use either LLC’s (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE- check out this article to learn more.

4th pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a “asset holding company”) and a completely separate company handles all of your operations (this is a traditional LLC a/k/a “operating company”) For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

5th pillar is owning everything anonymously. If people don’t know what you own, then they are less likely to sue. People don’t sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner still, it doesn’t matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.

Specifically regarding your case, you can also implement a strategy known as Equity Stripping. Equity Stripping is the process of placing a mortgage on a piece of real property. The mortgage act as a "lien" on the property. A lien is a "notice" attached to the Client's property, in the form of the publicly recorded mortgage, telling the world that a creditor claims the Client owes it some money.  Any person searching the title of that property will see that the property is encumbered by a lien.  Meaning the property is not worth its full value unless that note is paid.

• Example: an owner has property worth $500,000.  A lien is placed on that property for $450,000.  Because there is the lien on the property, the value/equity of the property is only $50,000.  If an individual wishes to sue the owner, he/she will first look to see if the Client has any equity to attach a judgment to - meaning, does the Client have enough money to pay the individual.  The individual will see the lien and realize that the lien must be paid first before the lien is removed from the property. Until that happens, the person will only be able to get his/her hands on the $50,000.

But when you approach asset protection keep in mind each "pillar" will cost you time/money. So to really know what is best in your situation having an experienced attorney explain the exposure you face and the likelihood of law suit is pretty important. Hope this helps!

This is not legal advice, just my opinion as a real estate investor.

Scott Smith · Answer

Currently New Jersey does not allow you to form a (S)LLC in the state; however, I know many investors who form the Series LLC in other states and have their properties nested within the (S)LLC. To accomplish this without having to pay the additional foreign filing fees you would just nest the properties into land trusts.

Land trusts are also very functional because they will streamline your investments for estate planning, add an additional layer of anonymity/privacy when formed by a knowledgeable attorney and allow you to retain favorable financing options.

This is not legal advice, just  my opinion as a real estate investor.

Alicia Collins · Answer

@Scott Smith Thank you very much for your detailed response. I had no idea about Series LLC. I will look into that. Thank you for that article. Great info and value. I will have to find out if NJ allows for Series LLC. (S)LLC sounds so much easier.

Alicia Collins · Answer

@Patricia Steiner Thank you so much for your response. I understand what you are saying. Sounds like LLC is the way to go!

Alicia Collins · Answer

@Patricia Steiner thank you very much Patricia. Are there any specific reasons why you recommend that route for all cash purchase and mortgage purchase?

Patricia Steiner · Answer

Alicia, congratulations on your first investment property. I'm sure it will be the first of many.  I recommend titling all investment property in the name of an LLC.  It provides greater asset protection.

LLC or personal name for all-cash offer?

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