Totally lost on creating LLC
Phoenix, AZ · Member since 2019 · 33 posts · 12 votes
Hello,
I currently have 1 rental property (this may go up very soon) located in Ohio, I live in AZ. I have done a lot of reading about the benefits of an LLC. My main reasons for wanting one are the protection it provides and to keep my Debt to Income Ratio balanced, but i have no clue where to start. I've read that NV and DE are great places to create the LLC but i do not fully understand the benefits/draw back of doing this. I have decided i would rather speak with a real estate attorney than trying to guess on my own, but do i speak with an AZ attorney or OH, and does anyone have any recommendations?
Thanks
Wow! Lot's of misinformation here. Let me try to explain why you MUST have an LLC.
If you are a sole-proprietor (No LLC) and a tenant gets killed because of a faulty oven in your SFH rental, their estate/heirs will sue you for $10 million or more! They will take your rental, they will take all the money in your personal accounts, savings accounts, IRA's and 401k. They will take your vehicles, and then, depending on your state's homestead laws, they can take your personal residence. They will get a judgment against you for the rest. They will use Writ of Attachments and garnish your wages and you will work the rest of your life to pay them.
It the property were owned by an LLC, they could only sue the LLC and most likely all they could take is your SFH rental. (Assuming you do everything correctly and do not allow the corporate veil to be pierced.)
Here is another scenario where the LLC will help protect you:
If you are a sole-proprietor (no LLC) and a UPS driver slips on the wet lawn of your personal residence, hits his head on a rock and dies, his estate/heirs will sue you for $10 million or more! They will take all the money in your personal accounts, savings accounts, IRA's and 401k. They will take your vehicles, and then, depending on your state's homestead laws, they can take your personal residence. You know the rest. What you may have noticed is that they cannot take your SFH rental because the LLC owns it!
If the property were owned by an LLC, they could only sue you personally for your liability and most likely, all they could take is your personal stuff. (Still bad, but imagine if you had 50 rentals like @Arlan Potter. He would have lost all 50 of his properties!).
Sure insurance is great, but what if your policy was only $2 million max and you're sued for 10 million?
I recommend that you put your personal residence and other personal assets in trusts and LLCs as well. The reason you might use a Wyoming LLC or Nevada LLC to own an LLC in your own state is for anonymity. If someone wants to sue you, they'll never find everything you own.
@Stanley Bronstein posted that you are required to register your out-of-state LLC. This is NOT true for all states. Be sure to check with your state to see if this applies to you, and your particular situation.
Hello,
I currently have 1 rental property (this may go up very soon) located in Ohio, I live in AZ. I have done a lot of reading about the benefits of an LLC. My main reasons for wanting one are the protection it provides and to keep my Debt to Income Ratio balanced, but i have no clue where to start. I've read that NV and DE are great places to create the LLC but i do not fully understand the benefits/draw back of doing this. I have decided i would rather speak with a real estate attorney than trying to guess on my own, but do i speak with an AZ attorney or OH, and does anyone have any recommendations?
Thanks
Hey Nate,
Ideally you will want to pick the LLC with the strongest protections and the least costs involved. However, with the ability to use a land trust to avoid foreign filing fees, investors are much more flexible now. It's something that many don't get too involved in until they have scaled up in their investing, or have many personal assets at risk. There are many different asset protection strategies, each with the pros and cons, that can continue scaling with the investor.
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.
This is far more than you need to know at this stage. The reason I share it is because forming LLCs in different states from where you reside for additional benefits is really not going to make a big difference for a small investor. The fees and knowledge involved with the process don't really justify the effort for newer investors to choose an LLC with a (slightly) stronger internal liability shield. If you do choose to get an LLC the first thing you should do is learn how to operate one correctly, as many people negate their protection by commingling funds or other small mistakes. Once you get the basics and scale, then you can start jumping into the more advanced entities. (Once again, some investors start with more money than others - if you do have a lot of persona assets you want to protect and are willing to invest more money early on to keep them protected, then this could be something to look into. It just doesn't justify the costs involved for new investors most of the time.)
This isn't legal advice, just my opinion as a real estate investor.
I am glade to come across this forum and comments/posts provided by the BP community as I am currently stuck in a similar situation.
I am currently working on acquiring my first investment property and will be getting into contract soon. Furthermore, I am also looking to establish the LLC this coming up week. I recently spoke to my lender (Bank) and I was informed that they won't allow me to go through the mortgage process with an LLC. Due to this situation, I was also told that closing of the property (Title/Deed) will need to be under my name as well; not the LLC. Because of this recent noticed, I have several questions which I hope someone can provide some insight!!
1. Is it still worth it to create an LLC at this point? If so, should I create the LLC as to where the investment property resides or would it be ok for me to create an LLC in Arizona as they have a low filing fee and no annual fee? (Note that the investment property is not located in
Arizona)
2. Is it worth it to go through the process of transferring the Deed from my name to the LLC after closing? (What are the Cons and Pros)
3. If I were to transfer the Deed from my name to the LLC, how would my mortgage be affected? In addition, can I also transfer the mortgage under the LLC?
Thank you for your help BP Community!
This is not legal advise but I would speak to an Ohio attorney. You could even read below link
https://www.tuckerellis.com/news_publications/newsletters-client-alerts-352
@Justin Y., a new LLC is generally difficult to secure financing with - I wrote an article about this with some thoughts on how to get financing and move the property to the LLC. Following are some of my thoughts re: your questions above:
1. LLC's help to compartmentalize your assets. First, they allow you to separate your personal assets from your business assets which is a great idea for most investors. Second, the State matters since the laws of the State identify what you can do, and what taxes you will pay. An accountant may be good to ask for the tax advice.
2. The deed needs to be in the name of the LLC to create the separation of assets in case some difficulty arises.
3. Using a land trust to transfer assets is protected by the St. Germain act from due on sale calls when the LLC is a pass through entity.
Good to see you on BP!