Best state to file an LLC for investments?

Question

What is the best state to file an LLC for investments? I've heard different things (home state, Texas, Delaware, Nevada, Wyoming) online and from other peers but not sure if it differs specifically for RE investing.

I am based in Texas and will be investing in this area for now. Trying to see if it is best to look out of state or not.

Any help would be appreciated!

Thanks,

Stephanie

Frank Maratta · Answer

@Stephanie Choi i would definitely set up an LLC. You can still get a residential loan with an LLC, you just need to close on the property in your personal name (as someone else stated residential loans are hard to obtain in an LLC) and then quit-claim the property to the LLC. While this technically may violate the due on sale clause of your loan, I’ve never heard of a bank enforcing it.

One thing to keep in mind is If you plan on acquiring more properties in the future and place them all in that same LLC, all of those assets in that same LLC are exposed if you were to ever get sued. So, something worth looking into is a “series LLC”.  This type of LLC compartamentalizes every asset held under the same (parent) LLC, so each asset is not exposed in case of litigation. From what I’ve heard, you can create one bank account for this LLC and multiple properties and it won’t be considered co-mingling funds.  I wish I had more info on this type of series LLC and if someone reading this does, feel free to chime in, because it’s something I myself am looking into setting up. I believe you can even take it a step further and set it up as an Anonymous trust, which would allow others to have to dig a bit deeper in case of a lawsuit (if they don’t know you own an asset or other assets then the less likely they may be to move forward with litigation).

Stanley Bronstein · Answer

If the original poster's forms an LLC in a state other than Texas, and then the  LLC is doing business in Texas by operating an income producing property in Texas, it's still going to need to be registered in Texas (as a Foreign LLC). That's increases the formation costs and ongoing costs, as the LLC is now registered in 2 states.

Stanley Bronstein · Answer

@Stephanie Choi If you are based in Texas and you are going to be investing in Texas, my recommendation (especially while you're starting out) would be to form your LLCs in Texas. LLCs in Texas don't pay any annual taxes unless your revenue gets above a threshold amount of $1,130,000. You still file an annual franchise tax return in Texas, but no tax will be due in most circumstances (unless you're making quite a bit of money).

Stanley Bronstein · Answer

If the original poster's forms an LLC in a state other than Texas, and then the  LLC is doing business in Texas by operating an income producing property in Texas, it's still going to need to be registered in Texas (as a Foreign LLC). That's increases the formation costs and ongoing costs, as the LLC is now registered in 2 states.

Matthew McNeil · Answer

I'd concur with the advice Frank offered.  I'd add this; if you used a conventional loan sourced from Fannie Mae they allow you to Quitclaim the property without violating the due on clause sale, which would be a very rare action taken by the lender because a Quitclaim doesn't transfer the mortgage.  Additionally, check with the title company to make sure the insurance remains intact before doing any type of conveyance.

Jim Cummings · Answer

@Stephanie Choi. You may already be aware of this; If you create an LLC to buy Residential Rental Properties (SFR & MFR), you will need to finance the purchase via a Commercial (Not Personal) Loan, which means higher rates, shorter Amortization Schedule, most likely 5-7 year Balloon type financing.

If this is your first purchase, suggest you buy in your personal name. By buying in your personal name, you'll be able to get Residential Terms (30-Year Fixed Interest Rates just slightly above Owner / Occupant (0.25% - 0.50%). Most Lenders will allow you to purchase 4 properties, and even some will go up to 10 before they start getting antsy about loaning you money, assuming you qualify for the loans.

Once you make the purchase, be sure to get an Umbrella Insurance Policy to cover you for any substantial losses. An Umbrella Policy for $2-Million should costs about $300 / Year.

Hope this helps!

Dean Letfus · Answer

Because of the risk if litigation I would always recommend an LLC, and set it up in a state where piercing the veil is difficult. We do all of ours in Arizona. You do not have to have it in the same state you are investing in.

Ali Boone · Answer

Agree with everyone else. No reason for an LLC if you're just starting. If for some reason you're set on it, then the only person who should answer your question is your [hopefully investor-friendly] accountant... not anyone on here because every investing situation is different and no one on here can know enough about yours to give you the best answer.

Stay with your personal name and get an umbrella insurance policy.

Jason D. · Answer

@Stephanie Choi best in what way? Why do you want an LLC?

You'll likely have to either have the LLC in the state where the property is located, or you'll have to file your LLC as a foreign entity in the state where the property is located.

Greg Scott · Answer

Stephanie:

If you are at the very start of your investing career, I think the first question should be do you really need an LLC?   If you are using traditional financing it may not be the right decision.  Upgrading your insurance may make the most sense as your first step to increasing your defenses.  Find qualified advisors and read a lot.

Assuming you decide to get an LLC, for most it makes sense to get an LLC in the state both where the live and invest.  Keep in mind the more complicated you get with your structures the more complicated the annual requirements become (and sometimes costs too)   If you do not properly maintain the corporate formalities, you may be putting yourself at more risk than if you did not have an LLC.

BTW, we invest a lot in Texas and from what I have read, it is considered one of "the better" states to have an LLC.

Best state to file an LLC for investments?

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