Should I buy my first rental property under an LLC or Personal?

Question

Hi Everyone,

This will be my first rental property, investing 35k for a 1k/month rental income. Please help guide me on the following questions

1. I will buy cash, and plan to refinance as early as possible. Should I buy the property under my new "LLC" name or under my personal name? I hear getting refinancing under a new LLC may become difficult task. Please advice.. I do not want to ruin my personal credit applying for refinance loans with my own credit.

What would be the quickest way to refinance and cash out my money to move to the next? I worry about refinance process, getting hit on my own credit everytime i apply for refinance loans.

Appreciate your advice

-Sammy

Weston Couch · Answer

@Shamsul Chowdhury Hi Shamsul, I'm not your lawyer but I can say I know people do what Justin mentioned. You can purchase the property in your name and put in a land trust that's assigned to an LLC. That addresses most of the problems you might have with buying it directly in the LLC, or transfering it directly to the LLC from your name. If you're interested in knowing more, feel free to DM or connect.

Scott Smith · Answer

Hey @Shamsul Chowdhury,

This is a question that is posed quite often. There is some opinion involved in the answer to the question, and what I might call "best business practices." It really just comes down to where you sit financially. Some people getting into investing start with nothing, and so don't risk much. Others don't start until later in life, after they have already accumulated a significant of wealth they want to keep protected. The important thing is understanding your exposure and match it with the "best practices."

When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.

The first 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(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.

The second 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.

The third 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, people suing 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. If you’re interested in using an LLC, this article also further explains the advantages of a Series.

The fourth 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.

The fifth pillar is owning everything anonymously. If people don’t know that you have assets, then they are less likely to sue because there’s no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land 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 though, it still doesn’t matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.

You can also utilize a land trust which can help you avoid any Due-on-Sale Clause issues, while also getting you beneficial financing options you would find with purchasing a property into your personal name. If you are just getting started I would highly recommend finding an experienced attorney who can lay out your current exposure and give you a strategy that limits your highest risk areas. If you have more questions about any of this, just let me know!

Best of luck to you moving forward!

This isn't legal advice, just my opinion as a real estate investor.

Byron Grim · Answer

@Shamsul Chowdhury inquiries will have a minimal impact on your credit score assuming your revolving debt (credit cards, HELOCs,store charge cards) is low. Inquiries will stay on your credit report for two years, but only affect your score for one year.

So if your seasoning period is within 12 months of completing your deal you would have gotten those points back for your FICO score.

Additionally, shopping for the same mortgage product within two weeks will impact your credit score as if it was one credit pull. All of the inquiries will show on your report because they must show who accessed your report.

I recommend you 1) pull your credit report from MyFICO.com before you shop for your loan 2) shop for the same mortgage product within two weeks 3) pull your credit from MyFICO.com after you are done shopping. Your score should have a minimal negative impact.

Brandon Sturgill · Answer

1. Yes, correct...unless you are using a commercial or other loan product...most lenders underwrite to Freddie/Fannie guidelines so they can sell the loan...

2. Correct...you cannot avoid this with a conventional lender. The credit check should not impact your score too greatly...

3. My guess is they are not...there is more to the story they are not telling you...conventional lenders can only originate up to 10-loans...some less. So, they have to have large cash reserves, are using other people's money, or have a commercial lender. All of these have drawbacks...

4. Most folks love the LLC to hold properties, but it doesn't really offer that much protection...you'd be better off with an umbrella policy or a rider. If folks are using a conforming lender to buy properties they are transferring the title to their LLC. after everything is stable...

Brandon Sturgill · Answer

@Shamsul Chowdhury Conventional lending laws do not permit originating a loan to an LLC...

It's an interesting path you're venturing down..most folks think all you have to do is BRRRRR your way to 100 units, but it doesn't work that way...

You can always look for a commercial product or maybe a portfolio lender, but your odds of a re-fi to an LLC are pretty slim...unfortunately, you need to have a credit pull every time you apply for bank money...and you'll have seasoning requirements as well. You can avoid seasoning if you exercise the delayed finance exception....

Good luck.

Justin Delahoyde · Answer

@Shamsul Chowdhury First not a lawyer. second i have herd some people will create a land trust, and then have then beneficiary of the land trust be an LLC. Banks are much less likely to be worried because most land trusts are estate planing tools.

Shamsul Chowdhury · Answer

@Brandon Sturgill , thank you for response.. That led to some more questions..

So even for Delayed Finance i will need to buy using my name instead of LLC right?

If I buy with my name and then do a delayed finance, my credit will still be pulled..

Folks that are moving to tens of or hundreds of units withing a short time, does that mean their credit is pulled tens or hundreds of times?

LLC to protecting myself for rental investment , how can this be possible if i buy using my name..

Should I buy my first rental property under an LLC or Personal?

Should I buy my first rental property under an LLC or Personal?

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