When to start an LLC???

Question

My husband and I are on the hunt for our first LTR. We did have a long-distance vacation rental until last March. We decided that we wanted to bring our money back home and start scaling around here(WI).

At what point does it make sense to start an LLC. Our accountant said it isn't necessary, our attorney said it's better to get it started right away and our lender said he can get us better rates for the first 10 properties if we don't get the LLC.

I'd love to know your thoughts!

Melody E Bergloff · Answer

@Sarah Gabrielse @Todd Rasmussen @Jacob Sampson

I generally agree with everyone that for tax purposes, you dont need it yet. I would set up separate business accounts to track that income and expenses separately.

As far as for legal reasons, I am going to defer that to a legal professional. The LLC does provide that asset protection as everyone has mentioned, but I cannot advise one way or another on that aspect.

Jacob Sampson · Answer

We waited until we had about 7 units, but honestly it's not really that big a deal.  Now if you have assets outside of your personal home or qualified retirement accounts your may want to get an LLC now to protect those assets.  For most people, when they are getting started, have most or all of their net worth in their home or retirement accounts so their is less worry because those are protected.

Todd Rasmussen · Answer

@Sarah Gabrielse

Hi Sarah,

It's probably not necessary just yet. Our attorney has advised us that if someone sues your LLC they will sue you personally as well. You are liable for decisions you make even on behalf of the LLC that exposes you personally. They are a good idea and we have one, but provide much better protection when you have employees that make decisions on your behalf. From the advice we've received, they can be something you worry about down the road a little ways. Quality insurance coverage is necessary now and with the LLC.

Your lender is referring to your maximum allowable mortgages backed by fannie / freddie. If you and your husband have the credit and income to qualify for a mortgage individually, you should alternate applying for loans and stretch that number to 20. You can purchase a house in your personal name to use these lower cost mortgages and transfer the properties to your LLC after closing. We do it by quit claim because it is easy and cheap but there is a formal way to do it as well. https://www.biggerpockets.com/... is a link to a blog talking about that method... about halfway through you'll decide on using the quitclaim process.

Good luck!