Purchasing properties into LLC for first rental properties?

Question

So I am fairly new on bigger pockets as well as becoming a landlord. I have some experience in real estate and I’ve flipped a couple of homes therefore I have a significant amount of money to be a cash buyer. At this point in my life I’d like to get passive income and my goal is to start a rental property portfolio with the BRRR strategy and I plan to own about 8 properties at least by the end of next year. I plan on buying cash first  From wholesalers with instant equity But to do so would it make more sense to go ahead and just refinance straight into the LLC to protect my capital? Or is there a better way to do it for the first few houses since I know I’d be jumping straight into commercial lending by doing that which would be more expensive than a residential one? Your advice would be greatly appreciated!

Leandro Bidal · Answer

@Bryan O. Oh but doing it that way (like a personal loan) on my first 10 properties wouldn’t that be on my credit making it harder each time I attempt to get one after another? And how do you usually get the personal loans to operate under your LLC still? I hope I’m not annoying you with all of these questions. Like I said I’m fairly new to this and I’m really trying to make the least mistakes possible!

Pauleen B Atkinson · Answer

@Bryan O.

I’m in escrow on two properties out of state in Memphis TN.  I would like to take the 2 properties and put them in a LLC.

I’m trying to wrap my mind around what filing for taxes are going to look like at the end of the year.  Being that I live in California LLCd in TN.  I’ve been approved to purchase 5-6 80k buy and hold.  I’m sweating as to what and how I’m going to file at the end of the year.  Yikes...... I guess I should really try and get to understand the pros and cons!

Paul Moore · Answer

@Leandro Bidal.  If your goal is truly passive income, I agree with others who said they would invest with a great syndicator. I talk to numerous investors weekly, and after doing a bunch of one-off single families, many conclude: "Why am I working harder than I need to... to make less than I could?"

I've been at this for 19 years, and there are a boatload of ways to make money and build wealth. But there are some ways that are easier than others. I wrote about this topic recently in a somewhat controversial post:  https://www.biggerpockets.com/blog/real-estate-deals-exist-where-to-find-them

Best wishes!

Bryan O. · Answer

@Leandro Bidal the first 10 are "regular" personal home loans. You can still operate the properties under an LLC. Once you run out of Freddie/Fannie then you finance the 10 into a portfolio loan (these are offered by commercial lenders). This would be a loan to your LLC (typically). That pays out all 10 of your personal loans when the portfolio loan happens. Then you  do it again with 10 personal loans.

Bryan O. · Answer

@Leandro Bidal What is a "big portfolio"? You can typically get 10 properties in good, long-term, "normal" loans. You can get commercial loans on them individually as well, but terms are much less attractive and insurance is more expensive for less coverage. What some people do is buy 10 "normal" home loans (Fannie/Freddie). That maxes out their personal mortgages, then have a lender come in with a portfolio loan and refinance the package. Then you have 10 more you can buy with good financing, roll them into the portfolio, etc. There are more ways, but that is just a general method you can choose to use.

I don't want to start an LLC flame war, but I would probably do entities as you mentioned. If you have access to a series LLC it might be worth looking into. Some people (typically ones that get paid based on your # of entities) will say to put every home in a new LLC. Some would say use an LLC to hold a max of $1m in homes, then a new one. I say have a good umbrella policy, figure out your risk tolerance, understand the cost and hassle-factor of maintaining multiple LLCs (different accounts, different books, different tax filings, etc.) and go from there.

Bryan O. · Answer

@Leandro Bidal the typical breakout would be to have your active income separate from your passive income. Your rehab company should be an entity. Once you finance out of each renovation, you would put them into your passive income entity. These are typically LLCs. There are tons of discussions in the forums around pros and cons of financing the long term personally vs commercially through an entity.

Jaysen Medhurst · Answer

@Leandro Bidal, if you're trying to get passive income, why the heck are you pursuing BRRRR? That is in no way "passive." Find a good syndicater and start writing them checks if you want to be passive. Or you can use your significant amount of money to bank roll other flipper.

Leandro Bidal · Answer

@Paul Moore thank you! Will check it out!

Leandro Bidal · Answer

@Bryan O. Thank you so much for your time to answering my questions you are being super helpful I really do appreciate it. So I can get the first 10 properties Freddie Mac/Fannie Mae route straight into an LLC? I heard any lender that worked under their guidelines would never finance under an LLC? Only commercial lenders did that? Again Bryan thank you so much

Leandro Bidal · Answer

@Bryan O. Thank you Bryan. So create maybe 2 LLCs? One for rehabbing and one to put my refinancing into? Also I’ve looked this up quite a lot and I know that at some point you’ll need partners to build a big portfolio. But realistically how many can you actually finance on your own whether it’s residential or commercial? I appreciate the advice and your time!

Purchasing properties into LLC for first rental properties?

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