Rental Property Investor · Orlando & Submarkets · Member since 2019 · 49 posts · 15 votes
Please share good and bad lessons learned about setting up an optimal business structure to buy a first rental property but be ready to scale to 5, 10, 20, and more in multiple states. What would you recommend? Those who are super-successful in building a large real-estate investment portfolio using BRRRR: please share what business structure you use and how you optimally protect your assets and manage them and your taxes. What would you recommend to someone about to dive into a first BRRRR buy?
This is great question Robert. I am in this situation right now. About to buy my first fourplex out of state and hope to add more in the future. Looking forward to the replies.
This is great question Robert. I am in this situation right now. About to buy my first fourplex out of state and hope to add more in the future. Looking forward to the replies.
Congrats on your pending first purchase @Bobby Kumar! And a four plex...great! Are you "house-hacking" by going to live in one of the units or rent them all out?
I definitely want to add duplexes and above to my portfolio, and hopefully we both can get great advice from those that came before us on this topic and on this site. I've read that lenders will consider multi-family homes up to four plexes the same as single family residential for conventional loan purposes, but not sure they would give a loan to an asset-protecting LLC or S Corps...I think they would only provide a conventional loan to an individual instead of a business entity under this loan rule. I'd hate to subject my family and our built up personal assets to unnecessary liability. My bank also told me my first beach condo rental property could not be transferred to an LLC if I stood one up...The loan would be closed and I'd owe the whole remaining balance. So, its in my name and that does not sit well in my mind.
I wish you the best in your transaction and your personal journey in real estate investing! Keep in touch and let me know how's it going! Good luck with the four plex!
~ Bob
P.S. I grew up in Massachusetts...and I knew a common nickname up there is "Taxachusetts"...does the state seem hostile or friendly to real estate investing at-large? Are you investing in/around Boston?
Yes, I'm still figuring out how the whole LLC will work with the loans. I'm actually investing with FIG- fourplex investment group. They build new communities with duplexes and fourplexes geared towards investors in great markets. These are all new construction and require a hefty 25% downpayment on a $700K property, but it is essentially turnkey. They have a good system set up. I won't be making as much profit as if I did a BRRR and there is a 1 year construction timeline. However, I thought this was the best way to get off my butt and jump in with lots of help... Currently the plan is to get the construction loan in my name and then refinance. I believe after refinance I can put the property in an LLC. I know many lenders won't accept this, but the lender FIG works with is used to this since many other investors use an LLC. We'll see how it goes. One thing I did in the meantime is to increase my umbrella policy to hopefully protect me from any issues while I get the LLC worked out.
As for Mass, yes the taxes are high and the new tax changes hurt quite a bit this past April! I'm sure there are deals for investment properties to be had here, but besides during a major BRRR on a >100yr old house in a suburb of Boston, I'm not sure how else one would make money here. Neighboring smaller cities in Rhode Island seem to have much more prospects for profitable rentals with lower capital outlay. I can imagine the DC/northern Virginia area may be harder and harder to find deals at as well.
Thanks @Bobby Kumar, appreciate the data point on your situation. Your strategy makes sense to me, and I hope everything works out as planned. Here in DC, I see cranes all around downtown DC and in northern VA...This place is booming. I am looking for areas that are on the outskirts of the heavily urban areas, where prices have not yet skyrocketed. I may invest in Prince Georges County, MD, where I live. Here, there is a bit of a crime issue and the prices are depressed as gentrification has not hit there yet. I see an opportunity as I see this area grow more and more...BUT, I know there will be more risk in the shady parts of PGC right on the border with Washington DC.
The large down payment made it cost prohibitive for me...
I like Mr Kumars @Bobby Kumar creative approach using a Refi to put down payment money back in your pocket.. Has anyone successfully done a refi on one of Figs properties?
Thanks @Andrew Frishman, but for the FIG properties, I would assume you probably should not try to cash out until at least a year or two after it is stablilized otherwise just increasing carrying costs.
Also thanks for your input @Josh Bauerle. I have heard the same advice from others. However, the legal liability is no small issue especially as one builds their portfolio and net worth. The LLC isn't the most important issue upfront, but will be more and more important as we hopefully succeed on our endeavors. Hence the question of how best to start out on the business structure.
@Bobby Kumar I can pretty much guarantee the structure you start with won’t be the structure you stick with as you grow.
In my experience trying to “optimize” these things before you start lead to delayed or never starting. Get started and talk to your attorney/cpa/insurance broker as you grow to make sure your current structure continues to work.
Thanks for the advice @Josh Bauerle. You bring up a great point about how umbrella insurance can act the same way as LLCs in protecting your assets. I have a bit of that umbrella insurance right now to cover anything that happens at my one and only rental property...I will look into that further. Just want to ensure I do not loose all my personal assets I built up thus far in my life if there ever is a problem with litigation at any one of these places.
Good luck with continuing to grow yours, looks like you have had quite a bit of success so far!
Yes, I'm still figuring out how the whole LLC will work with the loans. I'm actually investing with FIG- fourplex investment group. They build new communities with duplexes and fourplexes geared towards investors in great markets. These are all new construction and require a hefty 25% downpayment on a $700K property, but it is essentially turnkey. They have a good system set up. I won't be making as much profit as if I did a BRRR and there is a 1 year construction timeline. However, I thought this was the best way to get off my butt and jump in with lots of help... Currently the plan is to get the construction loan in my name and then refinance. I believe after refinance I can put the property in an LLC. I know many lenders won't accept this, but the lender FIG works with is used to this since many other investors use an LLC. We'll see how it goes. One thing I did in the meantime is to increase my umbrella policy to hopefully protect me from any issues while I get the LLC worked out.
As for Mass, yes the taxes are high and the new tax changes hurt quite a bit this past April! I'm sure there are deals for investment properties to be had here, but besides during a major BRRR on a >100yr old house in a suburb of Boston, I'm not sure how else one would make money here. Neighboring smaller cities in Rhode Island seem to have much more prospects for profitable rentals with lower capital outlay. I can imagine the DC/northern Virginia area may be harder and harder to find deals at as well.
Hi Booby,
What do you mean that lenders won't accept this?
All of my mortgages are in LLCs. Get Commercial Mortgages.
We even have single family rentals in LLCs with Commercial Mortgages.
@Frank Patalano, thanks for offering your experience with commercial mortgages and giving us the confidence in them. I have a question about potential negative tax implications with refinancing from a rental under my name to an LLC. If I convert a conventional loan I have under my name for my rental property to a commercial mortgage under an LLC I own, would I not have to pay capital gains tax like I was selling to a totally different person?
Thanks for chiming in on my newbie post! Appreciate any and all help kickstarting a successful rental property investment business!
@Frank Patalano, thanks for offering your experience with commercial mortgages and giving us the confidence in them. I have a question about potential negative tax implications with refinancing from a rental under my name to an LLC. If I convert a conventional loan I have under my name for my rental property to a commercial mortgage under an LLC I own, would I not have to pay capital gains tax like I was selling to a totally different person?
Thanks for chiming in on my newbie post! Appreciate any and all help kickstarting a successful rental property investment business!
- Bob
I am not an accountant. I only had one property in my own name. When I switched it to an LLC my accountant said that since I am still part of the entity it is not a capital gains event.