LLC before you buy your first deal?

Question

Here is my plan. Cash out refi my paid off primary residence for 150k & purchase a foreclosure w/pool for 129k(BRRRR) that needs a new roof & probably 5k in other repairs. Zillow has it valued at 234k but I dont think it could get over 200k after all the repairs. Heres my question. Being my first deal should I get an LLC before I refinance and put the 150k in the LLC and than have the LLC purchase the property or should I purchase the house personally and than give it to the LLC? I do not know much about LLCs. Should I get multiple LLCs before I make my first deal? I do plan on managing it myself should I get a separate LLC just for managing?

David M. · Answer

@Todd Rasmussen

@John Fitch

Just clarification.  With a LLC, you don’t exactly “control” when the profits are distributed to you.  For tax purposes, remember a LLC is a pass-thru entity so when it comes time to file your taxes, you’ll be paying on the profit.  If you want to “access” your funds, you do an “owners draw” (as opposed to a contribution), and transfer funds from the LLC’s bank account to your personal bank account.  You don’t take a salary or distribution.  A C Corp does that, and for absolute clarification I am assuming you don’t have a LLC taxes as a C Corp.

Whitney Hutten · Answer

@John Fitch Flipping is different.  I like LLCs for flipping.  For buy and hold:

1. Be a good landlord and fix anything health and safety-related ASAP

2. Get good liability insurance

3. Get great property manager to help you stay on top of things and be compliant in the state and jurisdiction

4. Get a good commercial liability policy

5. Think about how you use leverage to make yourself less of an "equity target"

These are just a few ideas...

Whitney Hutten · Answer

@Steve Burns Thanks for asking because they are NOT the same (and if you have the Q, I'm sure others do as well). Your liability policy will be the individual policy on the property.  The commercial liability (or umbrella policy if you have less than 4 properties) is the overarching policy that coordinates gaps in all other insurance policy to give you greater protection.

Think of it this way: the liability policy is in place to protect you from your tenants (ie. slips trips falls, dog bite, etc); the umbrella policy will most likely be used to protect your properties from you (ie. you are at fault in a car wreck, damages in an unrelated business, etc).

Work with an agent who can help you discern what you need.

Todd Rasmussen · Answer

Further clarifying, not all LLC's are pass-thru entities, but for single member LLC's or other pass through entities, agree.

Steve Burns · Answer

@Whitney Hutten in your reply to @John Fitch you listed a few things to do prior to purchase, #2 & #4 seem to be the same, however if different would you share with us what you think is a "GOOD Policy"?

John Fitch · Answer

@Whitney Hutten thanks

John Fitch · Answer

@Whitney Hutten What are those other steps? I also intend to Flip houses in the future as well if that changes anything.

Whitney Hutten · Answer

@John Fitch First, not a lawyer.  There are so many steps to take that limit your risk before opening up an LLC just to hold a property.  Do those first!  LLCs can be expensive to maintain.  The only caveat would be if you are going to use fix and flip lending, you will need an LLC to hold the property.  If you keep it single member, you should be able to refinance out conventionally into your personal name for a 30 yr fixed loan.

Todd Rasmussen · Answer

@John Fitch

If you are going to use BRRRR, you should keep the property in your personal name until after your refinance. Securing lending for an LLC will be more difficult and expensive, especially on your first deal.

Dan Schwartz · Answer

@John Fitch I don’t know anything about LLC law or costs outside of AZ, but if I were doing what you propose in AZ, I’d absolutely form an LLC for it.

Form the LLC, make an equity contribution of $150k, buy the foreclosure and fund the rehab SOLELY with funds from the LLC bank account (if you need to add more funding to the project, deposit it in the LLC bank account first), and then sell it with the LLC as the seller.  The proceeds will go to the LLC, but you as the sole member can control when they are distributed back to you.

LLC before you buy your first deal?

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