Creating LLC prior to purchase of first property

10 Replies

I'm getting all my ducks in a row before I get started investing. First, I cant seem to find a search function on this website. So here goes my question.... Should I apply for an LLC before the purchase of my first rental? I am envisioning purchasing 2 rentals a year, hopefully starting within the next 6 months. As I start growing my business, maybe this number will increase. In the event that I dint grow and end up with a few rentals, is an LLC worth the expenditure. I do have some personal assets that I would not want to lose if a tenant decided to sue me as a landlord. What other options are available to protect a landlord other than LLC?

Also, do some of you opt to create a new LLC for each property or do you limit each LLC to a value range?

Thanks

I am a newbie with no rentals but here are my 2 cents. Look for an insurance that has umbrella coverage to cover you as a landlord. If I am incorrect I hope someone helps me learn about correct way of going about this as well.

Hi, I am hoping to buy my first house and house hack in about 6 months too. Have you found any info for your question? I have been trying to figure this out, but haven't gotten the answers yet.

After a few hours of reading I can best ascertain that the only downside to getting an LLC would be the lending (commercial vs. residential). It appears people from all levels have been debating this since the existence of time! Although not always bulletproof, an LLC can add an extra layer of protection against losing personal assets in the case of a lawsuit. I have also come to the conclusion that an LLC should be capped at a pre- determined value of assets per LLC. I saw many recommendations of keeping no more than 1 mill of value per LLC. Again, this has all been debated time and time again. I am left undecided at this time and will likely purchase without LLC until I talk with a real estate attorney. I also want to start researching if utilizing a trust is a viable option and what benefits come with. So much to learn...

Hey, as a business owner (not real estate yet) you need to talk to a real estate accountant to see what type of corporation you need to start, it depends on how long you want to keep the properties etc. a C-Corp can put more money in your pocket for different situations as the LLC would. My 2 cents!

@Jason Pearson

You seem to have done your research. The main point of contention is dealing with commercial loans when you have a LLC. Then, make sure you operate the LLC properly to maintain your corporate veil

Putting long term assets into a C Corp is so very unadvisable for too many reasons...

S Corp is generally not advisable either, for not quite so many reasons. N.B. S corps are a tax status. You need to form a LLC or C Corp then elect to be taxed as a S Corp

Just take the default LLC. If you are single member the irs considers you a disregarded entity which means they don't recognize the LLC for taxation purposes so everything is on your personal return. For rentals, that is just a SchE filing. For multi-member LLC, they are taxed as partnerships which just means a 1065 form (if I remember correctly) which spits out a K-1 doc for each member to Clyde with their personal returns (think of a k-1 kinda like getting a 1099).

If you stay away from C and S Corp, there is not tax advantage or disadvantage to having a LLC. Well, maybe one advantage is in the case of a partnership so you can get the proceeds split up correctly. LLC are the asset protection.

And back to your question, it really is a matter of how much you want to spend to for asset protection. Each LLC will need a bank account. Homeowner insurance and umbrella policy is enough for many of us (until you deal with larger commercial properties). Also, if you go this far you should have insurance in/for the LLC. The idea goes if you are sued, the insurance company lawyers will fight the lawsuit for you. If you don't have insurance, then that means you have to hire your own attorneys to fight the suit on behalf of your LLC. Unless you are attorneys willing to work the case on consignment, you'd better have a large pile of cash hanging around

Make sense? Just remember to start down the "correct path for you." Most of the issues as you've read in BP is when investors can't get both the Title and mortgage and insurance etc all under one entity.

Good luck.