Form LLC before purchase?

Question

Hello everyone, I'm a long time reader of these forums and I'm ready to make my first investment. My fiancée and I are looking to purchase 2 4-plexs in the same neighborhood from the same seller. We will a living in one of the 2 bedroom units. The combined price leaves us with next to nothing left after a 20% down payment and closing costs.

My question is mostly about when is the proper time to form our llc? We will need both of our credit and assists to be able to finance the properties. How long will that process take? Does it need to be done before we close or before we even make an offer?

I'm going to speak with a lawyer this afternoon but wanted to see what the BP community had to say on the topic. Thanks in advance for your advice.

PS. We are in pennsylvania

Sergio B. · Answer

After buying my first investment property (SFH) using a LLC at the beggining of the year I can give you 3 main CONS :

- Insurance the House is more expensive.
- Permits from the county to do any modifications need to be pulled by a contractor, making repairs more expensive ( Down here a homeowner can be its own general contractor and use subs to do the actual work). Not possible if property is owned by LLC
- Banks won't lend you against the property ( Mine is valued around $85k free and clear and 95% of the banks i went to were not able to lend me, as soon as they saw it was under a newly formed LLC) Not the case if the property is under your name.

- If the property has liens because of violation codes, the county can give you an amnesty if you fix them , only if is NOT under a corporation or LLC.

I yet need to see a PRO....each personal case is different,I do this part time.....while holding a full time job... let us know what the lawyer says. In my case the second property I am looking for will NOT be under a LLC.

Jeremy S. · Answer

thank you everyone for the advice but we went in a different direction completely.

First off, my fiancee is now my wife and Junior will be here in september!  We bought a 3bd cape cod in a great neighborhood from a flipper. We moved in here in september and we love it.

As for investments, we purchases 5 single family row homes. 2 were already rented and we are finishing up rehab on numbers 3&4 but it looks like i let myself stray from my business plan on number 5 and that will require extensive work. I have had good experiences being a landlord so far and I've had an unbelievable amount of help from friends and family in my rehabs.  you would be surprised how many people around you are "thinking" about investing and would be happy to roll some paint in exchange for some of your knowledge.

To answer your question, I'm holding them all in my personal name

Thanks again for your replies and good luck with your investments!

George P. · Answer

so what was the outcome?

did you form an LLC or corp or s-corp?

Brad Glenn · Answer

Just reading through this post now, but super encouraged by the discussion.  I've been a partner on 13 purchases and rehabs in the last 2 years, all buy-and-hold, and we've chosen to purchase all in our personal names, and I'm frequently asking myself if that's the "right" thing.  Mainly for liability and asset-protection purposes.  Several attorneys I've talked with have advised that $1 million liability policy will cover 99% of any liability risks I'm exposed to on SFRs.  Question is am I comfortable with the 1% risk.

One other "buffer" is that many of the properties I'm involved with I have a co-owner on the deed, so those properties are somewhat protected from liability from other properties on which they are not owners.

I love the idea of putting properties in different entities and "shutting it down" if something goes south and continuing on with my other entities.  But if I'm signing personal guarantees on them all, I'm still on the hook personally anyways, I think.

PS - My very first post on BP. :o)  Finally took the plunge.  Thanks for reading.

John Schmiesing · Answer

Jeremy, looks like you're ready to jump in.  At this point I would hesitate to form the LLC as these are not commercial properties and you can gain liability protection through insurance.  Your loan amortization will be better with personal purchases, allowing for more cash flow and greater ability to reinvest and have extra cushion.  A negative to buying personally is the tenants will likely know your full name, whereas in an LLC it is easier to keep a higher level of privacy as the owner.

Everyone's situation is different so solicit as many opinions as you can.  I would advise to make the decision prior to purchase as you don't want to transfer from one entity to another after the purchase; you will incur RE transfer taxes.

best of luck!

-John

Robert Steele · Answer

Two words: liability insurance.

Colleen F. · Answer

If they are 4 plexes and you buy 1 you will get a much better interest rate on an owner occupied building and a 4 plex does not have to be a commercial loan. You will also have to put less down. I think in your case that would let you have reserves.  You should not have a problem given your credit score.  The unit will not cash flow as well but you are buying a home and investment at this point so you should figure that in. If you have nothing else I don't know if your money is well spent on an LLC right now. It is mostly for liability protection.   For our purchase with similar credit we got an excellent commercial rate on an LLC but is was still about 1-1.2% higher then a regular mortgage. I would research owner occupied loans with lower down payments and see if that works for you.

Jeremy S. · Answer

I agree that financing could be an issue and I may have to settle for just one of the properties.  The total purchase price would be 440k and we have about 105k between us and we both have credit scores ~800.  We have no debt and a yearly salary of 120k. I'm currently renting and she lives with her parents. Any suggestions on how we could get financing for this project and still have 10k to renovate our unit before we move in?

I will update after I speak with a lawyer. Thanks agaib

Jerry Kisasonak · Answer

Not sure why so many people are against forming a corp. I have several different companies and like knowing that if one goes bad I can fold it and carry on with the rest of my businesses. People who have everything in their own name have everything at risk.

Some folks also don't consider what happens if they personally do something wrong that brings about a lawsuit (i.e. had 2 drinks and got in an accident). If everything's in your name, again, everything is at risk.

Brant Richardson · Answer

Reserves?  Thats what credit cards are for right?  Two four plexes is a big bite for your first investment.  Any way you could start off with just one of them and have some reserves?

Form LLC before purchase?

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