LLC or buy in your own name.

13 Replies

Purchased my first property last year under my name.
Want to expand my portfolio but wondering if it's better to create an LLC and buy under that or under my name.
I live in Los Angeles.

Any thoughts?

There was a similar post earlier today. Short answer: get thee to a CPA and/or RE attorney who can analyze your specific situation.

It depends on a lot of things.

Questions: What kind of LLC (single member or multi member)? Is the property owned free and clear or is it financed? Why do you think you need an LLC?

If it's a single member LLC and considered a disregarded entity for tax purposes you're not sacrificing tax benefits by putting property into the LLC. Otherwise you might be.

If the property is financed and the note has a due on sale clause transferring directly into the LLC could trigger this and cause the note to be payable in full (although apparently you might be able to use a land trust with the LLC as beneficiary, but I imagine that costs $$ to set up).

If you're worried about liability issues, you may just want umbrella liability insurance which is cheap to get.

And there's probably other considerations. So yeah...talk to some professionals. It's worth it! Best of luck to you!

One other thing - banks don't typically lend to LLCs. In case that's a consideration for you.

I actually wrote an article on this awhile ago, title crash and burn with an LLC's. So as you can tell by the title it didn't work for me.

  • self-manage- so transparency exists and if an issue happens I still am accountable
  • Mortgage- mortgage was still in my name, if I transferred it into the llc I was still liable for the mortgage AND it violated the mortgage. So in 5 years or 10 years when rates are redicuoul and banks are looking for way out. I see this becoming a problem
  • Insurance- this is much higher and normals umbrella's don't fall under it.

Those were just the 3 "big" reasons. I recommend you talk to a Real estate lawyer to make sure this works for YOUR situation. I was told to look into trust but haven't had time.

Jaime, if your main concern here is liability, LLCs actually don't offer as much as one might think. The better solution is to get a good umbrella policy. You may also consider a GOOD property manager as they will know what you can/can't/should/shouldn't do with your tenants.

LLCs in CA cost $800/year to maintain. My umbrella policy cost $864 for $3MM coverage. Given the option for only one, I'd much rather have the umbrella. Keep in mind this is in addition to regular liability insurance.

@Melanie Smith  Looks like somebody was listening to the podcast! The land trusts definitely look like an intriguing option. Something I will be discussing with my RE attorney in the new year.

@Jamie Garcia  Best advice I can offer, just like most others, is to speak with your CPA or RE attorney as they know all the ins and outs of these methods.

Also, where are you investing if you don't mind... I also live in Los Angeles and am always curious where people are finding deals.

Originally posted by @Melanie Smith :

One other thing - banks don't typically lend to LLCs. In case that's a consideration for you.

 Hi Melanie,

Has that always been the case for you? I have an LLC, and banks are more than willing to lend to me in every state I've invested in. Of course, I could be the rare exception to the rule and just never experienced that.

Re: umbrella insurance, I have been using personalumbrella.com for years.  They will cover a good number of rental properties (up to 30 units) without any issue, and the premiums are reasonable.  You can access them through your independent insurance agent.  They do require a minimum level of underlying coverage.

If you put each property in an LLC it will reduce your liability. However insurance will be higher and will be more difficult to borrow money. I personally have an LLC for all investment property and a good insurance policy and umbrella as mentioned by @Fred Smythe.

What are your long and short term goals with this property and others going forward?

Bottom line: I would form an LLC asap. You can decide to add more properties or create another later. In Florida you can do it yourself for about $150.00

@Jeremy Billauer   unfortunately I didn't catch that podcast.  Wish I had now, though!  I only heard about it through other forum posts, but I do also plant to talk to my RE attorney about it.

@Travis Beehler   since I haven't done any deals yet, no. :)  I had 3 veteran REIs, my CPA, a RE attorney, and a mortgage banker each tell me that.  And I guess I shouldn't say "typically" - perhaps they meant "prefer" to.  But honestly having checked at a few banks while trying to line up for my first deal I've found that to be true.  But maybe I'm checking with the wrong banks....or just that I don't have enough experience yet.  Is it that you already have an established portfolio?  Or personal relationships with the banks?  Would very much like to hear more!

@Jamie Garcia  I should also add that I do actually have an LLC, but right now I'm mostly using it as a "store front" for establishing myself and networking. I'll eventually use it for renters (the LLC has its own bank accounts and PO box, etc) and holding property (either in a land trust after I learn more about them, or once they're paid off for liability as @Kevin Page  explained above.  I do also plan to get an umbrella policy after purchasing my first property next year.  I lived in LA for years, and if people there are still as sue-happy as they were when I lived there, doesn't hurt to get all the liability protection you can!

Originally posted by @Melanie Smith :

@Jeremy Billauer   unfortunately I didn't catch that podcast.  Wish I had now, though!  I only heard about it through other forum posts, but I do also plant to talk to my RE attorney about it.

@Travis Beehler  since I haven't done any deals yet, no. :)  I had 3 veteran REIs, my CPA, a RE attorney, and a mortgage banker each tell me that.  And I guess I shouldn't say "typically" - perhaps they meant "prefer" to.  But honestly having checked at a few banks while trying to line up for my first deal I've found that to be true.  But maybe I'm checking with the wrong banks....or just that I don't have enough experience yet.  Is it that you already have an established portfolio?  Or personal relationships with the banks?  Would very much like to hear more!

@Jamie Garcia   I should also add that I do actually have an LLC, but right now I'm mostly using it as a "store front" for establishing myself and networking. I'll eventually use it for renters (the LLC has its own bank accounts and PO box, etc) and holding property (either in a land trust after I learn more about them, or once they're paid off for liability as @Kevin Page  explained above.  I do also plan to get an umbrella policy after purchasing my first property next year.  I lived in LA for years, and if people there are still as sue-happy as they were when I lived there, doesn't hurt to get all the liability protection you can!

 Hi Melanie,

My first deal was at the absolute height of the housing market crash, and I had about $40k in cash, and the place I was looking at was only $110k.  So, my total out of pocket expenses was around $25k with fees, etc.  So, they were more than happy to lend me money.  What I have found with banks is that if you have 20-25% down, plus 6 months worth of the mortgage payments in cash, they'll deal with you.  As long as your credit score is good as well.

So, if you find a place for say 100k, you'd need $20-$25k +($536 monthly mortage X 6)  So, roughly $23,216 to $28,216 in cash, depending on the bank.  Go in with any higher, and they just look at that as a nice bonus cushion for you.

Then, when I went to buy my next rental, I had about $45k in cash, and the place I was buying was only $40k, so I could have bought it outright.  The bank happily loaned me the money.

I also have an LLC set up for my rentals, so I think that might show that I'm a bit more "serious" for lack of a better word, of an investor, rather than some random person off the street.

If you have any other questions, I'd be happy to help!

Travis

Loving all this discussion guys thanks for posting.

All your information is useful and I'll definately take into consideration everything mentioned. 

I'll create it and keep it as a "Store Front" like @Melanie Smith  mentioned and then see where I go from there as far as adding properties too it. 

If you are doing it for asset protection, what exactly are you protecting?

If your worth $10 million +, not going to manage the properties or have any handling of the day to day operations and don't mind the extra expense of financing for an LLC, then a LLC might be good for you.

If your not worth Millions, are going to manage yourself and want the low rates, longer term of conforming mortgages, for get the LLC, get the umbrella policy as mentioned by others

I think a lot of people get hung up on wanting to get into a business structure to sound important, for the average investor is makes absolutely no sense,,obviously there are exceptions

I have a company that I buy under. It was setup with advice from my accountant. I buy in trusts and then my company is the beneficiary of the trust. Trusts are basically its own company. Each trust you can dictate who the beneficiaries are and how much ownership they have to the property. I pay an attorney to act as a trustee for me for a fee each year and she handles everything for it.

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