Purchasing First Property in Upstate NY

16 Replies

Hello,

I am going to be purchasing my first rental property shortly and am very excited to get started but want to set everything up correctly right from the start. I have a few properties in my sights. There is some debate as to what is the best way to purchase the property to protect your personal assets. Should I form an LLC or take out a landlord policy from an insurance company that could give me the coverage I need. Also is it worth the money to consult a CPA and Real Estate Attorney before I begin? Any advice on how to begin with all of this and if going LLC is the way to go any advice based on experience setting one of those up would be appreciated as well.

Thank you

@Jeremy D.

Welcome to BP! You have come to the right place for your real estate questions. There is lots of debate on here about forming an LLC for your rental properties. I am just starting out myself, and have decided for at least the first few properties I will buy and hold in my name. On the insurance policy for my personal residence, I increased the liability to a million, and may consider an umbrella policy. After maybe 3-4 properties I will form an LLC and transfer the properties into the LLC. One thing I have heard though is to make sure in your initial financing that this is allowed, as some banks will call the note due in full when you do that.

As for spending money on consulting a CPA or attorney I wouldn't. Once the business is larger their fees for advice are invaluable, but just starting out the money can be spent on better things. A lot of your questions on how to structure your business can be answered through BP. I don't know if there is a REIA around your area, but I belong to one where I'm at. We have a very good real estate attorney and a few CPA's as members, so I just ask them questions when I go to the meetings.

Thank you Steve. We don't have a REIA, at least not one that is advertised that I could find. I will contact my insurance company and see what they suggest as adequate protection in these cases. Do you do background and credit screenings on your applicants, also did you purchase a rental agreement specific to NY or did you modify a free one? I am most nervous about protecting my personal assets for my families sake. I have heard horror stories about professional tenants who stage accidents and claims to take their landlord to the cleaners.

Originally posted by @Jeremy D. :

Sometimes you may need both an insurance policy and an LLC.

Thanks Greg!  Would you be able to elaborate on which circumstances you would need one, the other or both?  Or could you point me toward a reference that could explain it all in newbie terms?

Thank you,

Jeremy

Originally posted by @Jeremy D. :

Thanks Greg!  Would you be able to elaborate on which circumstances you would need one, the other or both?  Or could you point me toward a reference that could explain it all in newbie terms?

Thank you,

Jeremy

This might be somewhat extreme but try to get the gist of it...

Let's say you were trying to save some $. So you got a very basic insurance policy that only covers 'fire and vandalism'. You don't have an LLC. You personally have a house and other property worth about a million and about another million cash in the bank.

You bought and rented out a property that had some upgrades done to it -- without a permit. A few days after the couple moved in, the stairs caved. An 8 month pregnant lady fell along with the stairs and was found several hours later by her spouse unconscious beneath the pile of rubble. 

She unfortunately passed away as a result.

You got a letter about a wrongful death law suit and a few other allegations of negligence -- the wrongful death just stood out. 

Your insurance company sympathizes with you but says this wasn't a fire or vandalism issue. Your personal assets and cash are on the line but does not come close to what you are being sued for.

Regardless of if you did increase your coverage, if the insurance coverage is not adequate to cover whatever liability you face, and you dont have an LLC to insulate personal assets from business -- your personal assets is at risk.

If you do have an LLC, theoretically, only the assets of the LLC would be utilized to address any tort that arises in the course of doing business as the LLC and would/should shield your personal assets if the insurance is not adequate.

This doesn't mean they may not try to pierce the veil for any plethora of reasons.

Some issues to look at when thinking about renting:

http://www.insurancejournal.com/magazines/features...

Thank you Greg, that definitely tapped into the worst case scenario fear that you think about when starting out. Not to drag the conversation out but I have also heard about additional taxes you have to pay under an LLC which is why many people do not form one with one property, then I have heard of people who will form one for each individual property, so what is the real cost of owning a property under an LLC as opposed to just buying it under your own name?

I really appreciate all the information, I am learning quite a bit from this site. 

Originally posted by @Jeremy D. :

There is both an initial cost of creating/forming an LLC and (based on which state) a yearly cost of maintaining the LLC. With LLCs, earnings typically 'passes through' to the owner of the LLC and you then pay taxes just as you would individually.

If you plan on long term real estate investing, the duration or life of the LLC may become an issue in securing certain types of financing – especially under the name of the business entity. This is why delaying the LLC formation for 2 or 3 years could be costly in the long term.

Using our extreme example of a wrongful death liability that the landlord suffered, if you had five different properties all under separate LLCs, and the accident occurred only at one of the properties, only the assets of the LLC where the incident occurred would be at stake. Forming an LLC for each property may seem extreme to some, but perfectly rational to some.

The real cost of owning a property under an LLC as opposed to just buying it under your own name is similar to why people don't feel its wise to do business as a sole proprietor as opposed to an LLC or a corporation. If a liability occurs, your personal assets will be at stake. The life or duration of the LLC has some value when you start trying to get certain types of financing.

Thank you for all of the advice Greg. Between everything you have said and all that I have read I do feel that insulating yourself with an LLC is the way to go as long as it is set up right from the start and you keep your personal and business financing completely separate. My last concern that I will most likely have to talk to bank(s) about would be first time financing under a new LLC and all that, that entails.

Originally posted by @Jeremy D. :

Thank you for all of the advice Greg. Between everything you have said and all that I have read I do feel that insulating yourself with an LLC is the way to go as long as it is set up right from the start and you keep your personal and business financing completely separate. My last concern that I will most likely have to talk to bank(s) about would be first time financing under a new LLC and all that, that entails.

 Different banks may give you responses that vary on this... talk to a few of them. Also, the financing of SFRs and multi family properties may have some subtle variances.

So if you are trying to get an FHA loan for a multifamily, doing it under an LLC will change the process of it ? You did a great job explaining how an LLC works by the way!

Thanks for all the your great advice everyone.  I have an odd finance question that I was wondering if anyone has come across.  I have the opportunity to purchase one or more investment properties in cash.  They would be single family homes.  My question is if I purchased them at a great price in cash what would the chances be I could borrow above what I paid for it against the property or would it be possible to sell it back to myself and take a mortgage out on the property to fix it up and use the money toward an additional property.  Not sure if I'm being clear but has anyone done something similar.  I only have so much available cash and would like to use the equity in one property to aid in purchasing others.

Originally posted by @Ruslan Laranjo :
So if you are trying to get an FHA loan for a multifamily, doing it under an LLC will change the process of it ? You did a great job explaining how an LLC works by the way!

Many investors may encounter some issues if they initially get the mortgage in their personal name and then later try to 'transfer' the property to an LLC.

The bank may use such transfers as grounds to threaten that the loan be paid off  based on whatever the 'due on sale' clause stipulates in the contract. 

It may be best to have a specific bank that you are contemplating explain what may vary if you intend to utilize any particular multi family loan product that they have to offer. 

Most FHA loans for instance require that it be some sort of an 'owner occupied' investment so an LLC on the mortgage may just get too much attention or curiosity.

By the way -- an @ next to the name is how you 'ping' a person on here.

Originally posted by @Jeremy D. :

... My question is if I purchased them at a great price in cash what would the chances be I could borrow above what I paid for it against the property ...

It sounds like you an inquiring about getting a secured 'line of credit' on the property. You want to see what types of HELOC products a bank in your area might have; the limit of the line will be determined by the ARV of the property.

@Jeremy D.

If you have financing on property then: 

LLC: you likely won't be able to get the property with an LLC unless it's established or you find a local credit union/community bank to do it.

Insurance: that's what I would do regardless of if you get an LLC or not.

If it's all cash then: 

definitely do the LLC and Insurance.

Thanks again everyone for the great advice.  I have learned that I have a lot of ground work to do before I actually make my first purchase.  I have someone in real estate that wants to partner with me and I have found a mentor in the area that has been investing for nearly two decades that I will be meeting with soon.  As I expecting getting your feet in the water gives you the biggest shock.  I think the most difficult part will be finding a bank to back me.  The local banks that I have called to not want to give a mortgage to investors.

@Jeremy D.

Welcome to Bigger Pockets. It is great to see you hear.


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