LLC

12 Replies

My husband and I and another couple are looking to buy some commercial multifamily properties. We are wondering when is the time we should form our LLC: before signing the contract, at the closing, or even after the purchase? We don't know which state we are buying from yet. Thanks!

My business partner and I started our LLC prior to purchasing our first property. I know some on here might disagree with me, but the LLC helps us keep things separate (business & personal.)

There are some states such as Nevada that offer better LLC benefits than others. From what I have experienced you can use a LLC from any state to do business in any other state, you usually have to register with that state's Secretary of State as a foreign company. I do most of my work in SC & have a SC LLC.

Since you seem to have some time & are starting out, I would give Garrett Sutton's book "Loopholes of Real Estate" a read. He covers most the basics of LLC's, how to structure your partnership & how to protect you assets.

Best of Luck!

JW

Hi Michelle,

The entity is created usually after you have gone under contract. The sellers gives you limited assignability in the contract for your entity creation.

One thing you might not have thought about it that you might not want these friends as investment partners forever. There might come a day when someone passes and their kids inherit a portion and you do not want them as partners etc. Also your interests could just grow apart and they want to sell and you want to hold.

So it's important not just for the entity creation but cash flow, equity splits, exit provisions etc. need to be spelled out with your attorney drafted operating agreement before closing.

Also if the goal is to take the proceeds and not pay taxes then you need to set up the partnership a certain way. For instance if you both as partners have the same tax id and later want to do a 1031 exchange then you are stuck using that partner or you have to pay taxes. If you get a separate tax id using a TIC model then you can 1031 your portion on your own into something else. So it's critical with partnerships and entity creation to look at all the angles BEFORE closing on a property.

How large of a property are you planning on buying?? 

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@Michelle S.  

Nevada & Texas offer the best asset protection and favorable taxation for LLC formation.

Since you are partnering on the deal, it is best for you to get your legal ducks in a row, prior to closing on the property. There are some states where the taxation on an LLC incents people to wait as long as possible to form, but Texas franchise taxes on an LLC producing no or minimal income would be <$300/year.

Also, check out the site Lone Star Land Law.

http://www.lonestarlandlaw.com/

They have excellent free information on various entities, asset protection - from basic to seriously advanced - and it is all from an REI perspective. Great stuff.

Thanks for the input, Jesse. Will definitely look into the foreign company option. I just started out the research, and some states seem to charge a hefty price for out of state LLCs. 

Also thanks for the book recommendation. Will check that out too. 


Originally posted by @Jesse Waters:

There are some states such as Nevada that offer better LLC benefits than others. From what I have experienced you can use a LLC from any state to do business in any other state, you usually have to register with that state's Secretary of State as a foreign company. I do most of my work in SC & have a SC LLC.

Since you seem to have some time & are starting out, I would give Garrett Sutton's book "Loopholes of Real Estate" a read. He covers most the basics of LLC's, how to structure your partnership & how to protect you assets.

Best of Luck!

JW

 @Joel Owens:

Thanks for the great info,  Joel.  So we don't have to be in a great rush to set up an entity so we can focus on property research right now instead. 

Yes we will have to discuss extensively to draft an operating agreement since it's not just me and my husband. The separate tax ids info is great to know. Would never have thought of that. Will probably ask more later in regard to LLCs setup as we get close to that. 

We are all over the board as to what property to get. Our friends started out very ambitious and wanted to look at 200 to 300 units range to take advantage of economy of scale. The wife had a fair amount of successes with SFH or one unit apts over past decade in Australia. She just moved to the US. The rest three of us has almost zero experience In RE investment. Her idea is to bring in silent partners for financing. 

We are not quite comfortable with starting out so big, and not confident that we will be able to get the fund we need with our background even with what we think a killer deal. So we have kind of convinced her to look into anything under $2million at the moment while keep our minds open for big deals as well. 

I am a numbers person. I try to follow the 50% and 2% rules, but find those deals are hard to come by unless in a war zone. So not sure how strict we should follow these guidelines. Our partner seems to be more focused on property conditions that are renovated or in good repair. 
@Hattie Dizmond:
Thanks a lot for the info,  Hattie. We are looking at properties in TX as well, too. So if we end up with something in TX, it'll be a big bonus to form an LLC there.

Hi Michelle,

Australia works a lot differently than here. The best loans are above 2 million for various reasons.

It's actually more risky to start too small as you end up with local banks, recourse loans, the property doesn't have enough scale,  asset quality, short loan terms and amort. schedules, and more down than the typical 25%.

The funding is not an issue at all IF you have proper liquidity and net worth requirements.

The track record factor is typically smaller properties financed by local banks. For a larger CMBS lender it's all about the deal. A larger commercial PM company that has a track record will run the property and you just oversee them and their monthly reporting and phone calls to you.

I would strongly encourage you to talk and connect with some people on the phone about what kind of properties are out there and the debt available. In commercial it's all about the debt you can get on a property and terms.

There are deals but you have to be extremely focused. My commercial clients are buying a bunch of property. If you are trying to figure out the process and being a flaky buyer without direction the listing brokers and the sellers if selling directly will not waste time with you.

First time investors etc. new to the process or this country need a broker helping them through the process. It makes a difference if the listing broker receives an offer directly from a buyer that has no experience versus an offer from a commercial listing broker with a track record and the listing broker knows the buyer broker will be there making sure it closes and that the buyer is educated on what to do ahead of time.

Sellers do not want to waste time with flaky and or uninformed buyers. I hope I am helping. I am out there everyday doing commercial RE for a living and also an investor myself so I know how the markets are moving and what sellers expect in an offer with terms and pricing to accept your offer over other buyers.

You will likely need to have the LLC in place before closing. You could sign the PSA individually and then assign it to your LLC to save a few bucks, but if you're closing within 30-60 days, I would just form it and then move to close. You will want to have an LLC in place before closing to avoid transfer taxes, and your Lender (or any smart lender) won't allow you to transfer title from you (individually) to an LLC without their consent. You can probably get their consent, but you might as well do it before closing. Also, depending on the state, you will pay recording and transfer taxes, so it's better just to form the LLC prior to closing.

Good luck!

Very insightful conversations here!! Appreciate all the experts willing to share their knowledge. We (a group of friends) are also in the process of setting up an LLC for our REI. Is there a good resource or somebody willing to share sample lingo concerning-equity splits, exit provisions etc. 

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