Create legal entity for apartment complex?

11 Replies

Hey guys! I'm interested in multifamilies to smaller apartment complexes here in Springfield MO. I'm wondering if you have set up a LLC or Inc for apartment complexes or maybe leave them in your personal name? I'm not sure, that's why I'm asking!

Thank you!!

Tax accountant definitely said we should set up an LLC to protect our personal assets. Her rule of thumb was, for ever $1M in inventory, set up a new LLC.

Okay, so you group properties together in terms of price points? Example would be, 10 SFH's for 100k a piece gets an LLC for all 10 propertiesand the 850k apartment complex gets its own LLC?

Thank you for your reply!

@Kevin Carraway, I would suggest looking into establishing a serial LLC as the cost to set up and maintain multiple LLC's can become prohibitively expensive.

Ashley, I wasn't familiar with what a series LLC was until I just researched it. What I can find is that only a handful of states are able to form them. MO is not one of them. Although I see you're from IL, which you can there.
Thanks for the tip! Makes me wonder if I should open my LLC in IL.

The first sniff test for me is the property type - then the asset value.  I was so relieved when you asked about an apt community.  If 5+ units, yes, I use LLCs.  Opening a new one each time your commercial property inside it reaches $1M or $2M is an excellent idea I think.  (Less than $1M you don't have to complete Sch M on your taxes).

I have a house or two or 7 and none of them are in LLCs. I have found the LLC factor makes residential property difficult to finance and properly insure. I just carry good liability insurance. That's just me and I am not an attorney or accountant.

Unless you are worth a bazillion dollars @Kevin Carraway I wouldn't get too caught up in trying to put little houses into entities.   

@Kevin Carraway ,

If you form your LLC in IL you will have to register it to do business in MO anyway and will effectively be paying for two state's annual fees. It is generally better to form the LLC in the state where the property is located. There is also no guarantee that your state will recognize another state's rules for Series LLCs. The Series LLC is largely untested compared to regular LLCs so the risk that you are not truly protected is greater, especially in a state that does not have it's own regulations regarding them.

If you are forming the LLC for asset protection purposes, I would do it based on equity, not on price points. If you have five $100k houses that you own free and clear then you have $500k at risk. If you have a $1.1M multi-family with $1M in loans against it, you only have $100k at risk.

You have to weigh your risk tolerance against the cost to set up and maintain your LLC strategy.

Ashely, That’s what I get for using Wikipedia!
Steve, I was thinking that leaving SFH/Small MFs in my personal name. I read somewhere that when you put them in an LLC that you lose some tax benefits. Is that true?
Also since a 5+ apartment complex is a commercial property, does that make it active investing compared to passive?

Edward, I'll just keep everything in state to lessen the complexity of it all. I'd like to take advantage of every position I can when it comes to taxes/protection without going into crazy elaborate situations where I form a special trust in FL to register it to an LLC in Nevada, who operates in MO lol….
The equity portion makes sense though. I’m not worth a bazillon dollars right now lol. We’ll cross that bridge when we come to it. Haha

I understand FHA loans and strategies for 4 units and under.. After 5+ units though I am pretty green and unsure on. Are there any books that are recommended for 5-50 units investing?

Thank you all very much!

A lot of commercial lenders require each property to be in a separate company. As a result I have two a 9 unit and a 15 in separate LLC's.

Commercial and residential are really different animals, IMHO putting SFH's into LLC's is a royal pain when a simple insurance policy will protect you as well.

@Kevin Carraway for commercial deals inquire at local community banks or credit unions in your area, and start making calls to  VP of commercial lending about your "investment properties."

Typically they are looking for 65-70% ARV and a DCR, or debt coverage ratio of 1.25.

The key is that these portfolio/commercial lenders typically will only lend to entities like an LLC, so that is something you may want to consider.

Ask about seasoning, loan terms, if loan reports on your personal credit report, (it should not) if it is a recourse or non recourse loan, and if you will be required to sign personal guarantee, minimum net worth or income requirements.. this should get you started. Good luck.

@Kevin Carraway ,

You'll want to have a good tax attorney / tax accountant on your team, hopefully the same person.

The idea is primarily to facilitate asset protection.

You want to "control everything, own nothing" so as to be as unattractive a lawsuit target as possible.

You want to assure that a lawsuit from one property will not endanger others, or at least not a "large" portfolio of smaller properties.

You want emplace a layer of protection between your entity structure and yourself personally.

A qualified tax and legal professional can explain it (I'm not!). I can refer you, if you need one.

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