Rental Property Investor · Cincinnati, OH · Member since 2015 · 127 posts · 59 votes
Hello BP Community!
I am considering investing in both residential multifamily properties as well as some 5-15 unit complexes. Do I need an LLC when moving forward with a commercial property in that unit range, or is it just a "nice to have"?
Disclaimer: this will be my 2nd investment property, the first is a SFR. Look forward to the feedback!
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
7y
You don't ever need an LLC, but it would be very wise to form an LLC for each property for a protection stand point. Make sure that you run it like a business. Set up a bank account, and run all expenses and income through the business
You can have LLC and stucture it for asset protection, tax filings. It can be a business entity to have tax benefits.
I advice you to do series LLC with a trust. This is how it works.
These will be a master LLC with trust, an operating LLC for that master LLC. They will have a business bank account for collecting rents and Pt towards repairs etc. Costs 4-5k.
Each property will be in a child series LLC with its own trust and all these will be under the master LLC.
Benefits: 1. you will file only one tax return
2. Single maintainance fee for LLC (in California it costs about 800$ for each LLC otherwise)
3. You can buy single family home as investment property under your name. Then create a Land trust with series LLC for this property (costs about 500-600$). This should not invoke sale of property clause for the bank loans.
4. Great asset protection
5. This will still be a pass through entity for tax purposes.
Thanks for the input, Ron! Are you invested in both residential and commercial? Do you typically start by putting the loan under your personal info and then transferring to the LLC, or do you put everything under the LLC from the start?
Appreciate the feedback, Todd! I have heard this many times on the podcast - treat it like a business and not just a hobby.
Same question I have asked a few other times - when you are investing, do you finance under your personal and then move to the LLC later, or do you start from the very beginning putting everything under the LLC? Thanks again!
Rental Property Investor · Natick, MA · Member since 2019 · 7 posts · 8 votes
7y
@J Mort
I talked with a real-estate lawyer about this at some point, and they told me that if you try to transfer the title to an LLC the lender might call the entire loan due.
Having said that, I don’t have any personal experience with this and don’t know for sure, so I would recommend talking to a lawyer about this.
Thanks! Perfect summary. I am going to go back to EP 301...I bet there's some gold in there!
As a follow up - do you typically start by putting the loan under your personal info and then transferring to the LLC, or do you put everything under the LLC from the start?
Thanks so much Patricia! I am always a big fan of the pros/cons list because of how my mind works.
Curious for you and/or your investor clients - do you typically start by putting the loan under your personal info and then transferring to the LLC, or do you put everything under the LLC from the start?
Rental Property Investor · Tampa, FL · Member since 2017 · 70 posts · 115 votes
7y
@Christian Becker
@John Morgan
I agree, John. An LLC is no deterrent to lawsuits.
I represent and defend LLCs all the time in litigation. Plaintiffs (those bringing the lawsuit) always look for the deepest and easiest pockets to pick. An LLC may actually draw more attention to a potential plaintiff because there's often a larger liability insurance policy associated with it. Lawyers want to get paid as fast as possible and it is harder to collect on a judgment against someone's home or assets than it is from an insurance company that simply writes a check. So an LLC probably won't be any less attractive from a lawsuit standpoint but it certainly limits potential exposure when set up and maintained correctly.
To add to what people already wrote, note that an LLC protects against both "external" and "internal" liability. This becomes important if you have more than one partner/member for your real estate investments.
For example, let's say you team up with two other people to purchase an investment property. The three of you do not create an LLC. In doing so, Pennsylvania law will most likely say you created a general partnership where each of you is a general partner for the partnership. As a general rule, general partners are liable for the actions of the other general partners. So if one of the partners unilaterally acts and incurs liability on behalf of the partnership, the plaintiff could try to hold all three partners liable despite the fact that two of the partners did not do anything wrong per se.
An LLC prevents that to an extent. Unlike a general partnership, you are not liable for the wrongs of an LLC by the sole reason that you own the LLC. In the same scenario as the above, you are in a much better position to argue that you should not be held personally liable since you were just a member of the LLC.
Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.
Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
7y
Kyle,
To your question about starting with your personal name or the LLC, my clients (and I) do everything in an LLC name from the start. I'm a big believer in the "handle it once" and move on process. Hope this helps...
Rental Property Investor · Tacoma, WA · Member since 2018 · 113 posts · 149 votes
7y
The conventional wisdom is that LLCs provide asset protection and it must be true to some extent. Depending on your state, it costs money every year to file annual reports and you may need a registered agent which also costs money. I've often wondered if that money would be better spent increasing your liability limit on your insurance or purchasing an umbrella policy. As others have said, if someone sues they are going to try to "pierce the veil" in any case.
Real Estate Agent · Woonsocket, RI · Member since 2018 · 11 posts · 15 votes
7y
I have one 4 unit property (so far) that my wife and I purchased. I didn't create an LLC because I heard it was too easy to call it a sham company and get at our personal assets anyway. The fact is, we use the income for monthly expenses, and capital needed comes from our joint brokerage account. I opted for good (I hope) insurance and an umbrella policy. Am I missing something?
My attorney advised me to just do one LLC and put all my properties into one LLC vs a series. I would be interested if anyone knows of anyone who has properties in an LLC getting sued. I bet it's extremely rare. I think we're getting a little too paranoid about a rogue lawsuit and not having a series LLC for each property.
Rental Property Investor · South shore, MA · Member since 2017 · 1k+ posts · 1k+ votes
7y
Look into an umbrella policy, it might be more then enough protection for someone just getting started.. Ive heard of a lot of hassle when forming an LLC depending on what your plan is with the property. One example is dealing with the banks, it can be a real nightmare when the property is in an LLC.
Lender · Houston, TX · Member since 2018 · 22 posts · 12 votes
7y
There are benefits. Things to keep in mind: If you are holding rentals, you can not have a non-owner occupied conventional loan in an LLC name. It must be in your personal name. If you are wanting to buy and hold, i suggest you max out your 10 conventional loans, and then have your LLC going forward, and look toward non-conventional financing after you have maxed out your conventional loans or do not qualify. Feel free to message me with any questions you have!
Hi, Aurora...yes, my clients and I place all investment properties - regardless of type - directly in the name of an LLC - with the exception of personal/primary residence which has to be held in personal name or family trust in order to have Homestead Exemption in Florida where we call home. But every property type acquired as an investment is placed in an LLC. Some set-up one LLC for all properties and others want greater asset protection so they place each a different LLC or group them over several. We just won't do it any other way...
Chicago, IL · Member since 2018 · 546 posts · 227 votes
7y
For a lot of rental property owners who have opted to not use a Property Management Company, this can be a great option because it can keep those assets of yours safe as the property owner. Sometimes on our site, we'll see that they use the LLC information when it comes time to sign the lease and same for maintenance issues. Definitely handy for those who want to make sure they're covered. @John Morgan is spot on in saying that it can also act as a deterrent for those tenants who initially might be considering some type of legal action (that LLC does present a "polish" to the business, if you will, and can help to keep things in order. Not necessary as you're getting started, but could be a good idea to get things moving with this early on.