LLC - Must have or nice to have?

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!

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Todd Dexheimer

Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes

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

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Kayla Oliver
Rental Property Investor · Decatur, IL · Member since 2019 · 6 posts · 1 vote
7y
@Todd Dexheimer I am closing on my second rental next week. I just got an LLC and next to open my business account. Do you pay your mortgage through your business account? I need to learn the ins and outs of this account....do you know any resources where I can learn on this topic?
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Scott SmithPro Member
Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
7y
This is a question that appears on the forums daily, and there are many different opinions on the matter. For myself it was never an option when I began investing - and I encourage people to protect themselves. When I sit down with clients I will always discuss (1) their personal assets, (2) what their current investments portfolio and other business ventures before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. I often break it down into the "five pillars" of protecting your assets. The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur. The second pillar is a good insurance policy as that cover the majority of your exposure. However, it only protects you from one type of liability: accidents.
After that you want to compartmentalize your assets, which is often accomplished through the use of LLCs or corporations. I personally find the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely - check out this article to learn more. The fourth pillar is somewhat similar - you want to separate your operations from your assets. That means you establish a Traditional LLC to carry out the operations of your investments, in order to separate the liability from your assets, including: paying property management, paying contractors, collecting rent, marketing, etc. Finally, with the use of trusts while establishing these structures you keep your financing options open and add a level of anonymity by removing your name from public record - functioning much like a Wyoming LLC, but also allows you to fit your structure right into an estate plan should you want that in the future.
Realistically, none of these make you "bullet-proof," but you just keep adding more layers the more wealth you need to protect - the wealthy don't own anything, they just control assets. But when an attorney looks at their caseload and sees one potential case which they can't even see the investor's name on any documents and appears to be well protected versus another investor whose name is on every document and they don't have protection - the attorney always will pick the easy money. Attorneys have bills to pay, too.
I would just encourage you not to make a decision until you talk to an experienced attorney who can show you what is at risk. If you have more questions feel free to shoot them my way.
This isn't legal advice, just my opinion as a real estate investor.
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Larry Erves
Flipper/Rehabber · Atlanta, GA · Member since 2019 · 1 post · 0 votes
7y
@Ron Hall why do you use a separate llc for each property?
0 Reply
Jonathan W.
Los Angeles, CA · Member since 2019 · 512 posts · 301 votes
7y
@Kyle Neff I don't have many good suggestions but something to be aware of is that if you do an LLC series some banks might not be able to work with all the properties/series
0 Reply
Brian Miller
Bolingbrook, IL · Member since 2019 · 23 posts · 4 votes
7y
@Brie Schmidt
What is the difference if you pay cash or use a loan? Also what is the cost that goes along with an LLC in Chicago, Illinois? Let me know please thanks.
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Brandon Wells
Property Manager · Indianapolis, IN · Member since 2018 · 136 posts · 71 votes
7y
Would recommend a master holding LLC and then create single member LLC's within holding LLC for each property. Separate liabilities with only one tax return. @Kyle Neff
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William C.
Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes
7y
Just learned some very interesting tax codes that encourage LLCs. I will create an LLC tomorrow, and instantly reduce my income tax bill by $15,000. Kinda blew my mind I wasn't doing this already.
1 Reply
Delana Watts
Member since 2019 · 1 post · 1 vote
7y
@Jonathan M Peters
LLC is just a way of protecting your self so if something happens on or with the property it is not attached to you as a person so you can't be sued for your personal assets it goes to the LLC company it can be sued and all assets be confiscated but you will not loose your personal assets that is not tied to your LLC
1 Reply
Ian WalshBusiness Member
Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
7y
It literally takes 24hrs to get one. Don't overthink having it or not. It's usually not something people need like they think do or for the reasons they think they do. Focus on finding strong investments.
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Brie SchmidtBusiness Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
7y
Originally posted by @Brian Miller:

@Brie Schmidt
What is the difference if you pay cash or use a loan? Also what is the cost that goes along with an LLC in Chicago, Illinois? Let me know please thanks.
Cash or a loan is a personal decision.
You can google the fees
https://www.cyberdriveillinois.com/publications/bu...
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Brian Miller
Bolingbrook, IL · Member since 2019 · 23 posts · 4 votes
7y
Thanks so much Brie this is helpful, so much to know about investing in real estate.
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Keyun Rivers
Realtor · Palmdale, CA · Member since 2019 · 1 post · 1 vote
7y
@Jonathan M Peters control everything own nothing that's what your LLC is for protect your assets such as your properties put your properties in your LLC name help against lawsuits etc...
1 Reply
Tammy He
Rental Property Investor · Edinburgh, Scotland · Member since 2019 · 4 posts · 1 vote
7y
@Ron Hall hey Ron- why is that? What’s the benefit in setting one llc for each?
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Jonathan M Peters
Handyman · Mountlake Terrace, WA · Member since 2018 · 48 posts · 14 votes
7y
Originally posted by @Brian Ellis:

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.
I think you are on to something I have a meeting with my agent to cover the 3 units I have now. It should actually be a lot cheaper.
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Jonathan M Peters
Handyman · Mountlake Terrace, WA · Member since 2018 · 48 posts · 14 votes
7y
Originally posted by @Keyun Rivers:

I understand that it is supposed to help with lawsuit protection but what if you owe on the home ? isn't transferring it to an LLC going to require immediate payoff of the property?
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Ron Hall
Investor · Joplin, MO · Member since 2015 · 76 posts · 78 votes
7y
It protects each property individually, incase there is ever a lawsuit.
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Jonathan M Peters
Handyman · Mountlake Terrace, WA · Member since 2018 · 48 posts · 14 votes
7y
Originally posted by @Delana Watts:

@Jonathan M Peters
LLC is just a way of protecting your self so if something happens on or with the property it is not attached to you as a person so you can't be sued for your personal assets it goes to the LLC company it can be sued and all assets be confiscated but you will not loose your personal assets that is not tied to your LLC
Delana, do you use an LLC for your buy and hold properties?
If you do, do you have any experience with what it looks like to leverage equity on properties that are in your LLC or LLC's for each property to buy one large investment property?
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Jonathan M Peters
Handyman · Mountlake Terrace, WA · Member since 2018 · 48 posts · 14 votes
7y
Originally posted by @William C.:

Just learned some very interesting tax codes that encourage LLCs. I will create an LLC tomorrow, and instantly reduce my income tax bill by $15,000. Kinda blew my mind I wasn't doing this already.
WHOA! is that just a state-by-state situation?
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Lina Valenzuela
Real Estate Agent · Bridgeport, CT · Member since 2017 · 7 posts · 1 vote
7y
@Ron Hall Can you expand on why you open a separate LLC for each property? Thank you
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William C.
Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes
7y
Originally posted by @Jonathan M Peters:
Originally posted by @William C.:

Just learned some very interesting tax codes that encourage LLCs. I will create an LLC tomorrow, and instantly reduce my income tax bill by $15,000. Kinda blew my mind I wasn't doing this already.
WHOA! is that just a state-by-state situation?
No, it's a Federal tax reduction. I'd be happy to go over it with you, it's just way too complicated to explain right here. The long and short of it is LLC is the way to go, then the way that money is spent via there LLC, reduces your tax bill. It's legal, and simple, and may not even be a new concept to you, but having been an agent for 9 years was never told how or why to do it. But I am not an accountant so I can't exactly get into the weeds.
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Jonathan M Peters
Handyman · Mountlake Terrace, WA · Member since 2018 · 48 posts · 14 votes
7y
I see. I will have to talk to an authority on the subject in my area. Plus I will still need to go get an umbrella policy for the properties I have currently. and save even further.
0 Reply
Jonathan M Peters
Handyman · Mountlake Terrace, WA · Member since 2018 · 48 posts · 14 votes
7y
Originally posted by @William C.:
Originally posted by @Jonathan M Peters:
Originally posted by @William C.:

Just learned some very interesting tax codes that encourage LLCs. I will create an LLC tomorrow, and instantly reduce my income tax bill by $15,000. Kinda blew my mind I wasn't doing this already.
WHOA! is that just a state-by-state situation?
No, it's a Federal tax reduction. I'd be happy to go over it with you, it's just way too complicated to explain right here. The long and short of it is LLC is the way to go, then the way that money is spent via there LLC, reduces your tax bill. It's legal, and simple, and may not even be a new concept to you, but having been an agent for 9 years was never told how or why to do it. But I am not an accountant so I can't exactly get into the weeds.
This is totally uncharted waters for me. I am still pretty dumb on the whole rental deal. The whole process for me is buy cheap property the can be rented for more if I invest some of my know-how and time into it. Rent it. Pay myself back then start stacking for the next house.
Everything outside of that is now just part of a huge learning curve.
BTW! Nice suite man.
0 Reply
Curt Shenenberger
Investor · Sudlersville, MD · Member since 2017 · 3 posts · 1 vote
7y
LLC for residential with a mortgage - slow you down
LLC for commercial asset - necessity
True, but when buying with a mortgage you can still place the property in your name and then transfer it to the LLC 30 days after the transaction. The fee for the transfer is usually nominal. This way you still have the benefits of an LLC with the improved rates of the property being in your own name.
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Matt Skinner
Developer · Los Angeles, CA · Member since 2014 · 123 posts · 123 votes
7y
@Kyle Neff if you have assets to protect you should hold your properties in an LLC.
If you were starting out with few assets I would recommend only getting an LLC when you got your first asset.
Houses are best held in Land Trust.
Land Trust gives you similar asset protection (separation of your assets) but do not cost as much as owning and maintaining an LLC.
LLC can give you tax benefits that a Land Trust doesn't and if you're going to have investors or partners you should hold each property (or group of assets) in separate LLC's
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Selina Banda
La Vergne, TN · Member since 2016 · 93 posts · 28 votes
7y
@Todd Dexheimer thank you Todd
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