Different LLCs and structuring
Many of the lenders of investor loans I've been speaking to will mostly/only lend to a business such as an LLC. I've heard a couple investors talk about having an LLC for rentals, and one for flips. As someone who is looking to do both, is this a good strategy? What are the limitations of it for # of properties, scope of business actions, etc? I'm also planning to spend money to help me acquire properties (direct mail, off-market lead gen...), would I want to set up an LLC for that as well or could I fit that into another so I don't have so many?
The reason most lenders will only lend to entities (LLCs, S-Corps) is it makes it a "commercial" loan. The CFPB and most regulators consider commercial loans to have "no public to protect", so regulation is lighter. I don't really see any difference between you having one or two LLCs from a lending standpoint if you're doing DSCR-style loans, but liability will cross properties. If you get sued regarding one property, that might open up another property in the LLC to be grabbed. That's a question for an attorney, but from a lender's standpoint, it doesn't matter. I'm happy to chat about it to answer your questions.
I would recommend looking into a combination of a Series LLC as a holding company plus a Traditional LLC as an operating company. Series LLC is great primarily because it has unlimited scalability, and it can be used for holding both flips and long term rentals. Creating new child series does not require any additional filings or fees with the state, yet each series receives complete liability protections while you avoid the cost of creating an entirely new company each time you acquire a new property.
Traditional LLC, or an Operating Company, can be used for all property management activities, as well as to obtain financing.
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You'll need one LLC for each property that you get a loan on, or do blanket loans on multiple properties in one LLC
The different LLCs for different purposes may be a tax strategy as well. Check with your CPA before making elections with the new entities. you may find significant tax savings by having them separate.
Hi Bret,
From a tax perspective the main advantage of two separate LLCs would be the following:
Fix & Flip is subject to self employment tax which can take roughly 15% of your profits ON TOP of regular income tax. This can often be avoided by making the S-Corp election, you will need to consult a tax professional for your specific situation.
Buy & Hold is generally considered a passive business and is not subject to self employment tax. But, it is usually not a good idea to hold long-term real estate in an S-Corp because of tax basis, contribution, and distribution issues that can arise when dealing with appreciated assets in addition to missing out on the "step-up" in tax basis upon the sale of LLC interest or death of LLC member.
All this to say, two distinct LLCs will give you the option to mitigate self employment tax for flipping activity while retaining all the traditional tax benefits associated with buy and hold real estate. You should consult a tax advisor for your specific needs, I hope this helps!