New investor, is LLC the best way to go?

Question

BP Good Morning! My wife and I are about to close on our first turnkey rental property in Lebanon, Pa. This was an exciting process and we wanted to get our feet wet so we decided to go with a turnkey property. We want to grow our investment portfolio and have a short term goal of buying another at this time next year. Long term goal is to have at least 10 doors in 10 years.

We are indecisive on how exactly we want to buy for the future. Id like to brrrr when she would like to buy turnkey. Ultimately we need to do a brrrr for her to see the difference.

My question is how much will an LLC help us with our future in investing? We would possibly like to start a property management company down the road and if we had a LLC already that would be helpful im sure. But would we benefit with buying properties in a LLC? Im a quick learner and i can educate myself on personal business but I would like some good insight from someone that has done this in the beginning of there real estate investing career.

Thanks again.

Nathan Gesner · Answer

You do not want to mix your personal money, your investments, and a property management company. They should all be separate. Investments would be under one LLC and then your property management company would be set up under a separate entity. Rent money for your investments should never be mixed with rent money for properties you manage. Rent money for both should never be mixed with personal money. This is typically illegal and just bad practice.

Adam Lendi · Answer

@Steven Hershey

Check with your CPA. Most single member LLCs are pass through, meaning your tax situation will not change. You can elect to be taxed as an S corp, but by default it's pass through.

I just replied to another post on this topic this morning. Here are my thoughts, based solely on my experience, as it relates to this topic:

I'm going to open this with my disclaimer... I am not an attorney, tax attorney, or CPA. Definitely consult with yours before getting started.

My two cents... I think it is a very good idea to hold your investment properties in LLCs. The thought being, if tenant at Property A, LLC sues over damages at Property A, so long as you have structured it properly and have not commingled, the only thing that risk is the holdings of Property A, LLC.

There are a ton of considerations and you need to make sure you are doing things the right way. Let's start at the top. First and foremost, you are probably going to have a very tough time qualifying for a mortgage in your new LLC which has no tax history. The majority of us get a mortgage in our personal name and then quitclaim deed the property to our LLC. This can trigger a due on sale clause from the lender, as a quitclaim deed does transfer the title out of your person's name, as a sale would. That said, I don't know any investors who this has happened to yet and everyone pretty much does this. This does mean though, that the lender could demand you either quitclaim back to your person or if they trigger the due on sale, you would need to refinance, as your person.

For the LLC to be worth the paper is written on, it must be an independent entity from your person. This means it needs to have its own tax ID (EIN) and bank account. Do not commingle any of your personal money with that business bank account. The only things you can legally do are inject money to support the LLC if the company is not performing and take distributions in a manner which follows your operating agreement. Transfers in and out of the bank account to your personal account can pierce the corporate veil and expose you to liability in a lawsuit.

If you hold multiple properties in the future, you will likely want each one to be in its own entity. As I mentioned before, to reduce your exposure to liability, you probably won't want multiple properties held in the same LLC, since they can all be considered if damages are awarded. There may be certain tax advantages available someday for you to form another entity to sell management services to your other properties (CPA).

Hope this helps.

Steven Hershey · Answer

Great to know, thank you. If i create a LLC for my investments now, I read that I will be taxed in the 15% business tax bracket? also can there be more tax write offs with an LLC then just writing off rental property expenses?

New investor, is LLC the best way to go?

Most Popular Reply