Accountant · Member since 2018 · 8 posts · 2 votes
I am looking to purchase my first investment property SFH by using the BRRRR model. What is confusing to me is that most books advise on protecting your asset under an LLC. But then they say I will have a difficult time finding a bank to do the re-do. I further read tips on re-fi under a conventional loan but transfer the property under the LLC. Can someone shed more light on what this means? And what are the risks to look out for by doing this?
For your first property, I wouldn't mess with putting it in an LLC. The odds of you getting sued are low and it can be a financing headache, as you're finding out.
I didn't put properties into LLCs until I crossed the 15 property mark.
Once you build a sizeable portfolio, then put them into LLCs.
Depending on state laws, if the SFH is going to be your own residence for a period of time, having it in an LLC may prevent you from enjoying full tax advantages of a home in your name, and sometimes, better protections.
In fact, I bought a business from someone in an S Corp., owner was sued for $3 million, and the S Corp only had insurance for $1 million. He sold his home in NY, moved to FL, put the proceeds into his home, and the litigants found out they can't go after him. The FL homestead on his home protected him. Would be the same situation if his business was in an LLC. Was advised by attorneys that they normally sue the LLC and owners by default anyway, the owner for negligence, not for instances of co- mingling funds etc.
In your situation, get good umbrella insurance for now.
For your first property, I wouldn't mess with putting it in an LLC. The odds of you getting sued are low and it can be a financing headache, as you're finding out.
I didn't put properties into LLCs until I crossed the 15 property mark.
Once you build a sizeable portfolio, then put them into LLCs.
Thank you for this insight and the background story. I am actually from NY and we are planning to move to FL so this will be my starting point to start investing.
Thank you! Simple easy advice which I was leaning towards but just could not determine if that was the right move. I just thought 10 was the cap where traditional lending because more difficult.
@Dolly Marketakis you’ll be fine for your first few units without an Llc . But eventually you’ll need to convert over. Don’t bank with national banks. Use a small local one. They can bend rules , not break when it comes to lending. Big box banks have very tight guidelines. You do need read or listen to a few books on tax suggestions and strategies . Definitely benefits to a Llc.
For your first property, I think it'll be best to just get an umbrella policy. Later on when you have more properties you can transfer your properties into your LLC. Right now getting an LLC would probably be unbeneficial for your case especially since you wouldn't be able to get a residential loan, rather it would be a commercial loan.
Yes thanks for that. Right Based on my reading they definitely eluded to the same advice. It’s nice to know that in practice this is true as well with the larger banks. Do you have suggestions on the books that you found helpful on the tax strategies?
Okay. I am just curious if anyone else had heard that advice to buy it under the conventional loan and then transfer the deed into the LLC afterwards. Is that really a thing?
Also, what does the umbrella insurance do versus the regular insurance policies?
@Dolly Marketakis yes it's possible but I've heard it isn't the easiest thing to transfer a properties ownership to an LLC.
The difference between a Normal insurance policy and a umbrella policy is that while Normal insurance policies only protects the property to a limit in your case, while an umbrella provides coverage for claims that may be excluded by other liability policies including claims like false arrest, libel, slander, and liability coverage on rental units you own. This is what makes umbrella policies so beneficial, especially for tenants. And you can use a umbrella policy for more than one property (multiple property umbrella insurance consolidates all of your properties into one policy).
Hope this helps! Best of luck to you, if you need any help or have a question feel free to shoot it my way!
If you are planning to establish your residence, buy a home, Florida has the best homestead laws in this country. See: Florida Homestead exemption discussion It is written into the state constitution and the amount is unlimited. Exceptions are made for bankruptcy, IRS liens, and mechanic liens.
It's protection is so good that corporate raider Paul Bilzerian, sued for millions, $62 million by the government, moved to Florida and paid $65 million for an estate totally shielded by the homestead. That's even greater than the $3 million the seller of the business I know got away with. See Paul Bilzerian
With all this, still want to put your home into an LLC?
Yes, if you further get rentals, later on, when you have over five or six, you can consider an LLC. For the very first, your home in Florida, absolutely crazy to use an LLC rather than a homestead. It's true when you run into the 6-10 range and beyond, you'll have problems getting residential mortgages with banks not dealing with investors, as well as getting commercial umbrella insurance which cost several times more. But that's a problem for another day.
I used LLC's for my businesses other than real estate. My attorneys as well as my insurance agent insist I buy an endorsement with my LLC policy that covers me personally as well since litigant's sue the LLC's and owner by default, normally for negligence. The other reason is when you get involved with commercial real estate, you'll also have employees which requires workman's comp, unemployment insurance, etc., and in NY, the rates you pay depends on the number of employees and LLC's separates one entity from another.
Aria mentions that an umbrella might drop down to cover things not on the home, auto, or dwelling fire policy (for the rental dwelling). Some umbrella's may while others follow the form of the underlying policy. In the examples he used false arrest, libel, slander should be insured by adding "Personal Injury Liability" to the policy.
Thank you! Simple easy advice which I was leaning towards but just could not determine if that was the right move. I just thought 10 was the cap where traditional lending because more difficult.
It is but worry about that around property number 8.