Rapid City, SD · Member since 2013 · 10 posts · 0 votes
I'm trying to understand whether or not it is recommended to create a LLC or S Corp from the start. I plan to buy and hold multi-family homes and create a passive income. Do I wait until I have 5 - 6 properties and then form an LLC or S Corp? If I make an LLC or S Corp, how do I pay myself without having the income be viewed by the IRS as "Earned Income"?
SFR Investor · Dallas, TX · Member since 2011 · 604 posts · 243 votes
12y
@KrisHaskins I think you need to go talk to a lawyer, transferring title when the mortgage is in your name will not protect you,,,thats about as easy to pierce as it gets.
You can get commercial loans in a corp., however unless that corp is earning money and credit worthy, you will end up signing a personal guarantee,,,so nothing gained there.
You could have the property held by a corporate or LLC 4 entities down from you, but if you have anything to do with the management or rehab of it,,your on the hook (and you will be paying higher interest and if interest rates go up you can't lock those commercial rates in for nearly as long.
If your personally worth a few hundred million, then you take a different approach, but I personally have a $5M liability policy, and put homes in my name,,,I'm close to hitting 10, so I will have to go to commercial loans going forward, but not until I get my 10.
I negotiate contracts for a living, and negotiate terms with attorneys on a daily basis, don't think what your doing is providing the protection you think it is. It is amazing how many people have all this LLC's, etc, and get nothing from it, for most individuals it is a total waste of time.
Investor · Houston , TX · Member since 2011 · 6 posts · 0 votes
12y
Hi Joe......I'm sure there are BP Members on here that have a better grasp of this topic but my recommendation is to form an LLC per property to keep each one separate from each other.
Investor · hampton, VA · Member since 2009 · 428 posts · 249 votes
12y
good idea, but we do another layer of protection because we don't want our LLC out there for creditors either. We use a new land trust for each house and make our LLC the beneficiary. This way ur land trust ,123 easy st. Trust is on public record and the LLC remains anonymous. Good luck
SFR Investor · Dallas, TX · Member since 2011 · 604 posts · 243 votes
12y
If its single family, neither, you put them in your name unless you are worth a few hundred million and are worried about the liability.
They don't give conforming mortgages to LLCs or S corp, they give them to individuals, which allows you to lock in the low rates still available for 30 years.
After you have 10 mortgages, you will have to do something else going forward on financing, but for single family just buy a good umbrella policy.
Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
12y
Just starting out I would keep them in my personal name and get a good liability insurance policy to protect yourself. When you get more properties you can form an llc and move the properties in there. You wouldn't use as s Corp unless you're earning salary type income from say a consulting business.
Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
12y
LLC will not protect you like everyone say, but a good insurance policy will. Yes, you could hide the LLC behind a land trust, but it is not hard to find out what is behind the land trust.
Investor · hampton, VA · Member since 2009 · 428 posts · 249 votes
12y
@randy , yes our trustee is on file. He's simply a hired gun and carries no liability or makes no decisions. He/she only signs docs and must be
somebody u can trust. Here lately we're using an out of state trustee so the record has another state's mailing address. Just preference and I'm shocked to see peeps on this forum taking title in there personal name. I know this is gonna be harsh but what idiot would put a 6 figure asset in their own name? Any preditor or creditor cam simply come after it at any time. If ur doing it to borrow $, maybe. But then quickly transfer it out. But we borrow $ using trusts and LLC's all the time.
@randy , yes our trustee is on file. He's simply a hired gun and carries no liability or makes no decisions. He/she only signs docs and must be
somebody u can trust. Here lately we're using an out of state trustee so the record has another state's mailing address. Just preference and I'm shocked to see peeps on this forum taking title in there personal name. I know this is gonna be harsh but what idiot would put a 6 figure asset in their own name? Any preditor or creditor cam simply come after it at any time. If ur doing it to borrow $, maybe. But then quickly transfer it out. But we borrow $ using trusts and LLC's all the time.
The reality is, even if you have it in your name, just long enough for the financing to stick and then move it into a trust, you have created the entire trail anyone would need to connect the dots and subpoena disclosure of the trust beneficiaries.
I encourage anyone using the strategy Kris describes to make sure you have competent legal counsel who is very familiar with your investing strategy. This is not a strategy where you want to be creating your own trust documents or transfers. I know the gurus say, "just put it into a trust and you have total privacy," but it just isn't so. There are ways to do it. But, one missed step and the whole house of cards will come crashing down.
With a good liability policy there is nothing wrong with holding properties in your own name, there is nothing wrong with holding them in a trust or LLC or corporation. But, neither of those eliminates the need for a good liability policy. Corporate veils are pierced every day and the disclosure of the beneficial interest in a trust is but a subpoena away.
Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
12y
A lot of people used LLC or trust to borrow money by giving a personal guarantee. I agree why put six figure assets in your own name but if a creditor comes after you; they can get what is in the LLC or trust.
Investor · Madison, AL · Member since 2013 · 93 posts · 28 votes
12y
I would disagree that it is easy to see what is behind a Land Trust. As per the example above, John Smith Trustee of 123 Easy St. would be title holder and on public record and John Smith would be easy to search on and find. However the Beneficiary is identified in the Trust Agreement which is a private document and never sees the light of day except by court order. Then add a good umbrella policy for added security.
SFR Investor · Dallas, TX · Member since 2011 · 604 posts · 243 votes
12y
@KrisHaskins I think you need to go talk to a lawyer, transferring title when the mortgage is in your name will not protect you,,,thats about as easy to pierce as it gets.
You can get commercial loans in a corp., however unless that corp is earning money and credit worthy, you will end up signing a personal guarantee,,,so nothing gained there.
You could have the property held by a corporate or LLC 4 entities down from you, but if you have anything to do with the management or rehab of it,,your on the hook (and you will be paying higher interest and if interest rates go up you can't lock those commercial rates in for nearly as long.
If your personally worth a few hundred million, then you take a different approach, but I personally have a $5M liability policy, and put homes in my name,,,I'm close to hitting 10, so I will have to go to commercial loans going forward, but not until I get my 10.
I negotiate contracts for a living, and negotiate terms with attorneys on a daily basis, don't think what your doing is providing the protection you think it is. It is amazing how many people have all this LLC's, etc, and get nothing from it, for most individuals it is a total waste of time.
Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
12y
@Randy King,
You can disagree with what I said, but I do it all the time for lawyers who is suing and have not failed yet on finding out who is behind the land trust and yes one document is private, but if you know where to look, it can come to light.
Investor · hampton, VA · Member since 2009 · 428 posts · 249 votes
12y
@randy, good idea. There all types of entities to use as the beneficiary of the trust to add more protection other than the LLC. Don't think this the time to get into them all.. My attorney says I need at least 1in of paperwork to be safe...
I would disagree that it is easy to see what is behind a Land Trust. As per the example above, John Smith Trustee of 123 Easy St. would be title holder and on public record and John Smith would be easy to search on and find. However the Beneficiary is identified in the Trust Agreement which is a private document and never sees the light of day except by court order. Then add a good umbrella policy for added security.
You are correct, the trust documents are not filed at the courthouse. But, since 100% of the guru type trusts out there have the authorization for the trustee to do what a trustee must do in the trust creation document, they can be required by anyone who is in any kind of transaction with the trustee. They have the right to know what the trustees authority and obligations are in relation to the trust.
Even if the creator of the trust is smart, or well advised, and has that authorization in a separate document, that authorization will disclose the creator of the trust and honestly that is all that is needed to be off to the races.
Trusts were not created in common or current law to guarantee privacy. They were originally created to allow someone to continue owning an asset even when they were unable to manage that asset for whatever reason. Now, in addition to that, they are a very effect estate and tax planning tool. But privacy? Not as much as you think and nowhere near as much as the gurus claim.
Investor · Madison, AL · Member since 2013 · 93 posts · 28 votes
12y
@Joe Gore,
All bets are off if you have already been sued, that's what I was talking about by court orders. A lot of what is being talked about is making oneself less visible and less attractive to being sued. And I wholeheartedly agree that once you are sued that no entity can protect you like a good umbrella policy. But on the flip side, a large umbrella is a huge target for an attorney.
Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12y
I'm curious. How do you think a lawyer would know about your umbrella policy prior to filing a suit and you passing that long to the insurance company?
In other words, how exactly, does an umbrella policy make you a target?
Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
12y
Duncan Taylor,
All the lawyer need is the owner's name and business name to see if they have an insurance policy and what the limit on the policy is. Lawyers call an umbrella policy easy money.
Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12y
Originally posted by @Account Closed:
Duncan Taylor,
All the lawyer need is the owner's name and business name to see if they have an insurance policy and what the limit on the policy is. Lawyers call an umbrella policy easy money.
Joe Gore
You think so, huh?
You think you can do a name search and find an umbrella liability policy?
Investor · Madison, AL · Member since 2013 · 93 posts · 28 votes
12y
An attorney mostly wants to sue suable people. To be suable, one needs assets, insurance polices, etc. of value to be a profitable law suit.
"Even the bad lawyers know how to do a basic asset search and prepare discovery documents requiring asset disclosure." Correct. Just trying to appear less suable and not get to this point!