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"?
@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.
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!
Not being sued is pretty straight forward.
Treat people fairly and don't do anything causing others harm.
About 20 years ago the AMA released a study showing doctors whose patients liked them were sued far less often than doctors whose patients didn't like them.
We always liked our tenants, after all they are paying for the assets we will retire on, right? And we made sure everyone having any contact with our tenants treated them fairly, well and in the manner they'd like to be treated.
As a result, our incidents of being sued are down at the noise level compared to historical industry averages.
It sounds like going forward, as a new real estate investor, I would keep everything in my name. I don't need to form an LLC, but it is recommended to have a liability insurance policy. Once I hit 10 properties, then I'll have to get commercial loans in order to purchase my 11th property and up. But at 10 properties, is there a need to form an LLC? Also, why must I get commercial loans after 10 properties? Thank you for all the replies!
@Joe Luciano the number of properties is of less importance than the equity. Having 10 properties where each property is worth a million is different than having 10 that have 50k in equity.
Business owners that have a substantial personal net worth will separate their business liability from their personal assets using entities. Still, you will see some large companies go down and then see creditors go after the individuals assets because they guaranteed the loans.
If you are a single member LLC and you self manage your protection is minimized compared to a multi-member and separate management.
Having an umbrella is important.
If your personal net worth is high you are at more risk even with 1 property because lawyers always look for deep pockets.