Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
5y
Never used one in 20 years, and I've avoided all the expense of setting them up, costs of maintaining them and the cumbersome and convoluted administrative aspects of operating with them.
But I must admit I have missed all the benefits of being able to hobnob with those pretending to be players by showing off my all my LLCs. It's been really rough in that regard, but I'm working through it.
There maybe some special cases, but normally they just foreclose on the property. I suppose if you were that underwater they might seek to obtain a judgement against you...
That should be part of the reason for investment conventional loans to require 20% down... so while there might be some procedural vulnerability, you really shouldn’t run into the issue
Yes, I purchase it in the name of myself and my wife. 30 days later I Quitclaim the property into our 2-member LLC. I've done it many times.
if you dont mind me asking, do you inform your lender of your intent or ask them if they are ok with you doing a Quitclaim.
Also do you inform them before or after the Quitclaim
I don't inform my lender of my intent either before or after. I've QC'd my properties many times over the years and I've never had a problem, nor did the lender ever ask me about it. The reason is that I apply for conventional loans backed by Fannie Mae because Fannie Mae recognizes the legitimacy of a QC between the mortgage holders and the LLC so long as the LLC is controlled by the borrowers;
If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See for additional details.)
Investor · Miami, FL · Member since 2013 · 807 posts · 475 votes
5y
It's interesting to see that more people here are leaning towards personal ownership and away from using LLC's.
I feel there is a lot of misinformation and incorrect facts bouncing around within the RE community as a whole.
For me, the most pertinent issue is achieving anonymity. This isn't possible with either personal ownership or direct LLC ownership. If the investor is the managing member of an LLC, their name is shown as such on the Secretary of State website. And it's so easy for courts and lawyers to pierce the corporate veil. Many investors neglect to follow corporate formalities and their LLC is deemed to offer no protection.
A more sophisticated setup is a holding company in a state like Wyoming, which controls all the subsidiary LLC's. This keeps the investors name completely off public records and no one knows that you own anything. This decreases the chance of being sued astronomically.
I read an article a while back which asked Americans how they planned to make money in the future and at the top of the list was getting a payout from a lawsuit. There are many people out there who are actively looking to sue someone with money.
Homeless and poor people do not get sued because it would be a pointless exercise. The judgement would be worthless. Driving an inexpensive car and having nothing in your personal name is the best asset protection strategy you can have.
Having adequate insurance is good but I prefer to not get sued to begin with. Lawsuits are highly stressful. Insurance companies often just pay out the claimant because it's cheaper than going to trial. Your premiums then skyrocket.
People saying that it's so expensive to have an asset protection structure are incorrect. If you pay an attorney to set it up for you then, yes, this would be true. However it's definitely something you can study and set up yourself. Let's say you have one Wyoming Holding company and 3 Florida LLC's for 3 million dollars of real estate. The setup cost is going to be around $500. The ongoing annual fees including registered agents is going to be around $600. That would hardly put a dent in your opex.
The unforeseen cost is in the case of any eviction or legal matters, the investor cannot self represent. Only an attorney can handle it but most investors I know use an eviction company when needed anyway.
To be fair, I know very little about financing, having never really used it. I realize that a commercial loan is needed for an LLC, which comes with higher rates. But I also like to sleep soundly at night, not worrying about someone coming at me with a frivolous lawsuit.
Your third and fourth paras seem to conflict... but, i do agree a State like Wyoming has more favorable anonymity policies.
Don't forget that the commercial loan is an added cost to having a LLC. Nowadays having to pay something around 2% or more than current residential rates and having a balloon payment in 15 years (or less for some) can be a pretty significant cost to using a legal entity.
Don't forget some incremental costs such as bookkeeping and tax filing costs. Then there are all those Californians who are charged $800 per LLC regardless where it's formed...
Your third and fourth paras seem to conflict... but, i do agree a State like Wyoming has more favorable anonymity policies.
Don't forget that the commercial loan is an added cost to having a LLC. Nowadays having to pay something around 2% or more than current residential rates and having a balloon payment in 15 years (or less for some) can be a pretty significant cost to using a legal entity.
Don't forget some incremental costs such as bookkeeping and tax filing costs. Then there are all those Californians who are charged $800 per LLC regardless where it's formed...
Thanks for your comment on my post, David. I am not sure what part was conflicting though?
Firstly, CA is a whole other ballgame. They do things their own way and impose high taxes for the privilege of living and doing business there. So I am only referring to the other 49 states.
With regards to bookkeeping and tax filing costs, I disagree that this is an extra expense. Bookkeeping can be outsourced to a cheaper country. My bookkeeper of 8 years charges $3 USD an hour and has ninja precision. There's also inexpensive software platforms that do it all for you. With the holding company, there is consolidated tax filing. The subsidiary LLC's are taxed as disregarded entities and everything flows back to the holding company, needing only one tax return.
You can also avoid the commercial loan by buying the property in your personal name with a personal loan and then transferring the property into a land trust. You don't need to notify the lender when transferring to a trust. Then the LLC will be the beneficiary of the trust. So this is one workaround.
Oh, just you start with saying that the Secretary of State website shows the Member of a LLC... then you go onto say WY is a sophisticated setup... the first is a little too broad for my taste.
Your technique of outsourcing isn’t nearly as common here. Also, not everybody invests solo so it’s not always a single return.
Interesting way with the land trust. I'll have to mull that over and see how that provides the limited liability protection of the LLC especially since the mortgage is still given in your personal name and how is the LLC not your alter-ego. Hmmm...
Oh, just you start with saying that the Secretary of State website shows the Member of a LLC... then you go onto say WY is a sophisticated setup... the first is a little too broad for my taste.
Your technique of outsourcing isn’t nearly as common here. Also, not everybody invests solo so it’s not always a single return.
Interesting way with the land trust. I'll have to mull that over and see how that provides the limited liability protection of the LLC especially since the mortgage is still given in your personal name and how is the LLC not your alter-ego. Hmmm...
Good to chat with you. Take care.
Sorry for not clarifying but there are a couple of select states that provide anonymity of LLC ownership and do no disclose the members or managers. I know that Delaware, Wyoming and New Mexico don't disclose.
My technique of outsourcing isn't common anywhere, simply because people don't know of this method but it's truly a winner move!
A land trust DOES NOT provide limited liability protection. Not at all. Land trusts are good, mostly just for the point I keep mentioning; anonymity. However you need to have an LLC as the beneficiary to achieve any limited liability.
And lastly, you are correct that having the loan in your personal name will expose you. Good thinking for pointing this out. A loan won't connect you to a property directly. Like if someone is trying to locate the personal owner of the property, they won't be able to do so using the address. However if someone knows your name and wants to find your assets, they could do that and litigation attorneys are very good at that. So it may be dangerous for outside threats, like a car accident.
@Dennis Cosgrave. So my understanding is "due on clause" basically wording on paper but not applicable in real life and nothing to be feared from and majority transfer to LLC directly after buying on their names
@Dennis Cosgrave. So my understanding is "due on clause" basically wording on paper but not applicable in real life and nothing to be feared from and majority transfer to LLC directly after buying on their names
I would look into this. I believe there was quite a few banks during the housing crisis 2008-2013 that called many of these loans. Def want to do your due diligence on this .
Yes, the Due on Sale clause is kind of a weird one. For example, I know attorneys that have been in this business 30 years and never seen it happen. But, there has been a couple of attorneys over 30 years that has seen it happen once or twice... Apparently, its really not that common.
Investor · NJ · Member since 2019 · 10 posts · 2 votes
5y
Yes, we purchase and finance properties not using a LLC then transfer them later to a LLC. It was not expensive to setup, (e.g. ~$250). Primary purpose is asset protection though each property is under a Landlord policy and we separately have an Umbrella Policy. [READ: Belt and Suspenders]
Rental Property Investor · Middletown, CT · Member since 2020 · 3 posts · 2 votes
5y
@Misael Carlos Vera
I’m an extreme novice.....but I believe the GREATER RISK comes when you scale up. Having multiple properties with your name on it make you super easy low hanging fruit for lawyers. EASY TARGET. And they LOOK for easy targets...law school is expensive. You’d be equivalent to an elderly out of state landlord who poorly self manages a property and just dealt with a few back to back evictions. Thats how lawyers would look at you.
Rental Property Investor · Richland, WA · Member since 2017 · 2 posts · 3 votes
5y
@Misael Carlos Vera speaking from an insurance side, the primary reason to purchase within an LLC would be asset protection. That being said, you can get the same protection for often time less money (and additional costs) by simply increasing your personal liability policy (on home/rentals/etc.) to $1MM for very little cost. Then, you can choose to purchase a personal umbrella liability policy as well which would then bump your liability coverage over you personal auto policy as well as home/rentals an additional $1MM (or $2MM for a bit more). The cost of the umbrella usually starts as low as a few hundred dollars per year, and you can add additional rentals/properties in your personal name for $20-30/year.
There are likely little to no tax benefits of the LLC due to most the time being a single member LLC and thus, treated like and individual from a tax perspective as it will mostly pass through to your personal returns, but you now incurred the additional costs of the LLC filing. 👍🏻
Investor · Louisville, KY · Member since 2017 · 199 posts · 253 votes
5y
If you have your property in an LLC you will have to hire a lawyer for things like filing an eviction as an LLC is considered and individual in the eyes of a court and you can not represent the interest of a LLC without a law license.
However, if the property is in your name you can represent yourself in court and your interest.
Insure accordingly with umbrella policies and also require your renter to carry renters insurance. For example if they have someone visit them and they slip and fall and sue you it will go to your insurance company. Your insurance company will then push it to the renters insurance company and in cases of non neglect the renters insurance company will be the one paying out the claim.
So when a tenant tries to sue you they will actually sue their own insurance company.