Using an LLC when purchasing an investment property?

Question

I am about to pull the trigger on buying my first investment property & have a question...

- Is it a worthwhile idea to open an LLC before purchasing an investment property & using that for the purchase? To take liability and personal risk away... This has been mentioned to me in the past not sure how necessary this is?

Any input/experience appreciated.

Fred Krauss · Answer

@Venu Vedre if you move the property to a Land trust and have the beneficial owner the LLC then they can't call the loan.  A number of banks will finance a property in an LLC an Land trust.  The thing about a Land trust is no one knows who the real owners are as the you title the property when you buy is in the house number and street name  so you will know which property it is.  If you don't  do it this way you will quickly loose track of which property is which.  Such as 428 main street land trust.  Union band is one that will finance in a Land trust or a LLC.  You have to get used to saying you don't  own the property in a Land trust as you don't own the property the land trust owns the property.  Then have a operating agreement with another of you LLC to manage each property you have in a Land trust.

Scott Smith · Answer

Having your real estate investments housed in an LLC is important at any stage, but it becomes more important when you have more in your personal name. If you purchase a property in your name and there is ever an issue that exceeds insurance (or insurance refuses to pay a claim,) then any settlement/judgment can spill into your personal assets. Here is an article of how the LLC can function in that type of scenario.

I would just encourage you to seek out the help of an attorney when you make your first LLC so you know how it should be done. From there some people continue to use attorneys and others take on the responsibility from themselves. There are several things that can go wrong when you set it up yourself - not that the WILL, but they can - so it's best to do it right the first time.

Mike S. · Answer

The basic setup of an LLC varies between states but it is in the $100-$300 range usually. You can file yourself.

The drafting of the operating agreement by a lawyer can cost you between $500 and $2000.

These are averages and your result may vary...

Account Closed · Answer

I recently sold mine, that was held in an LLC, and the new buyer, also LLC.

Some of my friends that hold commercial property, hold it in an LLC, and then when it's time to sell, they sell the LLC, that just happens to hold the property. But, some counties are catching on to this. It's so the property doesn't get re-assessed and taxed at the higher value.

Venu Vedre · Answer

There are some older threads here that have discussed this before. please feel free to read them. Here are a few things to think about.

Pros of LLC:

An umbrella policy will have a limit. If that is exceeded, a lawsuit can go after your personal assets to make up the rest. With an LLC, if set up correctly, they can only go after assets in your LLC.

Cons of LLC:

We have to maintain strict separation of personal finances/banking from the LLC finances or else the llc veil can be pierced .

You cannot get a loan on an LLC so first you have to buy Rental Properties on your name and then change title to the LLC. This will invoke the Due-On-sale clause that the lender can call.(They have the right to call but not obligated). For ex: If you bought a home at a very low interest rate and rates increased, then bank can call the note so you have to either pay or refinance at a higher rate.

Can be expensive to maintain if you only have 1 or 2 properties

Tax benefits:

I think tax wise both approaches can be handled as pass-through taxation but there are advantages to an LLC if you have a big portfolio or actively flipping houses etc. I have heard some BP podcasts from @Amanda Han and @Brandon Hall that discuss tax strategies that can be useful.

I think if you are just beginning to invest in rentals just take a 1-3 Million umbrella policy to get started. Of course this is my opinion only.

If you decided to go the LLC route I have used delawareinc.com in the past, i think they have reasonable fees but also compare against legalzoom/incnow etc. Hope this helps.

Kyle Jensen · Answer

@Scott Smith any idea of a ballpark cost for having an attorney setup your initial LLC?

Using an LLC when purchasing an investment property?

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