I'm a newbie investor looking to start investing in real estate soon this year. I'm trying to decide between investing with or without an LLC in order to keep my personal assets separate. So, I'd like to see your suggestions on whether or not I should use an LLC.
If the answer is yes, should I create one myself or use an attorney? And if I should use one, do you have any good investor friendly real estate attorney recommendations. I will be investing in Houston, Texas.
Thank you for letting me know, I didn't know that a CPA could do it for me
I would be very very skeptical if an accountant/CPA offered to create an LLC for you. Accountants/CPA's should not be practicing law or giving legal advice.
It can also show that a business is trying to do everything but not specialize in one specific area.
If you are looking for an operating agreement - speak to an attorney.
Rental Property Investor · South Sioux City, NE · Member since 2017 · 8 posts · 2 votes
5y
Hello!
Using an LLC will make financing your property a bit more difficult. You will almost always need 20 or 25% down (unless you find a portfolio lender that is more flexible) and your loan term will probably be amortized over 15,20 or 25 years with a ARM at 3 or 5 years. Your interest rate will also be higher due to it being a commercial loan and that loan will most likely need to be personally guaranteed. Finally commercial paper, usually is "callable" by the bank, which means they can make the note due for most any reach with short (30-60 days) notice, although most banks only call a note if the personal is behind on payments, as calling notes "just because" is not a positive reputation builder.
Hopefully this helps with the LLC side and this is from what I have learned from just talking to all my financing banks.
Disclaimer. This is not intended to be financial, legal, tax, or any other professional advice, but instead is for educational purposes only.
One thing I wanted to mention is my strategy... I'm looking to do a fha/3% conventional loan for financing and then transferring the title to an LLC and having it in the LLC.
Thank you for letting me know, I didn't know that a CPA could do it for me
I would be very very skeptical if an accountant/CPA offered to create an LLC for you. Accountants/CPA's should not be practicing law or giving legal advice.
It can also show that a business is trying to do everything but not specialize in one specific area.
If you are looking for an operating agreement - speak to an attorney.
Investor · Richmond, VA · Member since 2020 · 108 posts · 135 votes
5y
@Ethya Lawani I agree with @Basit Siddiqi. Form or "organize" your LLC in accordance with your state laws. You can go to your state corporations division website and access all the instructors, documents, and guidance needed. Most states are now offering online submission of creation documents and corporate filings. You will need to pay the associated fee and you'll be set.
Where any attorney is crucial, is the structuring of your Operating Agreement. Depending upon the provisions you have included within your OA, they have varying risks and mitigation should your company ever be sued.
A CPA can be helpful to consult for determining certain tax elections and other aspects of how you wish your entity to be treated for tax purposes. A tax or corporate attorney should be able to help you out with some of the more nuanced aspects.
Not sure about your state, but in the states where I have incorporated, an OA is not required immediately during filing of “Articles of Organization.” You can have that written and signed later. You need only maintain it on file as it is not required to be submitted to the corporations division.
Contractor · Webster, TX · Member since 2016 · 94 posts · 75 votes
5y
@Ethya Lawani Congratulations on the new adventure you are about to begin in real estate investing. Trying to protect your assets by forming an LLC probably won't be successful, and I'll tell you why in a minute. But if you want to form an LLC, you can go to the Texas Secretary of State website, https://www.sos.state.tx.us/co..., create an account with their SOS online portal, and for about $300 bucks file a certificate of formation. That creates your LLC, legally. Since you are the only owner of the LLC, the IRS will consider you a "disregarded entity" for tax purposes, so you won't need a separate tax id, and you file all the income and expenses on your personal return. Now, real companies also have operating agreements, which specify all the big picture items of how the company will do business, who the officers are, how they get elected, etc. You need a lawyer to craft that for you. They have their own form documents, so they can spit out a basic one for you at a fairly nominal cost. Then you have to go through the motions to have a company. This means having annual meetings, and then signing minutes of those meetings, and storing them in a way you can find them later. A lawyer can help craft annual meeting minutes for you. Finally, you need to make sure you business has separate bank accounts, and the money is accounted for like a business would. So you may need to pay an accountant to keep your books proper if you're not familiar with business bookkeeping. You need to do all these things because if things ever hit the fan and you get sued, the first thing a good lawyer will do is try to "pierce the veil" of your company, say its a sham company, have the judge disregard the entire company, and then go after all your personal assets. If you ever do get sued over something, you'll spend a bunch of money paying a lawyer, whether you win or lose, so in a sense, you always lose because you're out the money. That's why this strategy isn't always as successful as people hope it is, even after you spend all that money doing these things I outlined above to protect yourself.
Here's an alternative strategy that works pretty good: buy insurance. Most of your liability in real estate can be insured away. Find an insurance company that specializes in helping small businesses, such as people who have dba's, for example, and ask for a) property insurance for your REI investment, b) but also "completed products coverage" for your property rehab business. Best part, if you get sued for something, the insurance company's lawyers will now go to bat for you at no charge. And if they settle with the person, the insurance company pays the settlement, not you.
Finally, sometimes real estate investors can suffer from analysis paralysis. What I mean is, it's great to look at all the pros, cons, numbers, and spreadsheets, but at some point, I want you to pull that trigger and take a leap. Run a good business with good ethical practices and create a good product, protect yourself with insurance, and you'll do just great.
Flipper · Friendswood, TX · Member since 2017 · 400 posts · 368 votes
5y
In my Humble view...there is no reason for most investors to do an LLC. Judges aren't dumb and LLC's aren't magic. If you are just a dude with some property hiding them in an LLC that YOU control...not only will you pay a lawyer to rep your LLC (because you can't rep your own LLC...or you prove its fraud) AND you get to pay one to argue in court that you aren't just hiding (alias) behind the LLC.
Now...if you own a ton of stuff already then sure....but there are MUCH better ways than an LLC, in my non-lawyer (not a paid liar) view to protect yourself in this business. MUCH MUCH MUCH better ways.
Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
5y
Definitely understand your goals and your concerns, talk to a lawyer about the LLC because it does offer benefits, only you can decide if they outweigh the (marginal) costs.
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