Real Estate Investor · Raleigh, NC · Member since 2012 · 59 posts · 17 votes
Hello All,
I know we all strive to look more professional as investors. Some of us are willing to go and get an LLC to do so. I was wondering if there was an easier way? Specifically, is there is a way for the tenant's check to be made payable to someone other than my name? You know, how some write out checks to 123 InsertStreetnamehere [similar to LLC held in property's name] instead of my name. Granted my name is adequate, but it just doesn't have the "Oomph" that says, this is a professional real estate business with a professional landlord.
DBA or form an LLC then get a bank account in that name. Easy peasy.
OTOH, I'm leery of checks. Absolutely not for application fees, first months rent or deposit. After that, OK. But if one ever bonces, that's it. Cash or MO only from then on.
Kyle J.
Thanks Kyle! I'm going to look into DBAs, so everything is the same? I can keep my bank accounts and deposit the checks as if they were my name? And does it have any affect on my taxes?
Thanks Jon! I like your advice on the MO or cash, although I don't know if my tenants will be crazy about paying for a money order
Also I guess my next question would be, is it better to form a DBA or an LLC that ONLY serves as a property manager for my own properties [i.e. to collect rent and manage my own properties].
Kyle J.
Thanks Kyle! I'm going to look into DBAs, so everything is the same? I can keep my bank accounts and deposit the checks as if they were my name? And does it have any affect on my taxes?
Thanks Jon! I like your advice on the MO or cash, although I don't know if my tenants will be crazy about paying for a money order
Typically what you would do is:
1) Set up a DBA name (also called a fictitious business name) in your county
2) Take the form they give you once your name has been approved to a bank and open an account in that name
3) Deposit/cash any checks made out to your DBA name using that account.
There is no affect on your taxes.
As for accepting payment in MO or cash, that's recommended for your initial application fee, and first month's rent and security deposit. Beyond that, I do not like getting paid in either form and actually prefer a check for monthly rent payments. The reason is because my bank allows me to simply take a photo of the check from my smartphone in order to deposit it. However, I actually have to drive over to the bank to deposit MO's or cash. It's just a hassle.
Also I guess my next question would be, is it better to form a DBA or an LLC that ONLY serves as a property manager for my own properties [i.e. to collect rent and manage my own properties].
That's a personal decision in which you'll have to weigh the pros and cons of each.
An LLC is a legal entity that can also be used for asset protection. However, they can be expensive in some states (in Ca we have the initial setup fee plus another $800 per year minimum - though other states are FAR less expensive). You'd also likely have to deed the properties into the name of the LLC to really keep everything separate and get the benefit of the asset protection, not to mention you'll need to keep all of your funds strictly separate. There's a lot that goes into it....too much for me to cover here.
With a DBA name, there's absolutely no asset protection, but you can appear more professional and conduct business and open accounts in your business name. Plus it's usually much cheaper. For instance, in my county it's only $33 one time fee to get a DBA name (compared that to my cost of setting up an LLC and the yearly $800 I'd have to pay!). In your county, it looks like the cost is a little higher ($70), but still very reasonable.
If you end up deciding to go with a DBA, check these links out:
I am not sure that having a check made out to a company vs an individual name would make a difference to most people. As long as they understand you are running a business, taking care of them as tenants, and expect to be treated properly I would think that might be what matters. As a matter of policy, I require cashier checks only. Haven't had one bounced...yet....and I get them made payable both to me and my corp depending on what the tenant chooses.
Wow great advice everyone, I appreciate the input. I will definitely consider getting a fictitious name for now and use my future umbrella insurance to act as my fiscal lawsuit barrier at least until I build up more equity. And after doing a brief search on Pennsylvania's business name search I believe I saw some people using a fictitious name and then having LLCs or Corps stemming from their name. For example: "Fictitious name" as the fictitious name and then "Fictitious name - 123 Property name" as an LLC.
I think that's a good strategy, but I would take it one step further in my future, having an LLC as the primary LLC and then having an LLC for each individual property assuming the primary LLC as the single member.
I've helped a cousin of mine set up an LLC in PA and it was very reasonable to do as far as cost and ease of transaction go. I would strongly recommend that you use an LLC as they will grant you the "professionalism" you are loking for but far more importantly, it will offer you critically important liability protections. It is a SMALL price to pay to ensure your personal property are not vulnerable to liability arising from your business transactions. Just my two cents!
OTOH, I'm leery of checks. Absolutely not for application fees, first months rent or deposit. After that, OK. But if one ever bonces, that's it. Cash or MO only from then on.
Jon,
Where we have been fortunate enough to have our units (re)rented 2-4 months before they become vacant, I have been accepting cheques for security deposits at the time the lease is signed. If there is a problem, we know long before they show - with the first month's rent - looking for the keys.
That said, most of our tenants pay electronically; we only have one left paying cash and two by cheque.
Although it might be true that setting up your LLC is not difficult, the non-Pennsylvanians do not realize that this state has a transfer tax that would be due upon transfer from a person to LLC (and vice versa). In Philadelphia, I believe it is like 4% of imputed FMV ... in other words, it's expensive.
So if investment property in Pennsylvania is owned in your personal name, get a high dollar amount of liability insurance coverage.
I am close to purchasing a property in Philly, and was wondering if I set up an LLC first, does the transfer tax apply to that if ownership goes directly to the LLC?
I am using conventional financing, so would a bank lend to me if I used an LLC for an owner occupier, or would I have to start as personal property?
Michael Garson I'm not familiar with the way things work in Philly, but I'm sure there is no transfer tax if you hold it in your LLC from the get go.
BUT, since you are using conventional financing, I don't think holding title in your LLC is going to be an option. I suggest following what Steve Babiak said and getting high liability insurance, like $1m.
There is a transfer tax due on any property transfer in Pennsylvania, unless the transaction is one that is exempt. So the initial purchase always has a transfer tax due (unless the buyer AND seller are both exempt from transfer tax such as the federal gov't). So your LLC buys it and keeps it, the only transfer tax is on the original purchase. If you buy it (transfer is due on the purchase), ans then you transfer to LLC - the LLC transfer has a transfer tax due. Then lots of people will transfer from LLC back to personal name to get financing (easier to get loan in your own name, with better interest rates and terms) - another transfer tax due for this.
The PA Department of Revenue has a web page devoted to transfer tax details, and the exemptions and forms to be completed, as well as examples of when transfer tax is and isn't due.
BUT, since you are using conventional financing, I don't think holding title in your LLC is going to be an option. I suggest following what
Steve Babiak said and getting high liability insurance, like $1m.
Could you not use a bare trust in this situation? If Michael Garson were a bare trustee for his LLC, then his name would go on the mortgage and title, but the beneficial owner would be the LLC.
We do not have LLCs in Canada, so our holding company is incorporated (Equivalent to an 'S' type corporation in the US, I believe). Generally conventional financing is not an issue, but we have encountered a couple of situations where the retail mortgage group at a bank had a hard time wrapping their head around the holding company being a "person" under the law.
One such situation was the bank not allowing an individual and corporation to hold tenancy in common. Last year, we jointly purchased a property (triplex) with an individual. We initially set the deal up as a partnership between our holding company and the individual. This is where we encountered the above policy of the mortgagee. In the end we solved the impasse by establishing a bare trust with me as the trustee for the holding company's interests.
Steve Babiak
Thanks, I almost forgot about the transfer tax. I heard that some banks can write out your LLC name as the deed owner, but then have the loan in the personal name [portfolio loan]. In this manner you would be forgoing the building up credit phase of the LLC. I assume this would protect the property from lawsuits and still get you the mortgage. If this at all is correct, I will most likely do that on my next investment purchase. Although for the short term, I will definitely get the umbrella policy!
Mehran Kamari
In the near term future, I will go with Steve's solution regarding the high umbrella insurance coverage. Seems to make the most sense at least when my net worth and equity is low!
The one thing lost in the discussion: Why do you think that having a rent check coming to your name is so bad and unprofessional? For properties that I own in my own name, the tenants know so, and their checks are made payable to me. Why make that more complicated than necessary? For properties held in my company name, the checks are made payable to the company.
And if you're thinking of having a single member LLC and then being your own manager ... risk exposure isn't really that much different in the end from just owning in your own name and being your own manager.
Definitely a good point Steve Babiak. Personally, it kind of goes back to the recent discussion that Brandon Turner had about seeming like the property manager rather than the owner. Also, if the tenant believes that a business is managing the company, I feel some part of them may think that they could hire big time lawyers if rent isn't paid or take them to court.
Thanks for the advice on the single member LLC, you've made me realize this really isn't much different than owning it myself. Thanks Steve!