When is the right time to create an LLC?

Question

Hello BP community!

I am a Chicago/Northwest Indiana investor and would like to know when is a good time to start an LLC? At the moment, I have a total of seven doors spread out over three addresses. I am not sure if my portfolio is big enough to start an LLC or if that even matters. I have been told my current portfolio size does not justify costs associated with starting an LLC. I have also been told that an LLC will make things difficult when trying to refinance or obtain a competitive interest rate. More cons than pros but hopefully someone can shed some light on the LLC .

Thanks in advance!

David M. · Answer

@Brandon Gore

https://www.biggerpockets.com/...

Maybe the above thread will get you started in seeing the bigger picture...  Of course, consult a qualified professional or two...

Basically, its the "same thing" but more "hassles" and costs to use invest with a legal entity.  You still need insurance.  Other than the general concept of needing insurance, but you also want the insurance company's legal team to fight any lawsuits otherwise you'll go broke with legal fees protecting your LLC.

Generally, the big issue is the more costly commercial loans that you will need to use since legal entities are not eligible for conforming residential loans.  The interest rate is higher and the terms are generally poorer.

You will also need to operate the LLC as a separate entity.  Don't co-mingle your funds and don't use it like an alter-ego.  Those are two quick ways to pierce your corporate veil and lose the limited liability protection that you sought.  Remember, these are legal issues, not accounting issues.  People will deduct anything through their LLC's to get the tax deduction.  THe accountant will make it fly, but an attorney would probably say you are misusing hte LLC.  Furthermore, until they get a lawsuit, they think they are protected.

This thread below might be useful.  Some people also say to get the loan in your personal name, then transfer Title to the LLC.  Again, that looks like an alter-ego usage (i write more about in the below thread).  Furthermore, the LLC can only limit the liability exposure for what it owns, so with the mortgage in your personal name you really haven't protected yourself.

https://www.biggerpockets.com/...

As one of the major contributing accoutants on bp has said, you can have 100 rentals in your name, 100 rentals and 100 LLC, or 100 rents and 1 LLC.  There really isn't a wrong answer.  You just need to figure out what works for you.

hmm..  For your size portfolio, its still generally on the smaller size.  There are posts on BP with people owning 50 or 60 properties under their personal name.  That is definitely more extreme.  With yours being smaller residential properties (no commercial properties including 5+ family units), many of us consider the liability as low risk.  Just keep your properties in good repair and have both a homeowners/landlord insurance policy and an umbrella insurance policy.

There are other schools of thought.  But, is it worth it to you have pay the higher lending costs, more tax filings, more bookkeeping/accounting (remember each LLC will need its own bank account), whatever yearly (usually ~$100) State registration fee, and whatever state/local laws for the limited liability protection of the legal entity?

For some (including those on BP), its worth it.  some have 1 property to 1 LLC.  Others batch it to have about $1M of property (not equity) per LLC.

I hope this helps.  Direct message me if you want to chat.  Good luck.

Brandon Gore · Answer

@David M

Thank you for the insight and I will read through the BP articles you provided. I will connect with you if I have any other questions.

Thanks!