Investing in real estate with an LLC or without one?

18 Replies

Hi to everyone

I just want to know:

1- how could affect me as an investor in real estate without an LLC?

2- what benefits can I get with the LLC?

3- what are the pros and cons. Getting an LLC?

I would like to see your experiences and opinions

Thank you so much!

The pros to an LLC is protection of personal assets outside of the LLC. But if you want to protect your personal assets and not do an LLC, you can obtain umbrella insurance.

The cons are higher financing cost compared to conventional. LLC loans are considered commercial and have rates that are higher, generally fixed for a few years & then float, and have shorter amortization period (max 20 years). Many believe that LLC have more tax benefits since it is easier to write off expenses. But I find this to not be true. 

Originally posted by @Charles Situ :

The pros to an LLC is protection of personal assets outside of the LLC. But if you want to protect your personal assets and not do an LLC, you can obtain umbrella insurance.

The cons are higher financing cost compared to conventional. LLC loans are considered commercial and have rates that are higher, generally fixed for a few years & then float, and have shorter amortization period (max 20 years). Many believe that LLC have more tax benefits since it is easier to write off expenses. But I find this to not be true. 

@Charles Situ what are some examples of tax benefits that some feel are easier to "write off" with an LLC?

 

@Lyn Green I was saying that it is a common misconception that you can write off more items with an LLC than not. But some examples of items you can expense if you have real estate, regardless of the entities it is in, are travel expenses to look at properties, marketing if you did direct mailing, and home office set up. I think meals and entertainment expenses were removed from the last tax reform.

@Junior Jaquet Hernandez Typically the same companies that sells you auto or home insurances can sell you umbrella. Umbrella is sometimes used interchangeability with excess liability insurance. They are like a back-up or an extra on top of where the liability portion of your auto or home insurance are not enough. But umbrella goes beyond where you may have existing liability insurance and is more broad. They are designed to cover situations where someone may sue you. 

1) Nothing

2) None! 

3) No pro just Con if you are small investor has less than 20 properties.

The whole idea of getting LLC is protect your personal asset, if you buy enough insurance, there is no point to get the LLC at all.

Also, if you have a lot of equity on your properties and you put it under LLC, in case a judgement, the creditor is going to take all the properties along with all the equity.

Also it is very easy for a good attorney to pierce corporate veil. The umbrella insurance policy for LLC is at least 4-5 times more expensive, not to mention the account fee etc.

I made a HUGE MISTAKE by buying all my properties in to LLC by listening to those so-called experts, gurus! now I can not transfer it to personal name because of tax consequences.

DO NOT PUT IT UNDER LLC, leave it on your personal name and buy 2-5 million umbrella (depending on how much asset your have) insurance in additional to your property insurance.

@Junior Jaquet Hernandez

This is posted on a lot in BP. Just to reinforce what's been said, the LLC is there only for asset protection via limited liability. Unless you are investing with non-spousal partners, you don't need it for tax purposes because the deductions are really identical. However, you do "pay" for the LLC in terms of needing commercial loans since legal entities are not eligible for conforming residential loans (I post on that a great deal about those people who move their Title back and forth --- bad idea in my opinion). Also, you need to operate the LLC as a separate entity (since legally it is) with its own bank account. Don't co-mingle your funds or use it as your alter-ego since there are sure ways to pierce your corporate veil. Do consult some qualified professionals and understand the difference between accounting/tax issues vs. legal issues. For example, many people, even here on BP, will claim every deduction under the sun (e.g. they installed new windows on their primary home) which "might be possible" for your tax return. However, ask them if they have been sued (which pretty much nobody has) and if the other side found out you weren't operating your LLC separate from yourself... hmmmm...

One opinion is to take the lead from the insurance companies. They are out to make money. So, they will have the risk covered. So, buy landlord insurance and an umbrella policy ($1m to $5M coverage) which kicks in 'over and above' and existing base coverage. So, for generally a few hundred bucks a year, have millions of additional liability coverage -- that's a pretty good piece of mind. When you own personally, this can be pretty nifty since you can also put it over your personal home, auto, etc. The LLC would have to have its policy. Usually any "regular" insurance company will offer an umbrella. I've had mine from my regular insurer providing home and auto insurance. Also, keep your property in good repair (i.e. don't be a slum lord) to eliminate/reduce your liability in the first place.

Ultimately, it does depend on your personal circumstance as to whether to use a LLC or multiple LLC's. Many investors on BP have mutliple single family rentals in their personal name. Even as many as over 50.

I hope this helps.  Good luck.

I use different LLC because I don't want people all up in my business.

You can easily search one of my LLCs and see the properties in it.

I keep about 1-2 million worth of real estate in each one.

There are a few more small reasons. But just put it in the LLC. You don't want your personal name all over everything.

no sure what do you mean by "a paper those terms and condition", are you talking about insurance policy on LLC or something else?
Originally posted by @Junior Jaquet Hernandez :

@John Chen

There is any way I could read by a paper those terms and condition on the LLC policy?

 

That will be ideal, I heard someone create one LLC for each property.
The problem is in CA, each LLC cost $800 per year, and accountant will charge at lease that amount per LLC. Also do not forget it is very possible for a good attorney to pierce corporate veil, when that happen, every LLC's asset your own and your personal property will all be at risk.
In my opinion, insurance is the best defense.
Also you can put the property in a land trust, then your personal name will not be on it.

Originally posted by @Jhanel Wilson :

I use different LLC because I don't want people all up in my business.

You can easily search one of my LLCs and see the properties in it.

I keep about 1-2 million worth of real estate in each one.

There are a few more small reasons. But just put it in the LLC. You don't want your personal name all over everything.

 

@John Chen

Yes having a trust and LLC would do the same. I started in 2004 before trusts became popular. So I have LLC's.

I also have insurance, so if someone tries to sue, and I am liable, they will pay. I have plenty of insurance so they won’t be able to take my properties or any equity. Most people trying to sue are just trying to get a quick buck.

If LLC's are too costly then go the trust route.

Thanks @David M. for your explanation. I am always on the fence about putting my properties in an LLC, so I tend to read all of these posts that come up. And usually the responses are presented in contrasting views for the same reasons. I do not have an LLC and honestly am more sold on NOT having one.

I always see the pros as "protection from about being sued", etc. But if you have followed the rules, keep your place safe, and have no real just cause for them to "go after" your personal property, is it common for frivolous lawsuits to move forward, and has anyone (that you know of) been burned by not having an LLC because of this (lost it all)? I can see if you own large MFHs or apartment complexes, or 25 plus SFH. Of course, I understand anything can happen, but doesn't the $1M plus insurance cover any serious lawsuits. I may be naïve on this, but I have not seen this in the 14 years I have been investing in my world or on BP.

@Julie Sisnroy

Nope, I don't know anybody personally being "burned." Lots of posts on BP about how corporate veils being pierced easily (probably because too many people don't protect it, or know how to is my guess). Also, posts on BP and well recommended book by a lawyer (can't think of it right now) talks about how they will sue you personally anyway when they figure out you are the owner of the LLC. Even if you use anonymity strategies such as starting with a WY or DE LLC, you really will/should disclose everything anyway in court. Both to be honest and not hide anything and I think because under subpeona or discovery or whatever, your are going to have to disclose your business relationships. Otherwise, the court will realize you are hiding one thing, 'so what else are you hiding' mentality ensues.

Yes, once you have commercial properties (anything over 4 family units), your liability increases and you need to start looking more closely at having a LLC. This is especially true since all the "residential" products out there are no longer available to you anyway.

Sure, I'd like to think if you keep your properties proper condition, the insurance should cover you.  the insurance company doesn't want to lose money.  Of course, if you run a slumlord and have black mold everywhere and sewage backing up, etc.. that liabilities on that lawsuit get pretty pricey, especially I'm guessing there must be a clause in the insurance policy about owner negligence (granted thats tough to prove to my understanding).