Hey Folks. I am a newbie investor in the DC, MD and VA. Is it a best practice to open up a business as a LLC or whatever other entity before you start buying your 1st investment property to protect yourself financially?

Any tips is greatly appreciated!

Hello Melinda and Welcome to Bigger Pockets! - Thanks for asking this question I am also curious about what the recommended best practice is for this process..

An LLC is not necessary. It's costs money and adds headaches for financing property.

All my investment properties are in my name. Easier (and better) in my opinion for financing. If you go LLC route, you'd need hard money or commercial financing.

Oh, wow! I was not aware of that. Thank you for sharing!  

So, how do you protect yourself from being sued if something goes haywire? @Justin Lanciault @Jaron Walling

@Melinda Harris You protect yourself by having home owners insurance, a well written lease, and renovating the property. I replacing old wiring, outlets, and leaking plumbing. The floating shelves in the kitchen don't hurt people. 

Also, don’t be a slumlord. And if anything it’s contractors who will come for you before your tenants do.

We speak to folks all the time who have created complex entity structures, often needlessly. We also speak to folks who have created tax saving structures.

There is no "one size fits all" when it comes to LLC formation advice. That being said, it pays to be cognizant of the tax, legal, and administrative implications of an LLC.

The best way to do that is to consult professionals. 

I'm no professional on the subject, but I'm surprised by most of the responses. It's really not very expensive to form and it adds just one more layer of protection. If something terrible happened and a tenant tried to sue you, it certainly wouldn't hurt to have the peace of mind that you can't be held personally liable. If you lost the lawsuit and the property is in your own name, the court could decide to seize your property and more. I know there can be tax benefits but that's not my expertise. In my entire loan portfolio, just about every investment property is held in an LLC. I'm smart enough to know that most of the investors I work with are much smarter than me, so if they all form real estate holding LLC's it certainly can't hurt. Maybe there are reasons not to form an LLC that I'm not aware of, but conventional wisdom tells me it's probably not a bad idea.

I’m new myself, but if I could give my two-cents worth, I would recommend setting it up first. Buy the properties in your name and make income deposits under the business account. You can always quit-claim the property to the business later, but financing is nearly impossible unless you have a large amount of initial capital.

Also, start out as a sole-member Llc. This will keep taxes simple. Do not confuse this with a sole proprietorship.

It's overrated in most cases.  If you want to do it, it takes 24hrs.  Focus on the bigger items in my opinion.

Thank you for all your feedback. This gives me points to do my research on and make the best possible decision for myself. 

@Ian Walsh Not a bad outlook. I’m a new member but quickly learning I should probably avoid the topics that aren’t my expertise. There’s enough knowledge here that my half-baked responses probably don’t serve much good haha, I’ll stick to questions about commercial loans!

Originally posted by @Justin Lanciault :

All my investment properties are in my name. Easier (and better) in my opinion for financing. If you go LLC route, you'd need hard money or commercial financing.

Is this accurate? i was under the impression i could form an LLC with partners and purchase a 4unit multi and still qualify for an fha loan. thank you in advance for any insights.

@Robert White Yes it's accurate. The majority of banks do not offer conventional or FHA loans to LLC's.

Originally posted by @Robert White :

Originally posted by @Justin Lanciault:

All my investment properties are in my name. Easier (and better) in my opinion for financing. If you go LLC route, you'd need hard money or commercial financing.

Is this accurate? i was under the impression i could form an LLC with partners and purchase a 4unit multi and still qualify for an fha loan. thank you in advance for any insights.

 

FHA is for personal name only.

Curious for those that have formed an LLC before purchasing, how long do you have to wait to quit claim it to your LLC if you purchase it in your own name to have more financing options? And when you do quit claim to the LLC do you then have to obtain new financing?

I tried flipping houses years ago, it went poorly, everything was in my name and had to file bankruptcy, so now I'm looking to get back in the game and have formed an LLC to cover myself should something go awry. Thanks in advance for any help, good post Melinda

I would love to address this if I can ! First and foremost I am no lawyer! I have been sued personally for personal injury. The LLC protected my real estate holdings. To big of story to tell here publicly.

1. Jaron says "An LLC is not necessary. It's costs money and adds headaches for financing property."

It cost $50 to form in arkansas, on line with the State of Arkansas, takes about 30 minutes. I have done it multiple times for people.  (approx $250 with the lawyers.) All of my financing has been in house loans, with a personal Guarantee signed. The Bank is not who I Am worried about. 

2. Justin , All my investment properties are in my name. Easier (and better) in my opinion for financing. If you go LLC route, you'd need hard money or commercial financing.

After spending $25,000 in legal fees, losing a lot of personal assets. refinancing a paid for house that made me 10k on rental income. The Attorney suggested I never put my name on anything, harder to find me as owner, and easier to sell business. not selling my name at a later date. 

3. Matty, I couldn't of said it better!!! Your spot on. 

Insurance has it limitations, And all the repairs you can do doesn't protect you from what i call the IDIOT FACTOR!  The idiot factor was settled out of court for 7 figures in my case. 

All in all, talk to your real estate attorney, spend a couple hundred bucks, and protect your assets.

This is MY personal Experiences, I learned the Hard Way! The houses in my name were subject to grab (2),  The houses in the llc they didn't even consider (46).  I have learned everyone on here is an expert in there own experience and business. . 

But i know the $50 would have saved me 25K in legal fees and 75K in assets. and a loss of 8500 in rental income. 

@Melinda Harris no you don’t need to do this. It’s unnecessary and spends money on something you don’t need. More importantly it takes away from actually doing deals, and instead focuses your time on unimportant details

Melinda, an LLC is simple and easy to create, plus offers you tax benefits and protects your personal assets in worst case scenarios. We have multiple LLCs, plus we use trusts for our properties. It's our goal to pay the least we can in taxes, protect the portfolio we are creating, and make it difficult to find who the owner is, through all these layers. We started with a simple LLC, and the rest has grown as we added properties. You can still finance your properties, no worries. Talk to a CPA as you start, and you'll have great advice for your investor future.