Starting an LLC after two properties

28 Replies

In the past year, I have purchased two properties in the state of Connecticut, but am yet to form an LLC, which I would like to do ASAP obviously for a number of reasons. I have put 25% down on both properties with a credit score on 820 and solid income so no issues there. I will list a series of questions that I would love a long time professional or expert in the field to answer and help someone out that is looking to continue to grow the business in the coming years:

Is it difficult to transfer the two purchased properties over to an LLC? Will I need to refinance and find a new lender most likely, or is it just a simple transfer hopefully?

Should I use an attorney for the LLC or just do it online? I always see cheap pricing online to form one but can I trust that?

Is there anything specific I need to do prior to forming the LLC to make sure I can tax the company completely separate from my actual, personal tax form each year? (I know it is possible, just not sure on specifics)

Is insurance more expensive when under an LLC instead of under my personal name generally?

Will the interest rates go up due to it being changed to an LLC?

Will financing be more difficult in the future under the LLC?

Any other tips are much appreciated but those are the questions that have been running through my head a lot.

@Jake Belden I'll take a stab at this... but by no means is this legal advice and I am not an expert. However, I own a few rentals and have a few LLC's.

1. It is not difficult to transfer 2 properties into 1 LLC. You will NOT need to refinance. Connecticut from what I have been told, has done away with the 'due on sale clause' which previously scared some people. What that meant was.....when the bank saw a change in ownership, they could technically call the loan due. However, this is extremely rare and people have been transferring property out of their personal name to an LLC for years. But now from my understanding Ct has done away with this clause all together so nothing to worry about any more.

2. I would recommend hiring an attorney. If you have bought and sold a few properties by now, maybe you established a relationship with an attorney who can help out. If not, it is not a costly and something I would outsource. 

3. One thing you'll want to do is have a separate bank account which technically you should have done already. But if you haven't, you definitely want to do so before forming an LLC.

4. You'll get mixed answers here. I personally have not seen an increase in insurance by having my properties in an LLC but I know clients and friends who have. I would just shop around.

5. Interest rates will not go up if you have a fixed rate loan. 

6. Financing will not be harder for an LLC but when you buy the property you will pay a slightly higher interest rate than if you were to buy in your personal name. This is why most people buy in their personal name and quick claim it over to their LLC afterwards. Going back to my answer in #1- people have been doing this for years (switching from personal to LLC) and the main reason is because you lock in the better rate in your personal name and then switch over for liability and protection... best of both worlds.

Hopefully that helps let me know if you have any further questions! 

@Jake Belden I'm in the same boat as you. I have 2 rental properties right now and I started my LLC a few weeks ago. I'm trying to see if I should quick claim the deeds over to the llc or just refinance them with commercial real estate loan.

Does anyone have a link to an article or post that summarizes the whole LLC topic? I am about three months away from getting my first deal for a buy and hold. This will potentially be three properties as a package deal from a landlord offloading some properties. I am trying to figure out if I should be setting up an LLC prior to getting involved in my first deal or if I should wait until further down the road, maybe in a year or so after a couple properties under my belt? I am trying to do my own research but I seem to end up confusing myself with the pros and cons. My limited understanding is that it is initially easier to get financing done when it is in my own name and then switch over as mentioned above but at what point in your investing career does one typically switch to using an LLC? I see most people that have 10 or more units almost always use an LLC but it seems to vary widely when someone has 5 or less units. Any advice or pointing in a direction would be greatly appreciated

@Michael Doherty what a huge help on all questions. Thank you so much.

If you have the time, can you expand on #3 if you know this: is any LLC able to file their taxes separately from their own taxes and is this the way to go? My understanding is an LLC can act as a corporation and file separately, which is what I want (I have a business partner and we want it this way)

@Alexander Bacon hey Alex, that is something I was wondering as well. When doing some research (and I'm sure you've seen as well), the pricing of an LLC is truly pretty cheap. With that said, I think it's smarter to get one sooner rather than later. I am a year in as of this upcoming April 29 and would feel a lot better just having that extra protection.

I would also take a look at what Mike Doherty said above in regards to financing initially under personal name for lower rate, and than switching it over. Seems like a pretty great strategy.

@Jake Belden I see, good to know. And yes, I did see that and it sounds reasonable. I'm just curious about personal experience I guess. I would like to hear about a person who was using their personal accounts and then switched to an LLC. What reasons specifically did they make the change for and how was the outcome? Was it worth it vs should they have waited or did they wish they started out with an LLC etc..?

@Jake Belden   this link may be helpful regarding your question. Link to IRS . You should keep all your expenses on your rental separate if you have an LLC. If you get audited you don't want to be caught commingling funds between personal expenses and 'business' expenses associated with your property. When you do your taxes at the end of the year you will file a 1040 form and you should add all your income and subtract all your expenses for your LLC.

The only reason to have an LLC is for liability protection. If a tenant slips and falls they can only go after what's 'in' the LLC. They cannot go after personal assets. It also may be worthwhile to look into an umbrella policy if you choose to not go the LLC route. Many investors choose to have both.

@Jake Belden

For federal purposes, LLC's actually have several ways to go. If you are a single member LLC federal irs considers it a disregarded entity meaning they basically don't acknowledge it. But you said you have a partner. As such, it's automatically is taxed as a partnership so you'd file those tax forms.

To finish the story, you can elect to be taxed as a S Corp which is another passed through entity, or as a C Corp which has its own tax filing as a corporation.

From what little I understand of your desires, sounds like the simple partnership is the way to go for you

@Jake Belden

If you quit claim deed a property, there are no warranties and should invalidate your Title Insurance. Of course it’s your call, but you probably want to keep your Title Insurance should anybody come forth with a claim—that was the original point of getting it.

Talk to attorney, but you should be able to confer the ownership over as just a transfer to the LLC to fund/capitalize it. Other than what CT has determined (no idea personally), due on sale clause is your only concern

I purchased my properties in my name then did the quit claim into an LLC without any issue.

My insurance didn’t go up and my rates didn’t change.

Upon refinancing one property, I had to quit claim from my LLC back to my name, refi, then quit claim back into the LLC which is a bit annoying.

For the second property I am refinancing now, I worked with a local credit union that I have a good relationship with and was able to keep refi with my LLC by using a commercial loan.

You can look up the LLC name you want to use here to see if it's available : https://www.concord-sots.ct.gov/CONCORD/online?sn=PublicInquiry&eid=9740

I had my attorney create the LLC but it seems pretty straight forward. I just filed the annual reports online and there's a $20/yr fee for each LLC in CT which is very reasonable.

@Alexander Bacon

There are TOO many posts on LLC. In short, it's about your risk aversion/tolerance and cost to have LLC in your state.

For SFH, insurance will cover your liability. If you have an apartment bldg, probably better I have a LLC for the asset protection since it's a more valuable asset and with so many tenants there is a greater chance, ie risk, of something going wrong.

LLC generally have some cost. In NJ, I can do a single member LLC for the cost of my time to register online with the State, no other paperwork, and ~$120 annual fee. I hear in California it's something like a $800 annual fee. Also, some states require an Operaring Agreement be filed. You could grab one off the internet, but I've never heard of one being "exercised." That is, who actuallly has a suit filed against their LLC and how well did that Operating Agreement hold up in court the way you wanted it to... is it really worth it to save maybe $1k to put so much of your asset at risk?

Also, you need to operate each LLC as its own business. No co-mingling funds and expenses between LLC's or personal accounts. If you did every SFH like that, you'd have many bank accounts, perhaps business credit cards (don't have to have them), and lots of data entries. Oh, wait... you don't do your own bookkeeping and tax filings? That's more you have to pay your accountant. I hear accounts tend to charge by the LLC...

If you don't keep your operations clean, you allow any half decent attorney to "pierce the corporate veil" and thus open your personal assets to becoming liable. Huh? Doesn't that kinda defeat the purpose of the LLC in the first place? Yup... so, you've got a whole lot of "back office" work to maintain the protection of the LLC. I haven't been on bp long, but I haven't seen posts about when things go wrong in a LLC. Honestly, I believe that's because rarely does something go wrong — if you operate your investments right.

I know this doesn’t exactly answer your question/concern, but it has to “make sense.”

Yes, using your personal name has many lending advantages. Even if you had the property in a LLC, you are going to have to personally guarantee the loan anyway...

Bottom line: pay several hundred for an umbrella policy, or pay for the accounting/bookkeeping, tax filings, bank accounts, your time, etc to have LLC's.

I hope that helps. I hope tone isn’t too snarky. It’s late for me and I typed this all out on my phone. Good luck, and feel free to ask any follow up questions. I’ll help if I can

I will try to add some additional comments but of course this shouldn't be viewed as tax or legal advice, just my experience.  A couple of things that I have learned that I either did well or would have changed include:

1. Create an LLC - either single member or multi-member (if you have a partner). I recommend using an attorney but you don't have to. There's enough good information out there to do this on your own. For me, I was introduced to a local attorney so I wanted to start building a relationship with him so I spent the money to have him create the LLC on my behalf. For single member or multi-member LLCs they will be viewed as a disregarded entity unless you file for an EIN. I started out with a single member and then moved to multi-member and filed for the EIN b/c I needed it for the Opportunity Zone Fund I was creating. In that case, it could not be a disregarded entity in order to qualify for the OZF. (Topic all its own)

2. Once the LLC is created, open a business checking account in the LLC name - As others have mentioned, you want to make sure you keep your business expenses completely separate from your personal expenses. This is a great way to do it.

3. Open a business credit card account - Same as above.  Use this for all of your business expenses.  Don't commingle business and personal expenses.  This will save you a lot of work when it's time to file taxes.

4. Purchase QuickBooks Desktop - Some will agree with this and some will disagree but this is only my experience.  Once we purchased our first 4 properties, and we started our own Opportunity Zone Fund, we knew it was time to have someone else do our taxes.  We found a great tax attorney that we trusted and again, decided we wanted to build a relationship with him b/c we were looking to grow our portfolio and we would need the advice.  He was willing to spend a couple of hours with me to give me a crash course in QB and accounting principles etc.  I wish I would have done this part sooner.  A couple of key points of using QB desktop - that's what he uses so I can send (through the software) an accountant copy and he can make necessary journal entries, etc and then send back to me.  I don't have to pay a monthly fee b/c the desktop version is a one-time fee and you continue to get software updates for free.  Any time I have a question, it's easy to get help b/c my tax attorney and I are using the exact same software.

5. Start a binder immediately - keep copies of everything.  I have a section for business credit card transactions, business credit card statements, checking account transactions, checking account statements, etc.  I then simply write on the receipt which unit/property that transaction is for so I can "classify" it in QB.  This allows me to see my balance sheet and income statement by class/property.

6. Get a mileage journal - put it in your vehicle and keep good records of your mileage, assuming you are using the mileage method vs. the actual cost method.

I know that doesn't answer all of your questions but hopefully these tips will help you get started.  Happy to answer other questions you may have if I can.  Best of luck.

    Great post, @Jake Belden . Here's what I got:

    1. Is it difficult to transfer the two purchased properties over to an LLC? Will I need to refinance and find a new lender most likely, or is it just a simple transfer hopefully?

    Nope. You will have to quit claim deed them to the LLC. Previously there were some concerns about triggering the due on sale clause at the time of the quit claim, but apparently that is no longer an issue in CT. Verify for yourself though.

    2. Should I use an attorney for the LLC or just do it online? I always see cheap pricing online to form one but can I trust that?

    Yes, you can make the LLC by yourself. It's cheap enough. You should get an attorney if you aren't comfortable doing it yourself, however. @Edward Schenkel is a great attorney for that kind of stuff. He's helped establish LLCs for some of my current property management clients. 

    3. Is there anything specific I need to do prior to forming the LLC to make sure I can tax the company completely separate from my actual, personal tax form each year? (I know it is possible, just not sure on specifics).

    Create a separate bank account, and understand some of the differences between owning in an LLC vs in your name (mainly the eviction process). I am not a CPA, but you will probably find that your LLC will be a pass-through entity for tax purposes, so the income will still show on your personal tax form in one way or another. I see that you have a partner, so from what I understand, the LLC will have a schedule E for real estate holdings and each partner will get a K-1. That K-1 income will be reflected on your personal taxes.

    4. Is insurance more expensive when under an LLC instead of under my personal name generally?

    Generally yes. 

    5. Will the interest rates go up due to it being changed to an LLC?

    No it should not. 

    6. Will financing be more difficult in the future under the LLC?

    Yes, possibly, because some banks will only lend to LLCs through commercial products. If you want to hold the asset in the LLC it's probably best to buy in your name and quit claim it to the LLC. If you do get commercial financing, expect to pay higher interest.

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    @James Johnson

    Yes, I would quit claim deed the properties to the LLC. If you refi you're likely going to have to pay points, higher interest and closing costs (or some combination of the three).

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    @Alexander Bacon

    Most people never end up creating a LLC, so you definitely don't have to have one before your first deal. Most people I know just set up a 1 or 2 million dollar umbrella policy to protect themselves against potential liabilities. Financing can be more difficult in the LLC, yes. Most people switch to the LLC method once they have a high net worth which can be made up of high savings, high equity, or both. This makes them a bigger target for money hungry lawyers, and thus more likely to be sued. If the properties are in the LLC, there's a bit more protection (assuming everything is being done to maintain the LLC properly).

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    IF YOU GO THE PARTNERSHIP AGREEMENT MAKE SURE YOU HAVE AN OPERATING AGREEMENT BETWEEN YOU AND YOUR PARTNERS. Have meetings, take meeting notes. It will save so much headache...I'm in the middle of a nasty dissolution of a partnership right now. Had someone taken the time to draft a partnership agreement, we would have all been better off! 

    @Jake Belden I'm not an attorney, but have most of our properties owned in an LLC. My thoughts are to get into an LLC, using an attorney, and use a CPA for tax purposes. Prices for these differ across states, but the advantages I find make it worth it are:

    1. Using an attorney and a CPA make you treat your rentals like a business. I know everyone on BP is a go getter, but you have the ability to find specialists in these fields and leverage their experience. Unless you’re on of these in your day job, I’d say build a team.

    2. You don’t need those team members...until you do. Non planned Pending legal action, tenant disputes, tax filing questions you didn’t anticipate, or an audit. All of these are unlikely. But when they happen, you want to pick up the phone, call your attorney or accountant, and get advice. You don’t want to shop around and figure out the best one when you already need their expertise.

    And for me, I don’t want to start those relationships in an emergency situation...while figuring out their fee structure...on a potentially stressful timeline...with who knows what else happening in your personal life.

    Good luck, and congrats on considering these next steps!

    @Alexander Bacon to answer your question on timing, it has traditionally been hard to get funding as an LLC with no history, so some people, myself included, purchased in our own name, opened an LLC, had the LLC manage the properties, and build a track record for the LLC that way.

    I think you'll find a lot of variable answers for the LLC debate. I opened one up right away and began its track record like mentioned above. I was able to network and meet a regional commercial lender at a meet up group. That took about 18 months. From there, we refinanced one from our name into the LLC due to the track record built over prior two years, and have purchased subsequent properties in the LLC name.

    Im neither a lawyer nor pretend to be one and I’m not qualified to give legal advance. I don’t think, personally, there is a “wrong” answer, as long as you’re operating like a business, with separate personal and business accounts, have adequate insurance (from an umbrella and the property policies in my opinion), and consult legal advice in your state/county on issues that are gray areas.

    Good luck to you.

    Before deciding whether your loan can be called under a due on sale clause, you or your attorney might want to review 12 CFR 591 which I believe may provide in part:

    § 591.1 Authority, purpose, and scope.

    (b) Purpose and scope. The purpose of this permanent preemption of state prohibitions on the exercise of due-on-sale clauses by all lenders, whether federally or state-chartered, is to reaffirm the authority of Federal savings associations to enforce due-on-sale clauses, and to confer on other lenders generally comparable authority with respect to the exercise of such clauses. This part applies to all real property loans, and all lenders making such loans, as those terms are defined in § 591.2 of this part.

    § 591.2 Definitions.

    For the purposes of this part, the following definitions apply:

    (b) Due-on-sale clause means a contract provision which authorizes the lender, at its option, to declare immediately due and payable sums secured by the lender's security instrument upon a sale of transfer of all or any part of the real property securing the loan without the lender's prior written consent. For purposes of this definition, a sale or transfer means the conveyance of real property of any right, title or interest therein, whether legal or equitable, whether voluntary or involuntary, by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest with a term greater than three years, lease-option contract or any other method of conveyance of real property interests.

    § 591.3 Loans originated by Federal savings associations.

    (a) With regard to any real property loan originated or to be originated by a Federal savings association, as a matter of contract between it and the borrower, a Federal savings association continues to have the power to include a due-on-sale clause in its loan instrument.

    (b) Except as otherwise provided in § 591.5 of this part with respect to any such loan made on the security of a home occupied or to be occupied by the borrower, exercise by any lender of a due-on-sale clause in a loan originated by a Federal savings association shall be exclusively governed by the terms of the loan contract, and all rights and remedies of the lender and borrower shall at all times be fixed and governed by that contract.

    § 591.4 Loans originated by lenders other than Federal savings associations.

    (a) With regard to any real property loan originated by a lender other than a Federal savings association, as a matter of contract between it and the borrower, the lender has the power to include a due on sale clause in its loan instrument.

    (b) Except as otherwise provided in paragraph (c) of this section and § 591.5 of this part, the exercise of due-on-sale clauses in loans originated by lenders other than Federal savings associations shall be governed exclusively by the terms of the loan contract, and all rights and remedies of the lender and the borrower shall be fixed and governed by that contract.

    While I agree a lender foreclosing because of the due on sale I'm not sure it can't happen.

    In addition, assuming you received an Owner's Title Insurance policy when you purchased the properties, if you're going to convey the property to an LLC, make sure the Grantee meets the definition of Insured under the policy. If it does not it probably will not be considered an Insured under the policy.

    While I agree a lender foreclosing because of the due on sales is rare, I'm not sure it can't happen.

    In my opinion it makes sense to set up LLCs for all properties. BUT...I would look at:

    - Having the properties personal to lower the interest rate first then quckly switched to LLCs

    - The value of the homes, and your net worth.

    If your thinking protection check out an umbrella policy for the long term (or both).

    It depends on the person though, some people feel LLCs on 2 or 3 properties is overkill and not necessary.

    @Thomas Houpt @Thomas Houpt

    There are a number of discussion posts on this topic. I'm on the app so don't know how to post url here right now to a recent thread I made a long reply. The topic is "Starting a LLC after two properties"

    Originally posted by @Ladè Baruwa :

    In my opinion it makes sense to set up LLCs for all properties. BUT...I would look at:

    - Having the properties personal to lower the interest rate first then quckly switched to LLCs

    - The value of the homes, and your net worth.

    If your thinking protection check out an umbrella policy for the long term (or both).

    It depends on the person though, some people feel LLCs on 2 or 3 properties is overkill and not necessary.

    Do you think there's a reason the interest rate is lower on a mortgage you take out individually versus one taken out in an LLC? If there is a reason, do you think a lender might think a borrower defrauded them for taking a loan out individually and then conveying it to an LLC?