Should I form an LLC?

Question

Hello all,

I just closed escrow on my second rental property and plan to close on number three by the end of the year.

At what point should I form an LLC or Corporation ? What are the benefits?

Dani Beit-Or · Answer

LLC forming is a very common question.

Like many of my friends, I agree that it is best to speak to an att. first to make sure you need one.

BUT I also want to encourage you to think about LLC w/more open eyes.

I have been investing in RE for 18 years.

In the first 8ish years I kept hearing about LLCs, and must have LLC, and how I should not operate w/o an LLC. Mainly this info was promoted by attornies and such services that plant fear and sell an LLC related product/service.

10+ years ago I started looking at this concept a bit differently.

Now I ask myself before making a decision:

1. What are the reasons I should consider LLC, e.x. asset protection, taxes, other.

2. What specifically are the risks/exposures I have in my investment.  And can I mitigate these risks differently? Fliping has different risks than owning a nice middle-class rental and are diff. from a running an AirBnb, etc.

In my humble opinion, I believe that we, the community of investors, have elevated the LLC onto a pedestal as if this is the best thing in life.

LLC fits very well with some scenarios but not all.

Note: I'm not an attorney, this is not a legal/tax advice. I just want to make whoever reads this think.

Ian Gorman · Answer

Sam,

I'd consider talking to a local real estate attorney to confirm, but I'd advise an LLC to protect your personal assets.

John Morgan · Answer

@Sam Eknoian

I would pass on an LLC if you have less than 10. Until you get them paid off or have a bunch, it’s not worth it. Just get an umbrella policy and get lower interest rate loans in your name. I have an LLC and regret it.

Raj Kapur · Answer

@David M. Thank you for the reply. I just joined BP and will search the forums for posts regarding this topic.

David M. · Answer

@Raj Kapur

Again, this has be asked and discussed many times on BP.  I suggest you do a search.  In short, any encumbered property can be moved over.  Most to all loans have a Due on Sale clause that allows the owner of the note to call in the remaining balance when there is a property transfer, e.g. when you change the ownership from yourself to you LLC.  Apparently, one or two States may have made this clause invalid.  Also, it seems to be pretty rare for the clause to be executed, but it does seem to happen.

Good luck.

Raj Kapur · Answer

Can a property with a conventional mortgage loan be moved to a LLC?

David M. · Answer

@Sam Eknoian

This is a pretty common question.  Here are a bunch of threads you might want to read through...  Just remember in California the State hits you with ~$800 a year per LLC as part of their annual fee for having a LLC...

https://www.biggerpockets.com/forums/61/topics/827155-starting-an-llc-after-two-propertieshttps://www.biggerpockets.com/forums/51/topics/838628-accounting-for-landlord-flipperhttps://www.biggerpockets.com/forums/51/topics/839992-tax-deductions-on-rental-rehabs

https://www.biggerpockets.com/forums/109/topics/839738-did-you-create-an-llc-when-you-began-aquiring-properties

Evan Polaski · Answer

@Sam Eknoian, are these properties mortgaged with conventional financing?

I have read of some here that don't form an LLC until they get to their 10 mortgage limit on personal mortgages.  Once you start moving to an LLC, you will also be moved to commercial lending which typically means lower LTV, higher interest and often shorter terms and amortization than conventional personal mortgages.

There are upsides, like personal liability protection, mortgages aren't on your credit report anymore, establishing credit for a business.

There is no right or wrong answers.  I formed an LLC to buy my first property and bought the rest in that LLC as well.  Looking back, I am fine with the trade offs I took, but I don't see any clear upside of one to the other.  LLCs have their pro's and con's.

Lisa Dittman · Answer

Hi @Sam Eknoian, @Ian Gorman,

An LLC is a very good idea to protect your assets and for tax purposes. Definetly talk with an attorney about benefits. It is not difficult to set one up and will save you possible time and money in the future. Congratulations on your achievements!

Lisa

Should I form an LLC?

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