Hi BP! I own and operate a seasonal business selling Christmas trees in Manhattan (hit me up if you want to hear more about that adventure!) and am wondering about buying oos rentals within my Christmas tree LLC. What are the pros and cons here? I'm thinking it'd be nice to have income during the year to support the large upfront purchase of trees in November and it might lend credibility to us in the eyes of lenders (for future expansion). What are your thoughts? Effective? Tax implications?
About me. I have a couple of rentals in Oklahoma City that are going well and I'm currently flipping a house and doing a new build both in Indianapolis... So I don't have zero experience... but also I'm still newish.
Hey @Joseph Schommer , where are your properties in Oklahoma City. Did you all do better or worse late year with the holiday in the pandemic?
@Ben Scott . My properties are in Midwest City and, aside from that big ice storm, we are doing great. Solid blue-collar area and section-8 is a strategy that's working great for me in OKC.
What do you think about an unrelated LLC owning rentals to pad the income and put assets on its books?
An LLC unrelated to your tree business? Or to the other rentals? I think its a great idea. Just not a ton of deals out there right now on the MLS. There are some gems off-market but they've become few and far between. MWC is a great rental area. Close to Tinker and I-40. Blue collar but relatively low crime.
@Ben Scott . @Ben Scott tree business is an LLC. I'm thinking of buying the properties in that LLC to good for cash flow and potential tag benefits? But trying to weigh pro's and cons.
Yes, I'm near Tinker. Love the area and super solid tenants.
I love the idea of having a steady but seasonal job and the supplementing with rental income, to me, flexibility is everything, you could take on bigger projects in the off season and reap the benefits during the on season!
Are your current rentals in the same LLC as your tree business? If not, I'd recommend keeping them separate. If something happened at one of your rentals or flips, it'd be awful for a litigant to be able to take assets from the tree business. I know some REI that create an LLC for each property. That may be overkill. But there's no real tax benefit, in my opinion, to buying a property in your tree business' LLC, especially if you're the only member of the LLC.
Glad your tenants are working out in MWC! Let me know if you need any market intel on Oklahoma City in the future.
Hey Joseph! From an accounting/creditworthy perspective it can be really helpful to have multiple streams of income. We actually did this with a side LLC we had that was just for side projects (photography and videography*). It also saved me some time with bookkeeping to consolidate. I was encouraged to look into a series LLC for the legal protection but i honestly didn't want to do all the work or spend all that money. Ultimately, I ended up separating everything out by business/trade later on when I had a more soldi track record that lenders were willing to lend on. Hope this helps!
I'd say if you have an incentive to do so for creditworthiness or time saved, go for it. Otherwise the slight increase in legal liability might not be worth it.
*As I type this I wonder if it made a difference that we tied the photo/video to the rental/flips?
This not tax or legal advice, please consult your professional.
@Joseph Schommer are you planning to take title in the name of the LLC? That would be the only scenario where I think it would be a good idea to buy it in your business. The general rule is you should separate your passive and active businesses. It makes tax time much easier. If the intent is to add to your personal portfolio, I would create a separate LLC for your rentals. Pay yourself a distribution from your business and use that money to fund the new LLC, take title there. Keep separate books.
@Forrest Faulconer Yes! That's kinda of what I'm thinking too. Also this way I can roll profits into other investments rather than A: Letting it sit there all year or B: taking the distribution on the cash to use in my personal investments (what I did this year).
@Ben Scott Thanks for that input. My current rentals are just in my name and I have an umbrella policy for protection bc California LLC's are bonkers, don't add that much protection and are cost prohibitive.
@Alyssa Dyer Astute as always. Ultimately I would like to expand the Christmas tree business far beyond what it is...and I AM doing that! What I will need in the future will be funding and loans and showing NO income for 11 months out of the year then $250k (gross) in December just feels untrustworthy to banks...even though I've done it for 10 years now. *Roll-Eyes-Emoji*. Thanks for sharing your experience. Makes sense to separate it later down the line once they take on 'lives' of their own.
@Greg Schuricht Thanks for your input! I was planning to take title in my LLC, yes. My intent is to grow my business to the point where it can snowball itself with different streams of income. December is a huge month but we have expenses year round that the rental income can take care of. We are also going to need loans in the future and I'm looking at it as a play to make us more credit-worthy.
re: your last sentence. I did that this year and am currently flipping a house and doing a new build with the proceeds all within a separate LLC.
@Joseph Schommer have you talked to banks about loans that can help expand your core business? The way you've talked about it sounds like you may have written yourself off without their input/feedback. How big of an expansion can your market support? What capital do you need to pull it off? Your 10-year track record of success should be an asset in this endeavor. It means you know how to pull money out of this particular market.
@Dan Schwartz Thanks for that feedback Dan! I haven't talked to banks in the NYC area b/c the expansion I want to do that will need a loan is buying a Christmas Tree Farm and running it. There are LOTS of subsidies for buying farms via the US Gov that I can tap...but I have to first show a track record of real estate/farm investments. I personally can show a track record, and that may be enough (esp with the deals I have going this year) but my company can't. A
Also, Most of the year I've got capital just sitting fallow in a bank account not doing much so I feel like it's a good time to make that $ Work!
@Joseph Schommer good point. I figured the extra capital was needed to buy more trees and open more lots, but yeah, a farm is an entirely different beast! Good luck!