The classic LLC question - but with a twist

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The classic LLC question - but with a twist

Brian Walters
Las Vegas, NV · Member since 2019 · 173 posts · 78 votes

We have all seen and read opinions on what people just starting in real estate investing should do in terms of creating a LLC to own and operate each property. Most of what I have read speaks to the opinions for young investors who are getting started. A lot of these seem to lean toward not setting one up, being the person is just getting started and wouldn't have much at risk either way.

However, what I have not seen a lot on are opinions on what would work best for new investors who are further along in life. For example, I am 15+ years into a good career, but still looking for ways to invest. Being married with kids my #1 goal is to provide and protect my family. Based on this, since I have started trying to learn, I have always leaned toward the LLC being the better way to go. The up front cost, if for nothing more than peace of mind, seems well worth it to me. I'm curious what others feel, or what others in similar situations have done.

Also, would you typically set up a separate entity for each property owned?  And if so, would each of those fall under a single, higher company, or just exist as individual entities?

The goal is to start investing in the Las Vegas/Henderson area over the next year so if anyone has any advice specific to that area I would love to talk in more detail.

Thank you to all who take the time to read and provide any thoughts and insight you may have.

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Marcus Auerbach
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
6y

There is no clear case for an LLC. First you have to understand that an LLC does not provide protection, it only limits your expose. And then there is this question:

What risks, specifically, are you concerned about?

If you run a sound buisness, keep the property safe and have good leases, your risk is low. Your liability insurance will cover the rest. You want to be safe? Add an umbrella insurance.

What incident would cause someone to sue you - successully! - and get awared more than one million? It's hard to come up with a good answer in a small residential property. You could also get hit bu lightning.

Once your portfolio grows, you can devide it in 7 figure chunks and hold them in individual LLCs, like 5 duplexes. At that point you need commercial financing anyway. Until then enjoy the benefits of a 30 year fixed loan, which you can only get in your personal name.

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  • Jared Baker
    Hartford, WI · Member since 2016 · 162 posts · 50 votes
    6y

    Hi Brian,

    I can't speak on personal experience, however my uncle, who is in his late 50's, just bought a duplex as an investment. He did go down the road of establishing a LLC for the exact reasons you mention. He doesn't want the possibility of losing anything because of the duplex. As for the multiple properties, that I think is a personal preference. I plan on doing individual LLC's for each of my properties and a higher level that owns all those for tax benefits and liability reasons. A little for expense and paperwork but in my opinion the added security is worth the extra work.

    1Reply
  • Brian Walters
    OP
    Las Vegas, NV · Member since 2019 · 173 posts · 78 votes
    6y

    @Jared Baker Thank you for the share of experience.  Was this your uncles first investment property? You said you plan on doing, what type of investing are you looking to get into and when is your goal to start?

    0Reply
  • Jared Baker
    Hartford, WI · Member since 2016 · 162 posts · 50 votes
    6y

    @Brian Walters My uncle only has the one duplex currently.  He has talked about buying a second one but hasn't done anything yet.  

    For myself I'm looking to build a portfolio of SFH, and multi family from 2-8 units. I already have a triplex which is currently under my own name as I don't have much in regards to personal possessions. I'm on the look now to add a few SFH over the next year to 2 years. In the next few months I plan on getting my LLC's established so when I purchase the SFH they will be protected from each other. I plan on doing an individual LLC for each property and then one holding LLC for all the LLC's.

    0Reply
  • Account Closed
    Charlotte, NC · Member since 2020 · 30 posts · 12 votes
    6y

    @Jared Baker

    Hi I’m just starting out and curious as to why you decided on an llc over an umbrella insurance policy or even a series llc, are there no annual expenses in Wisconsin or do they provide more protection than the aforementioned options?

    Thank you. Tyler.

    1Reply
  • Mike McCarthy
    Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    6y

    @Brian Walters in my opinion, the question isn't really about the LLC, but about financing.

    If you plan on owning the house outright, an LLC is the way to go. Except for a few states, the cost is minimal and doesn't add much work come tax time (a few extra forms).

    The real decision point is financing. If you're new to the RE game, and/or want the best rates, you're going to want a conventional mortgage (3.5-4% for 30 years). But lenders won't lend a conventional mortgage to a house titled in an LLC.

    Commercial loans will have terms that aren't as good (6%+ for 10-12 years, plus points). Plus, they'll need solid REI history.

    That's the real reason most RE investors go the no LLC route.

    That, coupled with the fact that lawsuits are very infrequent - and risk can be mitigated more cheaply with insurance.

    3Reply
  • Andrew Wicklow
    Insurance Agent · Chicago, IL · Member since 2020 · 41 posts · 32 votes
    6y

    @Brian Walters

    I'm a very seasoned investor and I can tell you the LLC is totally worth it.

    The LLC is not only about the protection it provides but almost more importantly the tax advantages. I'm not an attorney nor an accountant but I can tell you that both will say that the LLC is the way to go. The start up costs are not even a consideration (or the maintenance costs of keeping one).

    Single owner LLCs are disregarded for tax purposes so everything flows to the owner of the LLC. But pass through entities get taxed less than ordinary income which is what you're taxed as an individual who has income.

    As far as multiple LLCs are concerns. Many accountants say that you should use series LLCs because the taxes are easier. But I'm reality I think it depends on your state. The LLC laws need to be tested to make sure the series LLC hold up as true impervious entities. Because this is semi unclear In my state (Illinois) I always do separate LLCs for separate things that I will hold for a while (I want a Chinese wall between all different assets I will keep for a while). For simple fix and flips I use a single LLC and reuse it over and over.

    This is a lot of info to take in. But if you or anyone has any questions...feel free to reach out directly.

    Andrew

    8Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Andrew Wicklow

    That’s not really true... pass through entities pay the same tax as as individual. That’s the point. There isn’t a separate tax return to file like a C Corp which is taxed first. The income and expenses are tallied up then “passed through” to your to be figured on your personal 1040 return. The character of the income stays the same. So, passive rental income will stay passive.

    I don't know why you'd be listening to an attorney give accounting m/tax advise. I think you've been talking to too many "accountants" of one sort of they all tell you there is a tax advantage to to a LLC. LLC's are for asset protection. The main situation where they are needed is for tax/accounting purposes is if you are really partnering (ie non-spousal business partner)

    Single member LLC are disregarded entities at the Federal level. Multi-member LLC are taxed as partnerships by default. The deductions you can make are the same. The resulting profit/loss are passed in the same character onto your 1040 return.

    8Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Brian Walters

    I think the threads, at least the ones I've been a part of, generally apply to both "young" and "not so young" investors with regards to LLC. As it was mentioned above, the main sticking point is paying for the commercial financing. People try so hard to get around that it appears to my layman's point of view that they are jeopardizing their corporate veil.

    Meanwhile, there has been no evidence of a LLC corporate veil standing up to a lawsuit (posted here on bp as it regards to REI). That's great nobody is getting sued (or wants to talk about it). If you can maintain your corporate veil, that's great. If you don't mind "paying" the extra costs such as "all cash" or commercial financing, then go ahead. You just need to operate it "cleanly" to maintain your corporate veil. You'll still need insurance. And the tax return is the same since LLC's provide asset protection, not tax benefits (unless you are investing with a non-spousal partner in which case the entity just cleanly distributed the profits/losses, the deductions allowed are the same).

    Basically, many people/investors either are trying to do too much with the LLC or trying to ‘have their cake and eat it too.'

    I hope that helps. Good luck.

    0Reply
  • Manish Shah
    Investor · Parsippany, NJ · Member since 2016 · 45 posts · 5 votes
    6y

    Is it true that having LLC adds to the cost of managing real estate (insurance can go up, mortgage could be difficult or expensive). Agree, from accounting perspective, its clean to have LLC separate from personal finances.

    0Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Manish Shah

    Mortgage for sure is more expensive since you need commercial lending to do it right. People who use residential loans then quit claim deed to the LLC are just asking for trouble since "everything" needs to be underneath the LLC to get the asset protection.

    sometime other operating expenses, such as insurance, can be higher because you should begetting commercial products.

    If you just want to separate your expenses for bookkeeping purposes, you can just open another bank account...  nothing is stopping you from doing that.

    0Reply
  • Will Dixon
    Accountant · Corte Madera, CA · Member since 2018 · 73 posts · 88 votes
    6y

    @Andrew Wicklow

    This is false. Pass through entities, like the name suggests, pass the income through to the members. There is no reduction of taxes or recharacterization of income. Be careful with the information you are spreading.

    3Reply
  • Scott Schultz
    Rental Property Investor · West Bend, WI · Member since 2015 · 931 posts · 598 votes
    6y

    @Mike McCarthy I dont know where you are getting your info on commercial notes, I just renewed 3 of them at 4.375% and have never paid points, I have always used Commercial lending since my second flip in 2008 (paid cash for the first one) and my rental portfolio, I have 1 FNMA loan and the rest are either con commercial term, used as collateral for my commercial LOC's or are free and clear I own 23 locations, I have been investing since 2006 and am a Broker among other licenses, I think you are confusing commercial with private/hard money

    2Reply
  • Mike McCarthy
    Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    6y

    Thanks @Scott Schultz for the correction. That’s a great rate. What’s the term on those recent commercial notes you got? 
    it’s off topic, but having gone through a number of conventional mortgages, I think I’m ready to make the change to commercial. I’m sick of the underwriting process, that gets significantly more complicated as your portfolio increases. 

    1Reply
  • Scott Schultz
    Rental Property Investor · West Bend, WI · Member since 2015 · 931 posts · 598 votes
    6y

    @Mike McCarthy 15 year amm 3 year term, I did a few in January they locked me for 5 years at 4.875 initially the loan only costs me $500-600, and I’m ok with rate risk, I have plenty of cash flow to absorb Much higher rates. I did and FNMA on 1, what a pain, and expensive up front, I probably won’t do that again any time soon

    0Reply
  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    6y

    There is no clear case for an LLC. First you have to understand that an LLC does not provide protection, it only limits your expose. And then there is this question:

    What risks, specifically, are you concerned about?

    If you run a sound buisness, keep the property safe and have good leases, your risk is low. Your liability insurance will cover the rest. You want to be safe? Add an umbrella insurance.

    What incident would cause someone to sue you - successully! - and get awared more than one million? It's hard to come up with a good answer in a small residential property. You could also get hit bu lightning.

    Once your portfolio grows, you can devide it in 7 figure chunks and hold them in individual LLCs, like 5 duplexes. At that point you need commercial financing anyway. Until then enjoy the benefits of a 30 year fixed loan, which you can only get in your personal name.

    10Reply
  • Brian Walters
    OP
    Las Vegas, NV · Member since 2019 · 173 posts · 78 votes
    6y

    @David M. @Marcus Auerbach first, thank you for the input, much appreciated.

    The loan piece is a big part that I left out of my initial post, but is definitely something that needs to be taken into consideration.  If the higher rates from a commercial loan are going to eliminate the cash flow, the benefit is gone.  Though it does sound like there is still a way to make it work if done carefully and correctly.  This is 1 part that keeps me on the fence of which way to go.

    One thing I don't really see anyone speaking much to on this thread to this point are the tax benefits of the LLC. Aside from keeping the finances separate from my individual, there's also the ability to have expenses (valid expenses) flow through the LLC rather than personal expenses no? For example, if a new computer is purchased, couldn't it be paid for by the LLC rather than by me individually? Same could be true for a car, phone bills, etc. if the items are necessary to run the business. I'm sure everyone here has read Rich Dad Poor Dad and this is one of the many points that stuck with me. As long as I have a good CPA on my team, couldn't this be a huge personal benefit as well?

    0Reply
  • Preston Hunter
    Contractor · Member since 2019 · 3 posts · 2 votes
    6y

    @Mike McCarthy

    I bought my first BRRR property with cash in an LLC and when it was time to refinance and get my cash out, the title company prepared papers to transfer the property back into my name, I closed on the loan, and then we transferred it back into the LLC. Seemed like a clever hack and the lender did not object.

    2Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Brian Walters

    No, I skipped Rich Dad Poor Dad...

    No, the LLC doesn't change your allowed deductions. If you want to claim an active business, you can make those deductions on SchC as a sole proprietor... Unless you elect C Corp tax status for the LLC, no matter what is a pass-through entity. So, your types of profits/losses (e.g active and passive) will be ultimately taxed on your personal 1040. So, your investments are only rentals, any profits will be passive on SchE. If you want to deduct expenses for a computer, phone bills, etc. they will go on SchC (regardless if sole proprietor or single member LLC).

    I think maybe what you are asking is how some people make multiple LLC's. There is one fixed LLC to do the management, and set of LLC's for the properties. A legal agreement is drawn up between teh mgt LLC and the various property LLC's (which hold Title, mortgage, etc.) so that the Mgt LLC is doing the leases (ie. the tenants' leases are with the Mgt LLC) and the Mgt LLC is paying the expenses of the property. This has been discussed many times before on BP. This lets you further separate the liability. Perhaps this is what you are asking?

    From all the reviews I've seen on Rich Dad Poor Dad, I hear is more a "sales pitch" book.  Not so speak out of turn, its seems to be "selling" people on concepts but short on practice/detail -- even seen this sentiment in posted reviews from reviewers who said they've read multiple books.  

    Does this make any sense?

    1Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Preston Hunter

    Yeah... That's been discussed many times in BP as well. Too bad the Title company and the lender just sold you services but had no legal interest in your legal affairs. In my layman's opinion (and brought up on BP), you just jeopardized your LLC's corporate veil. Its starting to look like your alter-ego because you aren't willing to use commercial lending and operate it as a standalone business. Also, that sounds like a double close which many professionals ahve just warned me not to do. Furthermore, since the mortgage is in your personal name, you shouldn't really have full asset protection / limited liability afforded by the LLC since the LLC doesn't have both Title and the mortgage. For the LLC to provide the limited libabilty/asset protection, you need to ahve all the "assets" under the purvey of the LLC.

    Its a very grey area on protecting / maintaining your LLC's corporate veil. There are many actions you can do to pierce it. However, you won't know that its really happened until you are taken to court, and I haven't seen a post on BP where somebody has fessed up to being taken to court. I guess that's a good thing that people aren't getting sued. Put it another way: you can file your taxes incorrectly for years and claim how great you are... Then, perhaps on the 10th year the IRS catches up to you and does an audit and shows you your mistake, of course an honest one. Attempted moral of the story is just because you are able to do it and nobody stops you, doesn't make it right.

    Good luck, and make sure you talk to a few qualified professionals.

    0Reply
  • Rich SomersPro Member
    Investor · San Diego, CA · Member since 2019 · 131 posts · 116 votes
    6y

    For anything residential (4 units and less), don't use an LLC..a good umbrella policy is more than enough. For anything Commercial (5 units +), always use an LLC. Each commercial property should be held by it's own LLC in the state of the subject property.

    All the LLC's in your portfolio should be owned by a holding LLC in a non piercing state such as Wyoming or Delaware. Reason being is this protects you from both the inside and outside attack. I'm by no means an asset protection attorney but this is how we have our LLC's structured.

    2Reply
  • David Schlatter
    Wayland, IA · Member since 2014 · 13 posts · 3 votes
    6y

    We started out in the beginning with an llc. My wife and I are the 2 managers. After 5 yrs we switched to a series Llc. We have never had a loan in our personal name. We used a local bank then this year we switched to a portfolio loan and 3.75% 5 yrs arm. We currently own 30 separate properties. Some loans are with a local private investor but all are in the Llc’s name . We do put any expenses towards the Llc just like you said. Tools, computer, miles on vehicles, wages. We started in 2007. I hope this helps. Good luck!

    1Reply
  • Preston Hunter
    Contractor · Member since 2019 · 3 posts · 2 votes
    6y

    @David M.

    Thanks for that information. Would you recommend transferring the property to an LLC after refinancing to avoid piercing the corporate veil?

    0Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Rich Somers

    Out of curiosity, what is a "non piercing state?"  By mentioning WY and DE, I understand they both have favorable anonymity as well as inside and outside charging order protection policies.

    Yes, I second your comment on commercial properties.  They wouldn't qualify anyway for conforming residential loans, and commercial properties by their nature will have greater liability issues.

    0Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Preston Hunter

    NO!!

    In my layman's opinion, you shouldn't transferring the Title at all. If you transfer Title AFTER refinancing, that means Title is held by the LLC and the mortgage is given by you, personally. You are liable for the mortgage. So, the number 1 undisputed way to pierce your corporate veil is to co-mingle funds. You are liable for the mortgage payments. But, the LLC holds Title and should be the landlord. So, which bank account do you use to make the mortgage payments. Also, you really only should be getting the asset protection when the LLC holds everything, i.e. Title and mortgage. You only get the limited liability protection of the LLC when the "asset/item" in question is held by the LLC...

    By doing the "lender (who is only responsible for selling you a loan) recommended approach," you are showing to all that the LLC can't operation on its own. The LLC can't get its own loan. The LLC has to transfer the asset out of the LLC's control so that Preston Hunter can get the loan. Then, Preston Hunter transfers Title back. Now, its your alter-ego. Lets' look at it another way... Lets say I own a single family property but my finances are screwed up and can't refinanced my loan. Would it make sense you for you and I have to have a handshake agreement where I transfer Title to you, you refinance, you immediately transfer Title back to me (subject to the mortgage of course --- oh, a "subject to" transaction), and I agree to make the mortgage payments that are under your name?? All without any legal paper stipulating that after you get the loan you'll transfer Title back to me or that I will make the mortgage payments? what a mess...

    Does that make sense?

    1Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    6y

    @Brian Walters, a couple of things. First not all states have the same laws, I am lucky, my state has great liability protection for LLCs. My opinion is that saying LLCs offer no protection is wrong to the point of being absurd. The sole reason for forming corporations and LLCs for centuries has been asset protection. To suggest the last few centuries of asset protecting is incorrect is idiocy. That being said they do not provide absolute protection, the veil can be pierced if you do not run them correctly, and you cannot make yourself immune from personal acts. It is slightly more expensive to get loans in an LLC. I typically pay at least one point of interest rate higher than personal loans, and the terms are normally 5 to 15 years shorter and you get ARMS, (adjustable rate mortgages) rather than a 30 year fixed. My interest rates get adjusted every 5 years, my loans are usually 15 or 20 year. The cost of running an LLC in my state is negligible. Usually about $200 a year for the annual report and it takes about an hour for my bigger companies. The protection from LLCs are in protecting you and your personal assets from liability for LLC debts, and charging order protection for the property in an LLC if you are sued personally for things occurring outside the LLC. An LLC is really just a corporation that gets pass through taxation but provides liability protection. Originally LLCs were just for partnerships, but the states have expanded to solo LLCs also. I could write on these for hours, but I wanted to clear up some misconceptions. Now many folks do just fine without LLCs and use a lot of insurance, but that doesn't mean LLCs don't work, and work well. I would never do a separate LLC for each property unless they are expensive properties. I won't do a separate LLC for each $60K house, but I would for a $400K house. I hope this helps. Regardless of what you decide, jump in and do it.

    1Reply
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