Looking for First Property - Create an LLC first?

[Kelly Beres]

Hi All - I'm actively looking to buy my first rental property in Charlotte, NC. My plan is to do a BRRRR and build a portfolio in the next several years. Should I set up an LLC before my first purchase? And if so, any helpful tips in doing so?

Appreciate an insights!

[Ryan Coon]

You've waded (perhaps unwittingly) into the age-old and long-debated question of when to form an LLC. As you can see, opinions are all over the map. However, as an attorney who has worked with hundreds of real estate investors to secure their assets, I'll offer my two cents on why earlier is often better.

1. Insurance is a Tool, Not a Shield

You will often hear people suggest getting more insurance instead of an LLC, especially early in your journey. While insurance is a vital tool, I caution against relying on it as your sole remedy.

Insurance policies are full of "carve-outs" that allow providers to deny payouts. From toxic mold and environmental factors to dog bites from "dangerous breeds," I've seen providers walk away and leave investors to foot the bill for catastrophic liabilities. Remember: insurance companies make money by collecting premiums, not by paying out claims. An LLC provides a layer of protection that doesn't depend on a claims adjuster's approval.

2. The Freddie/Fannie "Due-on-Sale" Myth

Many investors avoid LLCs because traditional Freddie Mac or Fannie Mae loans generally require you to close in your own name. While these loan docs contain "due-on-sale" clauses, there is a common misconception regarding transfers.

Both Freddie and Fannie expressly allow you to transfer your real estate to an LLC that is wholly owned by you. This carve-out is explicitly in their guidelines. You can close personally to get the best rate and then transfer the title to your entity without triggering the clause, provided you follow the proper procedure.

3. Small Investors Have More to Lose

There is a myth that you only need an LLC once you have a "large" portfolio. I argue the opposite: New investors need protection more than anyone.

If a mogul with 100 doors faces a catastrophic liability that wipes out three properties, their bottom line is bruised, but their life is unchanged. If you only have two or three properties, a single catastrophic incident can wipe out your entire portfolio and set you back decades. The "little guy" has a much lower margin for error.

The Bottom Line

Liability planning is an individual decision based on your personal risk tolerance. No one on this forum has to sleep on your pillow; you have to decide what level of exposure allows you to rest easy.

Because I spend my days in the nitty-gritty of business structuring, I recommend using an LLC even for your very first property. It's better to have the bucket under the leak before it starts raining.