When to form an llc. before or after your fist deal?

6 Replies

I am a buy and hold investor currently searching for my first deal in the Western New York area (Buffalo) .  I've read about the tax benefits and extra layer of protection you get with an llc, but can you form one before you own any property and are just starting out?

I would always recommend to put all of your properties into an LLC. In your contract, you can write that you will have the option to place your property into an LLC at closing. Let an attorney do the work for you. Form the LLC once you have the property under contract.

Purchase as an individual. You're like a kid buying a $200 pair of Nikes before he's even tried dribbling a basketball. Figure out if investing is right for you before pouring time and energy into acting like an investor.

After the deal goes through, you can transfer ownership into your LLC. In your mortgage contract they say you would have to repay the loan immediately if you transfer ownership, but no bank in their right mind would do that as long as you are making payments. Attorneys will tell you not to, but every investor I've spoke with recommends it. Not sure if anyone else has any insight into this?

Good luck Jeff. Let me know if you have any more questions? Bought my first two rentals this year! 

There are lot's of threads in BP as well as elsewhere on this topic. If you used a residential (as opposed to commercial) loan to finance the property the odds are high that the property cannot be vested in an LLC at closing. If you Quit Claim to an LLC post closing you're violating the terms of the mortgage which is a contractual agreement. Contracts can be broken...you have to weight the risks in doing so. My suggestion is that you research the potential consequences thoroughly before you make a decision ( I would not simply go by the anecdotal comments in this blog). By the way...there are some residential lenders (non-agency investors) that do allow vesting in LLCs. You can search these out yourself ... or find a residential lender that non only direct-lends but also works with multiple outside investors in a correspondent or brokerage relationship (i.e. this will save you the time of doing the research yourself). Also, Commercial Lenders allow this as a rule...as well as allow vesting in other legal entities.

I went and got an LLC after doing my first 2 deals. I never use it because I prefer fanny/Freddie financing.

no tax benefits, just expense. You'll need it once you start getting commercial financing but that'll be ~10 units