Should I have an LLC?

Question

I have heard a lot about LLC’s and whether or not investors need them. I have heard a bit about it in BP podcasts, but honestly am not sure if I should be looking into having an LLC since I am just starting out. What exactly is an LLC (understand the abbreviation but am not sure why people are torn about whether or not investors need them)?

Account Closed · Answer

So an LLC is a Limited Liability Company, and it's used by investors and entrepreneurs to protect their own assets, and tie the risks to the company itself. This means that even if your real estate loses money, or goes into debt, the bank won't take your own car, your personal money, and your private assets. It looks great because if you get sued for slippery stairs for 500,000 dollars but only have 200,000 for your house or cash reserves in the bank, the LLC would go bankrupt, but not you. If you get into a lawsuit, the tenants will sue the LLC, but not you. That's the benefit of the LLC. It will separate your real estate investing from your own.

However, although it sounds like a good idea to get an LLC, since you have a house with a pre-approved(or maybe approved) loan, if you decide to get an LLC, you will technically 'Move' the ownership to the LLC, and not you. This will be considered a 'sale' by the bank, and this allows banks to request all the remaining loans you have from the bank instantly. That's not good. For example, if you have a 200k loan on your condo, and you transfer that house to your LLC, the bank 'might' ask you to pay all the loans immediately due to the due on sale clause. This is probably included in your terms for the loan.

One alternative way to protect yourself is insurance. When a lot of investors are starting out, instead of having LLCs, insurance protects them as well such as umbrella insurance, liability insurance, title insurance, property insurance, etc. Most investors starting out don't need an LLC. Maybe later on when you scale and grow exponentially, you might get one. You'll have a CPA and an attorney to talk to about that.

One last thing to note about LLCs is that they aren't bulletproof. One mistake that new investors make if they get LLCs is that they combine their own bank account and use their personal bank account for real estate investing as well. For example, collecting rent straight to their bank account, taking out money, and taking in money for their real estate investing in the same account they used to buy groceries. That will ruin the purpose of the LLC, and if one gets sued, you might personally be liable for any money. Create another bank account for real estate investing if you're going to get an LLC.

I hope it helps!

Randy Rodenhouse · Answer

Simple answer is if you have assets to protect then get a LLC.  However, I see many people spend a ton of money and time on asset protection and have nothing to protect.

Yes it is good to have a properly purchased in LLC but if you find a deal and it is your first one and you don't plan on holding it a long time then you could buy in your own name.  I bought several house in my own name before I setup my now extensive asset protection but now I have assets to protect.

Focus on getting a deal and then start getting your asset protection.  Just being practical.  Hope that helps.

Eliott Elias · Answer

A LLC will allow you to keep track of all your business expenses and build up business credit to one day have access to commercial lending.

Bruce Woodruff · Answer

This question gets asked a LOT. Do a search and you will find tons of valuable information....

Christopher Liu · Answer

Without going into many of the variables that would argue for or against using an LLC to own your property, I would say that the need for an LLC for everyone (and frankly each asset) depends on their particular situation and what they are hoping to achieve. Perhaps for your case, in order to help, the first thing to know would be the size of the investment asset you're looking to buy and the portion of your overall net worth it represents. Secondly, what is it about LLC that you have heard about, that makes you think you need them?

For me personally, LLC's are a necessary and critical part of my RE investment portfolio to reduce liability risk and efficiently structure how I pay taxes on these assets.

Albert Blair · Answer

Emily, an LLC. main purpose is for asset protection. I've heard the argument that if you don't have a large amount of assets to lose, a good umbrella insurance policy should suffice. However, once you begin to scale it makes sense to have an LLC. On the other hand, if you just want to have one in place before you scale is alright to have but not necessary in my opinion.

Jevon Shaw · Answer

@Allan Smith is spot on with his answer. Incorporating in the beginning isn't that big of a deal unless you are working with partners. In that case, you'd probably want some type of operating agreement

Ian G. · Answer

I don't have any real estate and I'm not a lawyer but I do have businesses and I think an LLC is important because of the reasons Allan mentioned.  Setting up an LLC is very easy and even an LLc that isn't perfect is better in my opinion.  I don't know the rules in Missouri but in a lot of states it costs under $50 and can be done online in a few minutes.

Allan Smith · Answer

Most of the time people set up in LLC to purchase the property in. If you were to get sued, people can only go for the assets that are in the llc, rather than the rest of your possessions like your car, accounts, and house.

I always advise people to just go make some money and worry about LLC stuff later. It's way too early in the process if you've not bought a few houses first.