Residential rental and flips - Individual LLCs under a holding company?
Miami, FL · Member since 2016 · 53 posts · 3 votes
Hi,
My wife and I currently have 1 rental property (condo) and plan to do at least 2 flips this year. Should we be incorporating each of these individually and then add them to a holding company, or keep them separated? Or group them all under 1 LLC?
1. yes, LLC's are not eligible for conforming residential loans. But, if you are doing DSCR's, it doesn't matter... (you can use "commercial" loans for personal properties)
2. the whole Due on Sale clause is contentious. Also, conforming loans allow for quit claim deeding to your own LLC. But, I wouldn't move the Title back and forth to get a new loan. In my layman's opinion, that looks very much like alter-ego, which is one of the two major ways to pierce your corporate veil. Then, it tends to lead to co-mingling (the other) since investor do it w/o any paper and now the LLC is making payments on your personal loan.
3. Yeah... if you are hyper concerned you keep making LLC's. the issue with series LLC is that they are not available in every State, and they are very new. So, very little case law actually shoring up their intended use.
4. Yes, as to your OP, you separate your business lines (in your case long term rentals and flips) with different LLC's. the risk exposure is diff between the two business lines so no point cross-exposing.
5. personal choice. 1mil is just a guide... Also, if you are heavily leveraged, 1mil of property value could be 100k of equity --- so what are you protecting? Many investors have claimed (on BP) that they do tens of properties in their own name. Some as many 50 or more.
5. Personally help properties have homeowner's/landlord insurance and umbrella policy. that's it. LLC's need homeowner's/landlord insurance and perhaps umbrella (if you bundle properties in the same LLC, or else its not quite as economical). remember, you still need the insurance to mitigate risks to your assets. LLC's asset protection is just to "contain" the damage --- you want / should be so that just the assets in the LLC are at risk, both inside and out.
5. (cont) For example if you don't carry enough insurance, say a fire or flood wipes the property, then the Note holder won't come after your other properties or your personal assets to recover money. However, the property in the LLC (asssumig in this case only one) is a total loss. If you get into a car accident, they can only sue you for damages and if they win the judgement, then you don't want to them to take the investment properties --- they aren't yours, they are owned by the LLC.
Hope that helps. Good job doing the research. Happy to chat. Good luck.
Put two lawyers in a room, ask a question, and get 18 different answers.
Short answer: it depends.
Long answer: it really does depend. Rental income is taxed most favorably while flip income is taxed at much higher rates, so there's an income tax perspective, and that's entirely relative to the rest of your income tax picture. Then you look at possible exposure to legal liability. From what? Tenants, trespassers, contractors, suppliers, guests, etc. It's different for each type of income. Then there's state reporting requirements to consider. Some states are easy to work under, others are difficult.
I doubt this helps, per se, but I hope it illustrates that your question is not as straight forward as it might appear.
@Jerel Ehlert good answer :)
@Jack Taylor I think most lawyers and CPAs lean toward mitigating as much risk as possible and the individual LLC option is generally the safest. If you want to get a variety of opinions from CPAs, Lawyers, and investors search the forum "LLC or not" or "LLC" using the magnifying glass feature in the top right corner of Biggerpockets.
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*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
@Jerel Ehlert @Sean O'Keefe Am I ok to just repost the question there or as an "LLC or Not" in "Starting Out"? I don't see any specific forum, only the title of posts "LLC or Not". Just trying to post in the right spot.
@Jerel Ehlert @Sean O'Keefe Am I ok to just repost the question there or as an "LLC or Not" in "Starting Out"? I don't see any specific forum, only the title of posts "LLC or Not". Just trying to post in the right spot.
Posting the question here is fine. I think what I was getting at is that a lot of new investors have posted this question already (and gotten some great answers) so if you search "LLC" in Biggerpockets or some combo of LLC and other words (like "Multiple LLCs") you might find these threads helpful.
I'm reading through them all now. I'm seeing reasons to/to not form a corp - tax benefits and asset protection, basically. Can someone confirm if I'm regurgitating correctly?
- Using LLCs will make it more difficult to get a loan, plus a higher interest rate
- Someone on another post said it would accelerate a loan to use a quitclaim into an LLC (don't know if this is true or not).
- LLCs may not shield you regardless of whether something happens on the property or happens BECAUSE OF you unless assets are compartmentalized. Series LLC appears to be the best way to do this.
- Separate operations from assets if you do LLCs
- Use LLCs only if you have 1+mil assets, otherwise not worth it.
- Most umbrella insurance policies will cover the likely scenarios, LLCs would cover additional asset protection in the event of a lawsuit.
Glad to hear any other points.
1. yes, LLC's are not eligible for conforming residential loans. But, if you are doing DSCR's, it doesn't matter... (you can use "commercial" loans for personal properties)
2. the whole Due on Sale clause is contentious. Also, conforming loans allow for quit claim deeding to your own LLC. But, I wouldn't move the Title back and forth to get a new loan. In my layman's opinion, that looks very much like alter-ego, which is one of the two major ways to pierce your corporate veil. Then, it tends to lead to co-mingling (the other) since investor do it w/o any paper and now the LLC is making payments on your personal loan.
3. Yeah... if you are hyper concerned you keep making LLC's. the issue with series LLC is that they are not available in every State, and they are very new. So, very little case law actually shoring up their intended use.
4. Yes, as to your OP, you separate your business lines (in your case long term rentals and flips) with different LLC's. the risk exposure is diff between the two business lines so no point cross-exposing.
5. personal choice. 1mil is just a guide... Also, if you are heavily leveraged, 1mil of property value could be 100k of equity --- so what are you protecting? Many investors have claimed (on BP) that they do tens of properties in their own name. Some as many 50 or more.
5. Personally help properties have homeowner's/landlord insurance and umbrella policy. that's it. LLC's need homeowner's/landlord insurance and perhaps umbrella (if you bundle properties in the same LLC, or else its not quite as economical). remember, you still need the insurance to mitigate risks to your assets. LLC's asset protection is just to "contain" the damage --- you want / should be so that just the assets in the LLC are at risk, both inside and out.
5. (cont) For example if you don't carry enough insurance, say a fire or flood wipes the property, then the Note holder won't come after your other properties or your personal assets to recover money. However, the property in the LLC (asssumig in this case only one) is a total loss. If you get into a car accident, they can only sue you for damages and if they win the judgement, then you don't want to them to take the investment properties --- they aren't yours, they are owned by the LLC.
Hope that helps. Good job doing the research. Happy to chat. Good luck.
@Jack Taylor - if you are more of a visual person, here are some diagrams that might help you further on this quest:
Asset Protection Decision Diagram - to help assess the need for asset protection, and what to implement: https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-decision-diagram
Asset Protection Onion Diagram - what, when, and at what cost one should implement in terms of asset protection - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-onion-diagram-v2
What is needed for complete asset protection OR the domains that need to be intersected to find asset protection - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-spectrum-diagram
How a fully implemented asset protection layout might look. - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-structures
If you want more details, from an investor perspective, PM me.