Investment Portfolio Strategy - LLC and Tax

[Nicholas Sanchez]

I am looking for assistance on how to go about asking questions related to my own personal investment portfolio (two condos and one multifamily home in Chicago), as well as how to structure myself moving forward as I am starting to get in the market for a next multifamily purchase. I went more of the house hacking route to start my investing so I purchased my three properties under my name. So, I want to determine the process of potentially creating an LLC for them and going forward as I purchase new properties. Some of my initial research has pointed to work with real estate attorneys and tax CPAs - I am wondering if this seems accurate to anyone who has gone through this process or if you have any suggestions to aide in my search.

[Savannah Wallace]

Hi Nicholas,

It’s awesome to hear that you’re looking to expand your investments! I know it’s no easy feat.

For any real estate investment, I recommend placing each property into an LLC for asset protection.

LLCs can help shield you from personal liability if a tenant were to ever sue as well as offer protection against creditors in case of a personal judgment through charging order protection, when the LLC has been structured appropriately. With the property in an LLC, if someone were to sue the property, they could only go after the assets in the LLC and not anything else (assuming you did not guarantee anything personally and the corporate veil has not been pierced).

Also, depending on the structure, you can remove your name from the public record as the current owner of the property. For my clients, I recommend that they place the properties in an LLC that has been formed in the state where the property is located and have the member of that LLC be a Wyoming LLC. This provides for both anonymity as well as charging order protection.

If you took out a loan to purchase any of the properties, depending on the type of loan, you may benefit from a land trust. Depending on the terms of the mortgage, transferring the property to an LLC may be considered a sale, thus triggering the due-on-sale clause. However, putting it into a land trust first avoids triggering the due-on-sale clause.

While there are inexpensive DIY options out there, I highly recommend working with a local attorney to help you set up your LLCs. I've had the opportunity to review a number of templates from companies, like LegalZoom, and have found that they often lack the necessary detail and thoroughness required for effective business management. Important sections are frequently omitted, which can create challenges in day-to-day operations and long-term planning.

This lack of comprehensive documentation becomes especially problematic if you ever consider bringing in partners or expanding your team. In my experience, the materials provided by these companies rarely offer sufficient guidance or clarity to support such transitions smoothly.

Good luck with your investments!