Should you create LLC before buying the property ?

Question

Should you create an LLC before buying a property or vice versa?

Scott Smith · Answer

There are strategies that would utilize both options. If you were going to finance through the LLC by getting a commercial loan, then you would form the LLC first. This would be difficult in your situation since you wouldn't have time to season the LLC, so pretty much all lenders would require you to personally guarantee the loan. This means the LLC doesn't offer it's full value in liability protection.

The other option is to finance the purchase in your personal name and then transfer it into the LLC after the fact. The issue is this that lenders might use the due-on-sale clause to recall the note, since historically that has been viewed a prohibited transfer (though they rarely take action on their threats if you are paying the note off.) To entirely avoid this issue you could just create a land trust, as described in this article. It is an excluded transfer that allows you to both have the beneficial financing through your personal name without the lender being able to recall the loan through the DOS clause while still offering you the full liability protection of the LLC.

Sounds like you are pretty new to all of this, so I would really recommend sitting down with an experienced attorney who can assess you situation and give you some recommendations. They can form the entities for you at a price, but you will have confidence the entities were formed correctly - some of the DIY LLCs I work with are basically just an added business expense that offers nothing useful because the investor formed it wrong or never learned how to operate an LLC correctly. If you want to do something, best to elarn how to do it right.

Just some ideas! I personally work with land trusts on all the properties I own because they can also offer anonymity and help you roll them into your future estate plan very easily.

PJ M. · Answer

Questions like this get asked a lot around here so the search may be your friend.

Ultimately though, I think the answer is..it depends.  It depends on what you are looking to do with the property, where you are in your investing career, and a ton of other things.

I like to describe it this way.  The LLC is a tool.  It has its specific purpose and it has other purposes for which it can be beneficial.  It's like a hammer.  A hammer is a tool.  It has it's specific purpose, banging in nails, and it has other purposes for which it is useful; removing nails, closing a can of paint, etc.

Does that mean when I am going to paint a room I would go buy a hammer?  Probably not.  While the hammer is a useful tool to have, it wouldn't be needed specifically for my painting job.  I can use my rubber mallet, the handle of my screwdriver, or in a pinch I've even been known to just stand on the paint can lid to get it to seal.  So no, I wouldn't just get a hammer if I was going to be painting.  If I had a hammer (and couldn't find my rubber mallet) I would bring it along, but I wouldn't just get a hammer because I was painting.

Whether you need an LLC is really dependent on what you are looking for and your specific situation.