New Real Estate Investor: When do I start my LLC?
When people ask me this question my only answer is: I don't know you. So how could I tell you to how to best protect the investment assets you may or may not have?
Best answer ever to this question, is a question: What did your CPA tell you?
Annoying right. Well, more annoying that grand generalities are WRONG ANSWERS.
Here is what I do.
I have a holdings company. It is literally called, "McCallum Holdings".
It is the parent company for all my other LLCs or partnerships I have.
I have one LLC for each different risk profile in my holding company. So, I identify the risk difference based off of the business's actions and customers. If I was actively flipping or performing renovations for other investors (coming to a midwest city near you in 2017) I would have it in a corporation. "Why?" you ask. like my 3 y.o. daughter does for EVERYTHING. Because I told you so (I say to my daughter and my CPA says to me). There are some things that I have to know, want to know, and want to know that the guy I pay knows better than the IRS. This is one of those questions I defer to YOUR CPA.
I don't flip but, I will have a long expensive chat with my CPA when I get that right property under contract.
All of my businesses are LLCs. I do have a trust, it has lent all my LLC's their capital so in essence. it owns all my businesses, well, at least it holds the debt. The trust belongs to my kids but I get to blow all the money until they come of age. An age I will unlikely see, even at 38 I know this is my retirement time. And I love it.
I have one LLC for my high end expensive rentals OR rentals I have previously lived in OR the tiny little houses in my cute tiny small town that I rent out because if you aren't a good person you pretty much get chased out of town by the other people living here. So, low risk.
I have another LLC for my less expensive "cash flow" properties. If someone in one of my properties or areas stole all these properties it wouldn't break my heart. I milk the cash flow out of these to pay off my better properties. It helps to defer some risk and I listen to my CPA.
Anyone seeing a pattern yet?
I WOULD RATHER REPRESENT MYSELF IN A COURT OF LAW THAN TRY AND DO MY BOOKKEEPING AND TAX PROTECTION. So should you.
Q: But what's a series and should I use them?
A: They are new and last I asked have not been formally challenged in fed courts, so ask your CPA.
Q: I own a couple properties in my name personally, when should I start my LLC?
A: When you first started owning rental properties. Call a CPA now. Do not pass go, do not collect $200.
Q: How do I choose a CPA?
A: Find one that is also an investor themselves, or one that has many RE investor clients, find out what type of investing they do. If it is in the same state, property type, and class that you have or are targeting...hire them.
Q: My CPA can set up my LLCs but I like doing my own taxes.
A: No.
Q: Why?
A: Because I said so. (if its good enough for my daughter...)
I'm not brilliant but I what stupid is, I don't even know if what I'm doing is right. I know there are better ways to do it. I know you can have Delaware trusts...and then there is the Nevada trust thing but K.I.S.S.
If you don't have $5M in net worth you don't need those types of things.
I talk to my CPA Thursday, so if anyone has a question they'd like me to ask, I'd be happy to do so. Otherwise, hit up a CPA on BP or two with a quick question. But, respect their time. Don't ask for free services, they aren't going to mentor you through your taxes. FEEL free to hire them tho! They are here for the right reasons.
So, life lesson here, CALL A CPA. Or see if @Jim Kennedy has a minute to chat. I think his addiction is as strong as mine is to this site.
Comments (2)
Thanks for this info, Meghan! A couple of quick questions on your set-up:
1) Is "McCallum Holdings" also an LLC?
2) We hope to purchase our first of many buy-and-hold properties later this summer - we plan to pay cash and have it deeded under *property_address, LLC* when the time comes. Should we go ahead and get that "parent" LLC set up now so that when we are ready to purchase, we can set up the property LLC under the parent LLC?
3) Are you and your husband listed as owners of the "McCallum Holdings"? What about your individual LLCs under "McCallum Holdings"?
We are just trying to figure out the best strategy to streamline this process without making things too complicated.
Thank you!
Mac L., over 3 years ago
How very thoughtful of you to point out my disease, ha ha ha . My real estate addiction is indeed as strong as yours, but Im double cursed - more later, but first:
You are correct to flip in a separate entity. The IRS can mess with you if you try to flip personally or commingle with your investment properties. Flipping is like a manufacturing entity in that you buy stuff (a fixer-upper), buy more stuff (rehab parts) and sell the new product to a user. As such, you have to subtract the ending inventory (unsold properties at 12/31) because you didn't sell them yet, so you cant deduct the costs, and thats the down side to that.
Single member LLC's pay no taxes unless they pay quarterly estimates. That can be a big number, so if you flip in an S Corp, the owner is required to take (the profits) out as salary. That way, you p[ay your taxes in throughout the year and dont get clobbered at year end if you consult ahead of time with your CPA.
Consulting throughout the year is important so you can manage tax expectations. Our clients know what to expect if we meet with them quarterly. That way the tax return becomes a mechanical input exercise for staff and (hopefully) there are no surprises. I subscribe heavily to the 5 P's of the Marines: Prior Planning Prevents Poor Performance. Having the answers was something I craved thru school and college and never had, but now that I've been in the real world, I can do that, and sleep better at night.
I have much to say about LLC vs privately owned, and I can tell you this if asked what to do: It depends. Some of our residential are not in an LLC and the reason they're not is if we didn't we could never have gotten 2.875% interest on a 15 year note. Past that its all about training the tenants. You cant have the inmates running the asylum. WE are professionals right from the start. Tell the to allow 45 minutes alone to review the lease when we hand over the keys. Then the tenant and I read, discuss AND INITIAL every page of the lease. If there's an issue I reference the appropriate part of the lease, and attach a copy with the correlating part yellow highlit. And so on. Remember that the letters in FEAR stand for False Evidence Appearing Real, but you gotta walk the walk and talk the talk
My other addiction: I not only like real estate, but I like all phases of real estate tax accounting. As a CPA I service hundreds of investors nationwide, and I am a 3rd generation CPA, my wife (who operates our properties with me) is a tax accountant (we met in college!)
On top of that I own a series of residential and commercial properties in NJ and until recently in Texas, too, but we sold off that line to work closer to home.
Heres another cool thing - I just got done giving a 4 hour workshop and a couple days later a 90 minute one for SJREIA on my 21 year plan to buy $2,000,000 of real estate and retire witih $63K - $73K of annual interest income alone!!! I have spoken several dozen times over the past 13 years in several different states.
Anyway, I'm always open to questions so I'll answer them asap. I am in my busy season right now - financial statement audits, 1099's 4th quarter tax planning, then tax preparation and so on, but I'll be happy to answer.
Jim Kennedy CPA
Jim Kennedy, about 4 years ago