Should I do a remote investment with or without a LLC?

Question

Hoping I can solicit some knowledge from the experienced community here once again.

What I understand from my nascent research is that one should ideally form a legal entity (LLC  etc) to buy any investments to protect personal assets from any lawsuits but I am curious how many actually do that because it comes with an added overhead. I have been reading BP forums a lot lately and noticed some people buy investments directly under their name instead of creating an LLC especially if they are doing a remote investments.

Is that just a lack of knowledge on their part or it is an educated decision? If latter, then what is the reasoning?

Tahra Wright · Answer

@Vidit S. It takes about 10 minutes to set up an LLC, especially if you are the only member. You can go right to the state website and set it up and get your EIN fast, so there's really no reason not to do it now. The costs are negligible compared to the liability of having a rental property in your own name if there is an accident there. It costs maybe $150 to incorporate and then $50 bucks a year to maintain the registration. If you are setting it up an LLC with a "3rd party" then you need a good operating agreement in place so it might take a bit longer, but you still need that in place before getting deals with business partners. It saves you from the "I thought he/she was doing that, or giving that, or agreed to that" later on.

People who are purchasing it under their personal name do so for a couple reasons. 1) The interest rate for buying an investment property under an LLC is always higher than purchasing in your individual name. 2) Banks that lend on LLC investments require 20% to 25% as a downpayment.

Hope that explanation helps!

People who are purchasing it under their personal name do so for a couple reasons.  1) The interest rate for buying an investment property under an LLC is always higher than purchasing in your individual name. 2) Banks that lend on LLC investments require 20% to 25% as a downpayment.

Hope that explanation helps!

Vidit S. · Answer

Thanks @Caleb Heimsoth and everyone. I spent almost all of today researching on this and finally found two articles with opposing opinions on BP (as is the case for the comments on this thread)  that have precipitated a direction for me.

For anyone who is in the same boat as I was in, I highly recommend reading these articles and especially the comments at the bottom,

https://www.biggerpockets.com/renewsblog/2015/06/0...

https://www.biggerpockets.com/renewsblog/2015/06/1...

TL;DR:

You can get away without an LLC if you do not have a lot to lose in personal assets, you are young, you have a decent umbrella insurance and you are not risk-averse. But if you want to be safe because you have a lot to lose, then go with an LLC, which might lead to a bit of an overhead in operations as well as costs.

Caleb Heimsoth · Answer

@Vidit S.  There are about a billion threads on this.  You don’t need an llc when starting out

Vidit S. · Answer

@Scott Smith Thanks Scott. Thats amazing input.

Scott Smith · Answer

This is a regularly debated topic on the BP forums, but as others have mentioned above it comes down to each person's particular case. What you are trying to do is protect yourself and your business ventures, and there are different levels of protection that are used to protect different levels of businesses. The main reason people get an LLC early on is to remove their investments from their own personal life, and vice versa. Here is how I like to break it down to people looking at growing their investment portfolio: there are "four pillars" of protecting your assets. The first pillar is a good insurance policy as that cover the majority of your exposure. However, it only protects you from one type of liability: accidents.

After that you want to compartmentalize your assets, which is often accomplished through the use of LLCs or corporations. I personally find the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely - check out this article to learn more. The third pillar is somewhat similar - you want to separate your operations from your assets. That means you establish a Traditional LLC to carry out the operations of your investments, in order to separate the liability from your assets, including: paying property management, paying contractors, collecting rent, marketing, etc. Finally, with the use of Trusts while establishing these structures you can add a level of anonymity by removing your name from public record - the use of trusts can also allow you the normal financing options that are lost when transferring directly into an LLC.

There are levels to the investment game. For someone just starting I always recommend some insurance, because it will take care of any nuisance claims for you and handle the little stuff. Anyone who is just starting and has personal exposure, say a personal home or business on the side, should also look into an LLC - even if the investment property isn't worth much. It just separates your personal life from the liability of the investment. Outside of that, there are generally "benchmarks" where common wisdom says you should "probably" increase your coverage. The more money you have, the more people feel entitled to try and take it.

Vidit S. · Answer

@Tahra Wright  Yes exactly, I am planning on embarking on a information chase on this knowing that the answer is going to be custom to my personal profile. I rather be safe than sorry so going to hinge on that rule.  But ideally I would like to build a solid core team in a market and build a portfolio with what some might call an ambitious goal of 3k in cash flow per month by end of 2020. And asset protection is going to be key in my mind. Thanks for all the terrific insights especially around your own experience in this.

Mike McCarthy · Answer

You'll get a lot of conflicting opinions on LLCs.

My opinion is when you're starting up, the LLC isn't worth it.  When you buy under your own name, you get easier mortgages, better rates, more favorable terms.  Also some areas require you to use a lawyer for an eviction if held by an LLC.

Plus, when you have a couple houses, I question how much an LLC really provides protection.  It seems like it would be easy for a good attorney to 'pierce the veil' and state that you as an individual are personally liable if something happens.

So all in all, for your first 5-8 houses, I think it's not worth the LLC route in most cases.  Once you grow larger, then it's definitely worth exploring asset protection.  Instead, get yourself landlord insurance and an umbrella policy.  And be a good landlord.  :)

Scott Smith · Answer

Sure thing! Always base decisions on the numbers. Just keep reading to make sure you recognize the risk and make an educated decision. You have a good approach to this stuff - keep on asking questions!

Vidit S. · Answer

Thanks @Ali Boone - you article articulates the pros and cons very well, especially helpful is someone like me has been reading and getting swayed left and right. :) and @Scott Smith.  I was not aware of the land trust option, definitely going to look into it. If the costs don't mess up the numbers, it sounds like a solid solution. Thanks so much for letting me know.

Scott Smith · Answer

This is a good article. You also face another issue with LLCs since you are in California - still blows me away that they are requiring the annual $800 franchise tax on those structures. I do want to offer another solution to the financing of LLCs, though. While you are true that a traditional mortgage isn't available to an LLC - that doesn't mean you can't use other tools to still get those benefits. This article breaks down one of the strategies.

I personally rely on the insurance for all the small stuff, then on properly establish [Series] LLCs and other tools for protection beyond that. Ultimately I just break the numbers down to (1) what personal exposure someone faces, (2) what their current investment portfolio looks like and (3) what their future goals are. From there you just lay out the strategies and pick the one that seems to fit the investor's needs and budget.

As a side note: For anyone in California, I look into the Delaware Statutory Trust. It offers many of the same benefits of a Series LLC, but you can avoid that annual franchise tax because of the type of entity it is. Very useful tool!

Should I do a remote investment with or without a LLC?

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