What Legal Entity to Establish Befor Investing

Question

I'm new to the personal investing side of real estate.  I assume without question, the smart answer is to establish a legal entity in which to buy property to afford a level of protection.  What are the primary options for legal entities, their pros and cons, and approximately how much should I allow for such an expense (attorney, filing costs, etc.)?  Thanks All!!!

Ali Boone · Answer

http://www.biggerpockets.com/renewsblog/2013/08/17/rental-properties-llc/

The comments have more info that the article.

Good luck!

Stacy Jackson · Answer

@Andy Collins

Thank you so much for your input.  Very enlightening.  I never thought of it they way you presented it.  Makes great sense!  Truly grateful for your wisdom.  By the way, being from Dallas, can you recommend a good REI group or organization to explore or join to begin meeting and making friends in the industry?  Thanks!

Stacy Jackson · Answer

@Mary B.

Thank you.  I like your thoughts.

@Steven Hamilton II

Thanks for the idea.  I'll have to explore this option.  That side of things is so new to me - I've a lot to learn there.  Thanks again.  Have a great day.

Steven Hamilton II · Answer

In Texas LLCs are not expensive.  I would recommend that you go with a series LLC for the rentals and an LLC for flipping/rehabbing.

Andy Collins · Answer

Unless you have a lot of assets, and your going to buy and hold single family, going the traditional mortgage route in your personal name is probable the way to go.

You can have up to 10 traditional mortgages, the first four are relatively easy, 5-10 have more strict underwritting (720 mid FICO, 6 month reserves for all rental property, etc)

Go meet and make friends with a good mortgage broker (or 2 or 3) have them go over the potential deals.

I would recommend doing that for your first 10 single family (everyone i different but just spend a couple of hundred dollar for a $2-$3 M umbrella policy.

After you get to that point you will put properties into LLC and get commercial financing, but as Jon pointed out, isn't as good as traditional mortgages (rates will be a little higher and you won't lock them in for anything close to 30 years)

For multi-family forget everything I just said, it a different world

Mary B. · Answer

So long as its not a sole proprietorship or general partnership i have no objections...

Kudos

Mary

Stacy Jackson · Answer

@Jon Holdman

Thank you for your input.  Very informative and certainly much to chew on.  In your opinion, does one attempt to begin as a sole-proprietor, so to speak, until enough equity and assets are built to then transfer and operate under an LLC?  Exposing personal assets until such time occurs -  definitely not the optimal route.

Jon Holdman · Answer

Ideally you would form some entity, usually an LLC, and have it buy the property.  The idea is to separate your personal assets from the assets of the LLC.  A successful lawsuit against the LLC could take its assets but not yours.

There are some downsides.  Conventional financing (30 year fixed rate loans) is only availble for individuals.  Financing is available for LLCs, but the term is usually shorter - 15-20 years.  It may also involve a balloon or ARM.  Such loans almost always require a personal guarantee and the lender will look at your financial situation.  If you buy in your name and transfer to an LLC you violate the due on sale clause. That gives the lender the right, but not obligation, to call the loan due.

Stacy Jackson · Answer

@Trevor Lohman

Nothing ridiculous about your inquiry.  If so, I'm as ridiculous as they come :)  I appreciate your thoughts on this matter.  Wasn't aware of the "give me all my money now" scenario, assuming it holds true.  I'm certainly looking forward to hearing more from Andy and others on this topic.  Should you happen to learn more from another source, I'd appreciate you monitoring this thread and share what you learn.  Thanks again!

Stacy Jackson · Answer

@Andy Collins  my initial thought is to begin with SFR and perhaps graduate to MF, unless I could find the right deal to give me immediate entry into MF.  My current strategy is to buy and hold for long-term residual income to augment retirement, or perhaps become a full-time investor much sooner - should I progress quickly enough. Thank you for your help!