Is it Wise to Set Up an LLC When Starting in Real Estate Investing?

by | BiggerPockets.com

Before I get started, I want to throw a big, fat disclaimer out there and let you know that I am not an accountant and I’m not an attorney. Everything I am about to tell you is just my opinion. My advice is you should go and talk to your accountant and your attorney because everyone’s circumstances are different. So what might work for me and someone else may not work for you.

I honestly believe that anyone looking to start their real estate endeavors should try to keep things as simple as possible. There are way too many things to learn when it comes to investing in real estate. I’m a big believer in starting slow, starting small, and starting cheap. Don’t overcommit, and don’t overcomplicate by spending large amounts of money on legal and tax advice when you need that money to grow your business and get to that next level. Once you get to that level, then, by all means, you can start spending thousands of dollars on legal and tax advice. But for starters, once again, start small, start slow, and start cheap.

Download Your FREE Tenant Screening Guide!

Hey there! Screening tenants can be a tricky business, and this critical step can be the difference between profits and disaster. To help you with your real estate investing journey, feel free to download BiggerPockets’ complimentary Tenant Screening Guide and get the information you need to find great tenants.

Click Here For Your Free Tenant Screening Guide

The Pros of LLCs

These are my observations and perceptions. I speak to a ton of investors every day because they reach out to me asking for advice on real estate. Look, in my opinion, if you start an LLC, it’s a great way to minimize liability from any potential lawsuit. An LLC will separate you personally, as long as you structure it properly, from getting sued by a potential tenant or whomever it may be. So the only thing that is kind of at risk is the assets that the LLC owns. You aren’t necessarily liable for a lawsuit as long as they don’t pierce the corporate veil, but that’s kind of the main protection factor of owning a limited liability company and having properties owned by that LLC.

Another thing is that because it’s a business, you are able to run it and treat it as a business. So you can expense a lot of stuff from a tax minimizing standpoint that the business requires to run efficiently and for that business to run your portfolio and those properties efficiently. So there’s a lot of tax benefits there, too. That would be the biggest pro of owning an LLC and investing through an LLC.

Related: The 3 Best U.S. States for Forming LLCs or Series LLCs

The Cons of LLCs

The con would just go back to what I initially said: It can get complex. There are many ways to have this structure. There are many things that you can do wrong where that structure could not be as bulletproof as you initially thought. It can get expensive, you have to do separate bookkeeping for that LLC or if you’re going to have multiple LLCs you have to even more bookkeeping. That can get expensive and time-consuming. You could make mistakes, do the wrong things and compromise the business or the accounts and then it won’t protect you from any personal liability. That would summarize the con.

Once again, guys, it just comes down to what you want to do, how big you want to grow, how safe you want to be, and how protected you want to be. I didn’t really focus on these things when I started, and then I got to a point where I had to start focusing on these things. But I made so many mistakes in the past that now I’m kind of on the fence on whether I regret spending the money up front or whether I’m cool spending the money now to go and fix everything before. I think to myself that if I spent the money then, I wouldn’t have had enough money to get where I am today. So even though it is kind of a pain in the butt now to backtrack and restart everything and make sure it’s done correctly, I’m still on the fence. Once again, it just comes down to you and what you want to do long-term. And, I strongly advise that you discuss this with your accountant and attorney—get them in a room with a ton of coffee and map it out.



Hey, I’d love to hear from anyone that has experience in this.

Comment below.

About Author

Engelo Rumora

Engelo Rumora, the Real Estate Dingo and your favorite Australian, quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate all over the world and has bought, renovated, and sold over 500 properties. He is currently in the process of launching an ICO that will "Decentralize The Real Estate Industry." He's also known for giving houses away to people in need and his crazy videos on YouTube. His life’s mission is to be remembered as someone who gave it his all and gave it all away.

11 Comments

  1. Jerry W.

    Engelo,
    A good common sense look at LLC protection. For me personally the cost of forming an LLc is only $100 in my state and can be done in 30 minutes or less. it only costs $50 to do annual reports as well so I think it is a bargain. The biggest drawback for me starting was you cannot get 30 year loans to buy property with an LLC, and the rate is a little bit higher. The longest loan I can get is a 20 year. By having the loan in your personal name the payments are a lot lower giving you more cash flow, because the payback in over 30 years. That lower payment can be important to new investors. In reality you need to keep separate books for your rentals and not run them out of your personal checking account. open an account just for them. All rent income goes in, all expenses come out. Do it any other way and your book keeper will divorce you or worse. Either way buy insurance.

    • Engelo Rumora

      Thanks Jerry,

      I didn’t even think about the difference when looking to borrow money.

      I’m not a fan of leverage so it’s something that’s never really on my radar.

      Your input is much appreciated.

      Have a great day and Happy Holidays

  2. Cornelius Charles

    Hey Engelo. We formed a LLC when we started “investing” 3 or 4 years ago. Since then, we’ve only done 1 deal, mainly because they are hard to find in Southern California. I know quite a few other newbies like us who formed LLCs right away and haven’t done any deals. I may change my opinion once i have more experience, but my thoughts are everything else can wait until after you are on the path of doing consistent deals.

    • Engelo Rumora

      Thanks for your comment Cornelius,

      There is so much information and various perceptions out there.

      The most important one is to take action and make S#@$ happen.

      As long as you don’t give up, you will learn along the way.

      I’ve probably made every mistake known when it comes to real estate.

      The only difference between myself and many others is that I just kept showing up.

      I wish you much success

  3. brian ploszay

    Yes. Some states offer a series LLC structure which allows you to place each individual property in its own LLC, under an umbrella company. For those of you who are beginner investors or have smaller holdings, an LLC may seen like a burden. It is because you’ll have to file a separate tax return for that corporation. Seems like a lot if you only have one property.

    But it is the liability protection that an LLC can offer and you should take this. If you have any material assets outside of real estate, this is a must.

  4. Joshua Dean

    Hey Engelo. In the post you talk about structuring the LLC properly to avoid personal liability. I have heard other people discuss this as well, but never in any detail. Can you talk about the difference between an LLC that is properly structured and one that isn’t? Thanks

  5. Cameron Bock

    From this article, it sounds like there is way more benefits to forming an LLC than not having one. While there are cons, it seems like they can be overcome by surrounding yourself with individuals who know what they are doing and appropriately budgeting for the costs.

    Ironically, I had been thinking about this topic very recently (on my drive to work this morning), and this article found me (is BP reading my mind?!). This article has given me a quick answer to my thoughts. Now to start doing the hard research…

    Thank you!

    • John Bettencourt

      Good evening Bigger pockets community. I am new to investing, but have started several companies in the past. In this discussion, it appears that most are favoring an LLC. I have always setup straight C- Corps for a complete separate legal entity that is not bound to an individual. In the investing industry, why would you not do the same to have protection thru bankruptcy etc that is afforded you through a corporation, and not just an LLC?

      Best regards

      John

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here