Author Topic: Talk to me about LLC's  (Read 622 times)

Jon Bon

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Talk to me about LLC's
« on: March 22, 2017, 07:21:52 AM »
So I have a few rental houses, currently all held in my name, and managed by me.

I know the big advantage of LLC's is to protect my other significant assets from liability. I was reading the thread about being sued for more then your limits and it made me all kinds of nervous. Does an LLC make it hard to evict? Does an LLC make running your business more complicated? Am I taking undue risk in keeping the properties in my name, or is my concern overblown?

So real estate investors: What are the PROs and CONs of an LLC over a sole proprietorship?

Thanks all,

JB




tmbrown

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Re: Talk to me about LLC's
« Reply #1 on: March 22, 2017, 07:40:25 AM »
One downside is that a bank is probably only going to lend to you if you're starting out. Now you can transfer you property to a LLC, but many mortgage notes have a "Due on Sale" clause which means you may have to pay the entire amount back. Now banks don't do that very often (right now). However, if interest rates rise there could be a financial incentive for banks to call these types of loans so they can reinvest them at a higher interest rate.

The positives for LLC's are limited liability and some flexibility on taxation. If you're more interested in this topic, The Real Estate CPA Podcast did a whole episode on this very thing.

Check it out here:
https://www.therealestatecpa.com/2016/06/14/episode-4-using-llcs-real-estate-business/

tralfamadorian

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Re: Talk to me about LLC's
« Reply #2 on: March 22, 2017, 08:38:00 AM »
Pros:

-If the LLC(s) is registered in a state with strong privacy laws, it would be very difficult to impossible for someone to find out that you owned a property by snooping.  This can greatly reduce your exposure to a frivolous lawsuit.

-If you properly separate the finances for each property and do not co-mingle them with your personal finances to avoid piercing the corporate veil then you have a much greater chance, if a lawsuit does happen, that the liability will not spill over from your real estate to personal assets, or vice versa.

-Some landlords who manage their own rentals prefer to play the nice guy with renters and represent themselves as "managers" to blame policy on the "owners" when enforcing unpopular decisions like late fees.   

-LLCs are pass-through entities so your taxes and ability to control your rentals are the same (ie: evictions).

-Your LLC(s) will be building their own credit by collecting rent and paying non-mortgage expenses.  This will open up the option for you in the future for the LLC(s) to purchase property directly and more easily obtain portfolio loans once you have maximized your own ability to purchase property through mortgage loans.


Cons:

-You will have to pay for the properties to be transfered to an LLC(s).  Depending on your location and whether there are transfer taxes, this may be expensive.

-You will need to register and maintain the LLC(s).  The costs of this vary widely depending on where you live.

- As tmbrown mentioned above, there is a risk of the due on sale clause being triggered if you have mortgage debt on your property.  I recommend doing some googling around (particularly on bigger pockets) so you can decide for yourself how that figures into your own risk tolerance.  For me, there is a tipping point at which shielding the equity of the property is worth more than the inconvenience of having to either transfer the property back to my name, obtain a new portfolio loan with the LLC as the borrower or pay the mortgage balance with savings.

SeattleCPA

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Re: Talk to me about LLC's
« Reply #3 on: March 23, 2017, 08:09:57 AM »
Pros:

-If the LLC(s) is registered in a state with strong privacy laws, it would be very difficult to impossible for someone to find out that you owned a property by snooping.  This can greatly reduce your exposure to a frivolous lawsuit.

-If you properly separate the finances for each property and do not co-mingle them with your personal finances to avoid piercing the corporate veil then you have a much greater chance, if a lawsuit does happen, that the liability will not spill over from your real estate to personal assets, or vice versa.

-Some landlords who manage their own rentals prefer to play the nice guy with renters and represent themselves as "managers" to blame policy on the "owners" when enforcing unpopular decisions like late fees.   

-LLCs are pass-through entities so your taxes and ability to control your rentals are the same (ie: evictions).

-Your LLC(s) will be building their own credit by collecting rent and paying non-mortgage expenses.  This will open up the option for you in the future for the LLC(s) to purchase property directly and more easily obtain portfolio loans once you have maximized your own ability to purchase property through mortgage loans.


Cons:

-You will have to pay for the properties to be transfered to an LLC(s).  Depending on your location and whether there are transfer taxes, this may be expensive.

-You will need to register and maintain the LLC(s).  The costs of this vary widely depending on where you live.

- As tmbrown mentioned above, there is a risk of the due on sale clause being triggered if you have mortgage debt on your property.  I recommend doing some googling around (particularly on bigger pockets) so you can decide for yourself how that figures into your own risk tolerance.  For me, there is a tipping point at which shielding the equity of the property is worth more than the inconvenience of having to either transfer the property back to my name, obtain a new portfolio loan with the LLC as the borrower or pay the mortgage balance with savings.

Agree with what Kelly says here. One other thing you want to know is how the LLCs are handled for tax accounting purposes.

BTW, the general rule is that you ignore single owner (aka "single member") LLCs in your tax accounting and that you treat multiple member LLCs (e.g., husband and wife) as partnerships in your tax accounting. But you have other options and your state location impacts stuff. Here's a longer description:

http://www.llcsexplained.com/llc-faq/should-real-estate-investors-use-separate-limited-liability-companies-for-each-property/
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Lmoot

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Re: Talk to me about LLC's
« Reply #4 on: March 23, 2017, 04:51:07 PM »
Are there generally rules regarding how you handle the financial aspect in LLC's? Like, can you do what you want with the rental income? Such as on another property, or for personal use?

SeattleCPA

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Re: Talk to me about LLC's
« Reply #5 on: March 23, 2017, 05:58:33 PM »
Are there generally rules regarding how you handle the financial aspect in LLC's? Like, can you do what you want with the rental income? Such as on another property, or for personal use?

I don't know if this answers your question, but the LLC operating agreement spells out how the LLC operates and how members (owners) work with the LLC.
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tralfamadorian

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Re: Talk to me about LLC's
« Reply #6 on: March 23, 2017, 05:59:00 PM »
Are there generally rules regarding how you handle the financial aspect in LLC's? Like, can you do what you want with the rental income? Such as on another property, or for personal use?

Yes, you can do with the income what you want.  The easiest way to do it while maintaining a separation of finances is to open a checking account for the LLC.  All the rents and property expenses come in and out of that account.  Then have the LLC cut you a check once a month with the profits that you use to pay mortgage loan(s) in your name, save for other properties or spend however you wish.  Just don't use the LLC checking account for personal purchases directly- that would "pierce the corporate veil".