Is it the best idea to establish an LLC or form of asset protection before I beginning any kind of real estate investment? Or would it be a better decision to wait until I have several properties?
Thanks, if anyone has some advice it would be really appreciated.
Regards,
garo86
What do you have that needs protection that isn’t covered by insurance? Most newbies have minimal assets and an LLC won’t protect business assets. You will essentially pay for protection of nothing.
You will be better off spending money on good tax advice. You will lose more to taxes than lawsuits. Gurus focus on lawsuits because chances are you won’t face an excess judgment and they will be long gone if that unlikely event ever occurs. They avoid taxes because even new investors have access to tax experts that can sniff out crap pretty easily. That’s not true with AP. The average investor can’t afford quality counsel and Internet resources are mostly inaccurate.
First you need personal assets to protect from a high risk activity, such as rental apartments, before engaging in an asset protection strategy. Insurance is good enough if you don’t have much to lose.
If you have a net worth of say greater than $250,000, consider protecting those assets from rental real estate risks by holding title in an LLC. First find your deal, then have the LLC buy it. You can fill out, file your Articles of Organization and pay the fee all online with your state gov. The operating agreement is more involved and you should seek counsel for that.
The assets held in the LLC will be at risk so hopefully the investment will be leveraged (mortgaged) having very little equity.
I know a family who bought a lot of rentals only to have one tragic fire (tenant drinking fell asleep with a cigarette) in which there were deaths and injuries and lost everything. The insurance was $1,000,000 but the judgments were in excess of 10 million. They did not have an asset protection strategy.
Why would you consider an LLC rather than a corporation? Most new investors automatically assume they need an LLC but don’t know why. LLC’s are great for holding rentals (long term) which assumes, you have property to place inside of the LLC. Do not spend capital on creating an entity that will sit dormant in anticipation of buying a property. On the other hand if you intend to flip/rehab property then you should consider establishing a corporation. Liability protection is one reason for a corporation however I typically recommend their initial use to add a level of business formality to your dealings e.g, Hi I am John and I represent Best Home Solutions and we help … versus Hi I am John and I would like to buy your house.
Best of luck!
I personally would rather an LLC since it offers better asset protection. Creditors are only limited to charging orders. You can do a search on this forum to read more about the details. They can take everything in your corporation including stocks.
Don’t forget that charging orders apply to executory LLCs. Members who have no obligation to the LLC have no charging order protection.