I’m sure this has been asked a million times but for buying with cash - no mortgage notes whatsoever - is it better liability and tax-wise to hold in an llc or inc instead of in own name?
I already know I can’t hold in an LLC if I have a mortgage through my current broker.
LLC = less personal risk unless you break the law where the veil will be pierced. Same on taxes as it passes through right to your personal tax forms.
And corporations can get double taxation unless you pay out salary equal to its net earnings.
Liability has nothing to do with it. Banks will make you personally guarantee loans to your LLC!
Or you can buy in your name and just carry a large umbrella insurance policy to help mitigate your liability risk. there’s pros and cons to both ways of doing it, in an LLC or in your personal name. check out the “Asset Protection” forum to learn more about correctly setting up an LLC.
if there’s one thing I’ve learned, your LLC’s asset protection is only as good as the operating agreement that controls it.
The disadvantage I see in an umbrella policy VS multiple LLC’s is that if you are found neglegent for some reason or another and something drastic happens to a tenant like death or permanent damage you will loose ALL of your property. With multiple LLC’s, as long as you did not break the law you will limit your damage to that LLC alone.
I’ve got a plan worked out with a local lender in that I won’t have my name on any notes. Hooch your right on the high interest rate…(but it doesn’t make much diff as I’m looking at doing 10yr am). Also I agree that local lenders don’t want to right 30-yr paper in this interest rate envrionment (would you!). The banks I’m talking to really don’t want to go past 10. Because of the number of homes I’ll have to own to make this work I can’t get the loans in my name. I think the Fannie/Freddie limit is 10. Plus personal notes screws with my personal credit.
Also the whole setup thing is a bit of a mystery. For right now I’ll just start an LLC and put the first handful in there. It would be nuts to not put it in an LLC in my opinion in that I have other interests in other corps/LLC’s and all that comes into play if the properties are in my name. What happens if some slime ball lawyer gets a judgement of 10 mil and my umbrella policy is 5mil…i’m crying then!
Hooch one comment you said doesn’t make sense to me. I understand that the down payment is capital contributed to the project and that you want a return on it but…the return is the calculations I presented. I don’t see why we should calculate phatom interest on a down payment when it is an expense we will not have to pay. To me I run the numbers and the return that is caculated is exactly the rate of return of the capital contribution…this should not be at the interest rate of the mortgage…the reason it makes sense to use leverage is because we can exceed the rate on the mortgage with cash flows off the properties. I really don’t see one way as wrong/right just a different way to see it.
One more question for you gurus. If I go and buy say 4 homes (like in my example) to get going in this and I allocate 50k for down payments repairs startup. How much additional capital do I need to weather the storm? Is it a certain number of months of no renters? big expenses? It may be impossible to answer cause most of the events are unexpected that would cause additional capital to be required…but what is a conservative estimate.
My thinking was 2k per property for repairs and 6 months of zero cash flow for each. All together (2000 + (500*6) ) * 4 = 20,000
Is that in the ballpark? It seems really conservative but I’m not sure hence the question.
Thanks again
sorry posted this in the wrong thead!! :banghead
:biggrin
When I got married, I told my husband, “for our 1 year anniversary, I want a house”! Boy oh boy did that frighten him. But within that year we found a 4 family in a low-income, working class neighborhood and I fixed the mess up out of that property. Going on Craigslist, Freecycle and networking with other investors. One by one they sat the husband and I down and talked to us.
Showed us various loans (almost free as long as you live at the property) and i went out and got some handymen to help put up walls, electricity, etc. and then I got all the section 8 folks I could! including going to the battered women’s shelters (I suggest this one only if you get a chance to interview the ladies with their children – to see if they let their children run around, mess around with things, see if the women are habitual liars, etc.)…you get my drift.
Yes, we went through a couple tenants who were just no good for our building! The husband wanted to be a landlord, but that fell on my shoulders when the 9/11 hit and I ended up losing my job and career in the event industry. I then became a full-time Property Manager. Ugh.
Don’t make the mistake my now ex-husband made:
getting close to the tenants and letting them “NOT” pay for this reason or that reason (see what Hooch says!!!)
Keeping up with the rent and every year they have to increase at least by 3% to keep up.
Don’t forget to add in the expenses of the keeping the property up (utilities start to add up, water, gas, common electric, etc.)…
So,
now it is time for me to become my own real estate investor! :beer
The bulidings are out there, now I have to learn how to get them with my great credit and with holes in my pocket!!! :shocked lol
anytips fellas?
There is less personal risk unless you actively participate in the management and operation of the LLC. Know that there is no limited liability if you are sole the member/manager. Illegal activity is not relevant to piercing the veil. You are responsible for your own illegal actions regardless of acting on behalf of the LLC or not. The LLC becomes liable if you engage in illegal actions while acting on its behalf.
If your actions are the ones that caused the liability, then all your assets in all the LLCs are at risk due to charging orders against you. There is no protection if the LLCs are single member. They will be liquidated to pay the debt.
Corporations are a good choice if you pay for living expenses with non corporate assets. You can take out money via benefits programs that are tax deductible to the corporation and tax free to you. Never take money out as dividends due to double taxation. If you draw salary from the corp and a public sector job, the salary and its associated taxes make you eligible for social security benefits. All that being said, they are not appropriate for a new investor who needs the income from RE to pay bills.
Entities isolate. They don’t protect anything you own. Since there is no mortgage involved, you need something that will protect the property itself, like equity stripping.
You should really sit with a qualified planner to evaluate your situation determine the most appropriate set up for you. LLCs, corps, etc. are just tools. Use the right tool for the job.
Quote from: Hooch on July 18, 2009, 09:54:19 PM
LLC = less personal risk unless you break the law where the veil will be pierced. Same on taxes as it passes through right to your personal tax forms.
There is less personal risk unless you actively participate in the management and operation of the LLC. Know that there is no limited liability if you are sole the member/manager. Illegal activity is not relevant to piercing the veil. You are responsible for your own illegal actions regardless of acting on behalf of the LLC or not. The LLC becomes liable if you engage in illegal actions while acting on its behalf.
But negligence is not necessarily illegal, right BLL?
Quote from: Hooch on July 18, 2009, 10:23:50 PM
The disadvantage I see in an umbrella policy VS multiple LLC’s is that if you are found neglegent for some reason or another and something drastic happens to a tenant like death or permanent damage you will loose ALL of your property. With multiple LLC’s, as long as you did not break the law you will limit your damage to that LLC alone.
If your actions are the ones that caused the liability, then all your assets in all the LLCs are at risk due to charging orders against you. There is no protection if the LLCs are single member. They will be liquidated to pay the debt.
But what if my actions were not illegal but questionably negligent? And my point was that the assets in that LLC are at risk but not my other LLC’s or my personal assets if I did not break the law. Right? Hence my liability is limited. From what you told me about equity striping that seems the way to go in combination with LLC’s.
Correct, but it is enough to create a way around the LLC if your personal actions were negligent and caused the injury. Piercing the veil has nothing to do with illegal actions. Failure to observe corporate formalities leads to piercing the veil.
That is incorrect. Negligence (not illegal actions) arising from your personal actions is enough to win a judgment against you personally. A personal judgment can be used to seize your personal assets and any shares in corporations you own. It is also enough to get a charging order against all the LLCs you own. They won’t be able to liquidate the LLC (unless the LLCs are single member LLCs), but the charging order will have the following characteristics which will force you into settlement:
In the chance your LLC isn’t executory, which is likely if you use one of the DIY kits or have no operating agreement, a judgment creditor can actually foreclose on your membership interests and take your place in the LLCs.
These lawyers are completely out of control. So basically you are saying that LLC’s are pretty much completely useless.
Only the ones sold on the Internet as a one-size-fits-all solution are the ones I would call useless. LLCs can be powerful if you know how to use them correctly. You can structure them such that a charging order doesn’t affect the business. Holding ownership in trusts for the benefit of your kids keeps you in control without owning the underlying assets. Certain provisions in the operating agreement can make a charging order unattractive. Controlled foreclosures can pull property out of an LLC making the entity a worthless shell. You can collateralize your rent payments so that a creditor can’t touch them. You can give the creditor LLC membership interests that have no control. They get stuck with a tax bill and no money to pay it. Combine them with trusts and corporations and you can make yourself virtually judgment proof. All that being said, the typical plaintiff will settle for the insurance limits and you won’t need any complicated planning
I like LLCs for low net worth people when they have partners as the LLC will isolate each partner from the actions of the others. Only their interest in the LLC is at risk from the actions of others. All bets are off if they are the one who caused the injury. Otherwise, good insurance is sufficient until the investor reaches a significant net worth.
Complicated stuff. Way over my head. Are there any books you recommend that pretty well cover this or is it something that you have pulled together from various sources?
It is very complicated and that’s why there are only a handful of people in the US that have more than a basic understanding of all the issues involved.
There is no one single source. There are many books that give a good overview of asset protection and how each type of entity works. Actually reading the case law that refined how the entities work in practice will give you a deeper understanding. Then, there is seeing how judges and juries react to actual cases along with watching the IRS and regulators. There are a few AP boards where actual attorneys answer questions and discuss new cases as they are decided, but you are never going to get the best kept strategies that are discussed on the golf course or over drinks. Going to law school and practicing law doesn’t hurt, but it’s not required. There are few non-attorney planners who are very good and have access to good attorneys that can provide the attorney-client privilege that is required to keep the plan intact.
For a person in your position (high net worth with several businesses), I would suggest your local, family attorney and tax expert retain one of the national planners that actually knows what he is dong (Jay Adkisson, Chris Riser, etc.). These are the guys who testify before Congress, meet with legislators to discuss new laws, and give presentations to the IRS and seminars to other attorneys. They aren’t cheap and the majority of their clients have a net worth in excess of 10M, but each plan is made specific to the individual and they diligently and proactively alert you to any deficiencies in your plan as new case law is settled.
People selling stuff at RE conventions are selling a more general product in a quantity versus quality arrangement to keep the cost down as the typical investor doesn’t have $25K to set up a simple, well crafted plan. Unfortunately, there is no follow up when the law changes and you don’t realize it until the creditors are taking away your assets. I view there stuff as educational material to help in understanding the topic. I wouldn’t rely on it exclusively.
Wow, like Hooch said. . I’m in way over my head with this LLC stuff.
I was really thinking that I couldn’t do it anyway since I will be using a mortgage for part of my first investment purchase and know from my broker that if I want to do it through an LLC the interest rate will price me out of it (as well as amount down). Then if I transfer title from me to it afterwards it could trigger the due on sale clause. . . that’s why I used the scenario of an all cash purchase.
Sigh. Now I have a headache!! and I’m scared!
But I still want to get into this. Everyone needs a place to live so that’s why I’d rather put the money here than elsewhere at this point!
Thanks for responding!
OldLineState- how much more expensive is it to finance the deal through your LLC? it should only be a couple % interest points more, and if that is going to push you into the negative for cash flow, how good can the deal be to begin with?
don’t complicate it too much. that’s my two sense. just go out and buy some real estate - get your feet wet - go go go.
and if you’r ein the Long Island area - call me :beer :beer
Do your deals and carry insurance. The rest of the stuff will fall into place when you actually need it.
The deal isn’t good and hence not a deal at all.
So I’m movin’ on