Clue me in here:LLCs?...

Okay, I’m just a noobie investor in the process of networking, education and raising some $$$. I have a fear about messing up and losing everything I own as a consequence of being new to the game. My family and girlfriend think I’m half crazy the way it is for getting so gung-go about REI so I’d like to protect what is not only mine, but my families too.

Somebody told me about LLCs and I’m interested in getting one set up. However, I’m not really certain exactly what that entails. If I were to focus primarily on “lonnie deals” and holding a couple rental properties long term, will a single member LLC suffice? Should I take the chance and set this up myself or hire an attorney?

Thanks.

Easy there tiger…take some time and talk to these guys, they know their stuff. You should also listen to the audio books in the free books and audio sections. I plan on doing the same but I would advise to speak to a tax attorney for advice on exactly how to set up what you want. There are many things to consider such as estate planning, taxes, and asset protection. From what I have learned a Single member LLC is pretty much useless as far as asset protection goes. Whether you should take the chance and set this up yourself or hire an attorney is up to you, but what’s the point of asset protection if you are “taking a chance” Piece of mind is priceless, if your going to protect yourself make sure you are protected.

Follow sound business practices and get plenty of insurance. That will protect you more than an LLC. Most of the information floating around the Internet and convention circuit is wrong and ALL of the DIY kits are junk. An LLC won’t protect anything if all you own is real estate and manage the LLC yourself. Real protection is going to cost more than you can afford at this point, which means you don’t need it. Put your effort into learning how to reduce your taxes. You face a bigger threat from taxes than lawsuits.

Thanks guys

BLL,

So at this point you’d suggest putting my personal name on the dotted line? This seems the opposite of what 99% of people seem to think and do. Are they ALL really that deluded and ill-informed, or does the LLC have its place? What am I missing here?

Could you expand a bit more on how holding properties in an LLC “wont protect anything if all you own is real estate”?

Thanks again

You are missing that you are always responsible for your own personal actions. If you are the one who built the deck that collapsed and injured people, if you are the one who installed the furnace that leaked CO and injured the tenants, if you are the one who violated the fair housing act, if you are the one who failed to maintain the property properly, etc. you are personally responsible. No LLC limits liability for personal actions. Even states with strong protection only limit liability when a member, manager, or agent causes injury where you were not involved. Doing everything yourself, the situation for most newbies, has the same liability protection as owning in your name. You are sued personally and your personal assets are used to satisfy any judgment. LLCs do limit liability, but only when used as part of comprehensive plan. Simply holding title in an LLC provides limited protection and absolutely none in some situations.

LLCs don’t protect rental property. They create a firewall to contain liability within the LLC. There is nothing to protect if you own nothing outside the LLC.

Thanks BLL.

What I’m worried about is my own personal home being put on the line shall somebody, someday, slip and break a hip at one of my rental properties. From my understanding, if the rental is placed in a properly managed LLC, then this would 9 times out of 10 protect my personal assets, right?

Where as if the rental was placed in my name to begin with, then my home will have a big bullseye on it from the persepective of my now plastic hipped tenants attorney, correct?

Thanks again for your help

It isn’t random chance. There is no 9 out of 10. Either the LLC works or it doesn’t. If you are that worried, you will need a comprehensive plan that involves much more than an LLC. Hire a local attorney and CPA to retain one of the national planners to draft something with multiple layers of protection. Expect to pay at least 10K and attend several sessions with the team. You will also need to invest many hours in educating yourself on maintaining the corporate formalities and separation between your personal and business affairs. There is also the costs of filing the annual reports with the state and the fee for the registered agent. You will probably need to hire a CPA to prepare income tax returns until you are able to do it yourself.

Why don’t you have a homestead on your residence? That protection is much stronger than any LLC. It lets OJ keep his million dollar mansion with a 35M+ outstanding judgment against him. Didn’t the people who told you about the LLC mention it? If not, it might have something to do with the fact they can’t make any money from a homestead.

Your home is not a target. The vast majority of lawsuits settle within the insurance limits and very few judgments exceed a million dollars. The scumbag crowd always takes the easy money. They won’t go through the time and effort to force the sale of your home or wait for you to sell it so that they can collect. You face a bigger threat from poor tax planning and will get a better return on the money using it to build your business than creating a plan for an unlikely situation.

Awesome. I actually feel a lot better now knowing this.

Thank you

So early in the RE game you are saying that it is more advantageous to learn the game, and try to hem your taxes rather than spending money to set up an LLC?

And you are also saying that good insurance is more valuable than the LLC at this stage?

What does the LLC provide? It doesn’t make you smarter. It doesn’t make it easier to find deals. It doesn’t easier to fund deals. It doesn’t make it easier to conduct business. It doesn’t make you more professional. It doesn’t prevent lawsuits. For the typical newbie, it doesn’t protect anything. An LLC becomes needed when insurance has paid what it will, there are still millions unpaid, and the creditor is looking to satisfy it with everything you own.

Let’s put that in a little perspective:
How many people do you know that have been wiped out by a multi-million dollar judgment?
How many people do you know that have been sued and insurance paid the judgment?
How many people do you know that have been sued and won?
Compare those numbers to the number of people you know that pay taxes. Which is greater?
Personally, do you spend more money each year paying taxes or paying off plaintiffs?

Why spend money for an LLC when the plaintiff is going to settle for the insurance limits? The typical newbie has most of his wealth in his home and his RE business. A homestead protects the home and an LLC can’t protect rental property.

Sorry for the repeated questions, but then why do so many RE investors buy property in an LLC?

This all seems so contradictory to what I have read.

Ignorance and gullibility. Few real estate investors need advanced planning.

So as an investor with no LLC can you still deduct advertising expesnes such as bandit signs, newspaper ads, etc. even if you are just doing wholesaling ?

Business expenses are always deductible. No entity is required.

If you dont have a business entity, can you still use money from other investors? Do they just write me a check or what?

Yes.

Brian,

good chat here. first - what investor is going to give you money? you’re not there yet.

separate checking accounts will help with money management - when you’re ready to actually start your business (any business), it’s important to separate personal money from business money.

you can simply “loan your business” money to start out. i would say, that if you’re going to buy real estate whether to fix up and sell or to hold - insurance is very important. the funny thing is, getting the insurance is going to be challenging but doable.

you see, most investors who buy fix and sell or hold and rent buy a property as a “personal residence”, then they turn around and do their thing. this catches up with them quick as well if they’re using conventional financing. HM or paying cash or “creative financing” will help avoid that type of pitfall - but with HM (hard money) interest rates are high and terms are a lot different. Plus - you don’t just pull a HML (lender) out of your ars…

network - that’s my suggestion to you. it’s going to be awkward cuz you don’t know anything - but bang around investor clubs, attend a few foreclosure auctions, goto some open houses - meet realtors etc…

the whole LLC craze got way out of control - i mean, i have manage an LLC - the one cool thing about it, whether it’s single owner or not is that the property/business is owned by an LLC - that’s the first pretty good thing - you’re name, personally, isn’t on it. now aside from that, without a vision for what you’re doing and a lack of overall knowledge, it’s pretty much a waste of time.

KISS METHOD - keep it simple silly… best policy. baby steps. i will say this though - don’t fart around forever. learn learn learn, then sooner or later you’re going to have to actually invest in something - purchase a good book and follow the steps. i can definitely recommend a book or two where if you implement what is in it - you’ll do pretty darn good starting out.

I have investors and 2 mortgage companies. 1 property is owner financed, and I am just unsure how to protect the property and myself separately while using some of the passive income to pay off my own debt.

I’ll give you an example of insurance. 10 yrs. ago, a local landlord incorrectly installed a dryer. The dryer caused a fire that killed a tenant. The tenant’s family just won a lawsuit against the landlord and got $300,000. I think the family could’ve recieved more but perhaps that was the insurance limit. Just thought I’d share that.