Hey all,
Is it more expensive to set up an LLC after you have acquired properties? Is it better to set it up before you buy them? Any input is appreciated. Thanx.
Mike
Organization costs are the same. The post acquisition issues are transfer taxes, insolvency, and fraudulent conveyance.
Cool. Thanx. I’ve heard it was more expensive to set up afterwards. I was also worried about a lender calling the loan. I don’t think it would cause a lender to call the loan or anything because i’d still have to personally guarantee the loan anyway. My plan so far is to hold off on the LLC until I have enough properties to warrant the cost. I keep flip flopping on this issue.
Transferring title to an LLC does trigger the DOSC with or without a personal guarentee. Whether the bank will call the loan or not is another story. When you decide to go the LLC route, it would be best to find a bank that will loan to the LLC directly.
What about the properties I own before the LLC setup? I think I may be better off making sure the lender will lend to an LLC before getting a loan from them. I suppose I could always refi to a lender that will allow an LLC with a personal guarantee if I had to. A lot of the advice I’ve seen so far is that an LLC is not needed until you have a few properties. However, I feel it’s worth a try to set it up. I still have to get the setup and maintenance costs. Thanx for you advice BLL.
Mike
Safest route is to refi into the LLC or have the LLC assume the loan. It won’t be a big deal if you have a solid relationship with the lender. In the 2 cases I have seen where this has been an issue, the bank allowed the LLC to assume the loan for a few hundred dollars. In this market, I doubt a bank is going to call any performing loan.
An LLC creates a firewall between personal assets and business liability. If you have no wealth outside RE or just a handful of properties, an LLC is unnecessary since there isn’t anything to protect. People complicate the issue when they decide to manage the LLC they own or do their own repairs and maintenance. That set up creates a way around the LLC to personal assets and all the other LLCs they own. There is little protection when an individual owns and manages an LLC.
In any case, the vast majority of cases settle for the insurance limits. An LLC or fancy planning like the gurus push doesn’t impress plaintiff’s attorneys who know how to defeat those plans. If you do happen to face someone who is out for blood, your DIY or guru level plan won’t survive.
If you really want to do it right, it will take much more than an LLC and several thousand in legal fees. You are much better off worrying about reducing taxes than getting sued. How many people do you know that have a 2 million + judgment versus the number of people who pay taxes every year? Put your energy into something that will really give you a return.
One last thing to consider: most states require an attorney to represent the LLC in any dispute, including evictions. Is that something you can afford when just starting out?
I didn’t realize it was several thousand in legal fees to set up an LLC. In light of that, I’m thinking I’ll stay away from the LLC for now. I don’t see the cost benefits yet. My main concern is protecting my personal assets Home, car, etc…Currently my home is 90% leveraged. I really don’t have a lot of wealth in assets…yet. Looking at it now, If I were to sue someone like me, I’d probably get more out of the insurance limit on the property. Am I on the right track?
An LLC is only a few hundred dollars to a thousand to set up. Doing it right involves several entities and a thorough analysis of your specific situation. That takes several thousand.
You are asking the right questions and educating yourself. You just have to decide when the benefits exceed the cost. That’s the time to do it.
oh I see. I’d be doing a single member LLC. I’m in Massachusetts. I want to hire a property management co. I’m sure there are guidelines that require me to be “hands off” when it pertains to property issues. I’maware that it has to be spelled out in the operating agreement. I know I’m going to have more questions the more I get into it. Thanks for your help BLL.
Mike
Single member LLC is worthless if that’s all you have and a MA LLC is $500/year. Plus you have to disclose your home address when you organize. Use a limited partnership or business trust. They are much cheaper and have nearly the same protection as an LLC. File a homestead and you can protect $300K of equity in your personal home.
Thanx again BLL.
Your welcome.
Have you joined any local REIAs or LL associations?
Yes, I joined my local landlord assoc. It’s very small but it’s all I have in my area. I don’t know a lot about a limited partnership or business trust. I hate to keep bugging you with questions but can you tell me the difference between them? Costs, setup, etc… Or point me to an article, forum or website that I can look up myself? I’m having trouble finding the info I need about them. Thanx BLL. I appreciate your time.
Which association?
A limited partnership is a partnership with 2 classes of partners: limited and general. Like LLC members who don’t participate in the business, limited partners face no liability from the partnership. Only their investment is at risk, but have no say in the business and can’t force the partnership to make a distribution. General partners make all the decisions and have personal liability for the partnership. That’s not really a problem when you plan to manage the business yourself. The cost to register in MA is $200. MA also has a limited liability partnership, where the general partners have some protection, but like the LLC, that is $500 to register and has the same problem when people manage the business themselves. That is just the basic description. There is much more to it.
You can Google limited partnership for more information. Just be careful when you see the term “family limited partnership” in your readings. It is the same thing as a limited partisanship, except the gurus charge twice as much because of the hype. It is actually a slang term for a limited partnership that owns a family business. Unfortunately, gurus advise placing personal assets in them for asset protection. That doesn’t work. These entities are for business purposes only.
Here’s an article on business trusts.
http://en.wikipedia.org/wiki/Massachusetts_business_trust
It’s the RHABC. Rental Housing Association of Berkshire County. I’ve been to one meeting so far. Everyone seems to be very helpful. We meet once per month. I’ll take your advice BLL and thanx once again for your time. Whatever I decide, I’ll more likelyy have it done by a local attorney with this type of experience. I’m hoping to get some referrals at my next RHABC meeting. Thanx again. :biggrin
MIKE