Hello! I’m new here but these forums seem great for learning. I want to get into investing and it seems the first step will be to get a business (LLC) started for tax reasons and asset protection. My question is, when is the best time to start my LLC? Does it matter if I start it now or wait until after taxes are due? Is it better for me to have a lawyer setup my LLC or can I save money and do it myself? (This is preferred).
Basically, I want to know enough about an LLC to get one started, but I don’t want to spend months researching. Are there certain things I SHOULD know or research before starting one?
I am in Texas and use an LLC. I had my lawyer set it up. I think it costs a couple of hundred dollars. I use it to be the trustee for my trusts.
Asset protection in Texas is kind of different from everywhere else in the USA. We are a red state. It is really friendly to business people and not very friendly to people bring lawsuits. If you don’t have your properties in an LLC or the plaintiff’s lawyer is successful in piercing the corporate veil and you are sued, the plaintiff’s lawyer will evaluate you to see if you have enough assets to make sure that he can get paid. Most of the time it is limited to the amount of the insurance. Since our properties are highly leveraged there is not enough there for the plaintiff’s lawyer to want. He will then look at your personal assets. If they win the lawsuit and you have to pay; first in line will be your insurance. If it goes beyond that they will attach your assets. If they do that you will probably file bankruptcy. In Texas if you file bankruptcy, you get to keep your cars your home, your retirement accounts and the tools of your trade. So all they can get is any spare assets you may have, like speed boats vacation homes, your Heisman Trophy and spare cash you have. If you don’t have a lot of cash sitting around, you don’t really have much for the LLC to protect. It is like the story about the bear chasing you. You don’t have to outrun the bear just out run the other hunter. The lawyer won’t chase you if you have nothing to get.
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Thank you for your response. So, just to summarize are you saying I may not necessarily need to setup an LLC until after I get things rolling in my business and more cash coming in?
Would you say it is an important first step (given the fact that I’m in TX), to setup an LLC FIRST or possible wait until later on? I believe I’ve kind of targeted rental properties as my entry point to investing (if this helps any…).
My opinion: Don’t use not having an LLC yet as a reason for not buying properties. It is always best to protect your assets with an LLC, of course, but properties can easily be transferred into the LLC with the use of a Warranty Deed. Start work on the LLC but buy the proeprties when you find them and transfer them after the fact, if need be…
Thanks for your response Keith. The reason I was thinking of doing it now was because I’m still learning about renting, contracts, etc…So since it’s going to take me a little bit longer before I ACTUALLY buy, I figured I might as well get the LLC out of the way depending on how it changes things around me(taxes, purchasing of property, etc).
I did hear that once I get an LLC, whenever I puchase property, the lender is going to want to see a business proposal? Is this correct? That might be one reason for me to wait just a bit before proceeding with an LLC. Or on the flip side, I suppose there are templates available or ways for me to create my own proposal.
Bilal, If a business takes out a mortgage it will need to put down 20%. The business would need to have established credit and a lot of paperwork about who the business is and what it is going to b e doing is required. If an individual takes out the mortgage you don’t have to put down anything. These financing plans that we typically use require an individual to take out the loan. What I do is buy the property with the mortgage and then transfer the deed into the LLC. That transfer costs about $100.
you can buy and finance inside an LLC with a personal guarantee, with no established credit or extra paperwork, business plans or proposals, and still get 90% or 100% financing at a competitive (8.65% rate).
you just need a good banker/broker.
once you set up an LLC, you will be responsible for federal and state returns, even if the LLC is doing zero business. but, it’s nice to have everything ready to go when you do have a deal. you have to balance out the pros and cons according to what’s important to you.
I agree with mcwagner.
I borrow 100% of the purchase price (70% LTV max) with LLC’s and even Land Trusts all the time (I’m in the middle of buying an apartment bulding now.)
I would set up the LLC before buying your first property. That will keep your personal name off the title (which is important). Setting up an LLC is not a big deal. You can do it from your Secretary of State’s web site (usually) in just a few minutes. So, it’s not like you can’t both -setup an LLC and look for properties. Setting up the LLC is just not a big deal.
If you don’t have the funds for a LLC don’t worry about it. Just get right into it with your personal name. It really depends what you are looking to do because you can bird dog and wholesale properties without a LLC.
Keith is 100% correct. Don’t let this stop you from getting your real estate business going. Next thing you will be looking at are the business cards, advertising, an account with a bank the list goes on and on.
Just get it going right away.
i know its good esp if you have rentals to have them in an llc’s name. however, is it any benefit if you are rehabbing/flipping to have sold it from an llc?
Now this is some good stuff. Friendly, conflicting opinions with some good info. THANK YOU!
You guys with a lot of properties recommending llc. Do you really think a newbie starting out with minimal cash, marginal credit and no assets should go llc?
I ran into so many roadblocks with lenders it would have stopped me from investing. Did you guys ever experience these hassles? How did you overcome?
new to the rei. been in it a while though
llc refi is easy. i have a lender who does them 80% 90 day seasoning for me
Yes, I think that anyone who is going to hold property should start out right by putting their properties in a LLC. I guess that the question is determination. If the newbie is determined to have start a successful rental property business, then a LLC is a must. If a newbie is planning to fail or has a history of failure, then why bother?
Dealing with small local banks generally eliminates the problems associated with buying property in a LLC. Small local banks give better customer centered service than big national banks or mortgage brokers.
Why not just setup an LLC, buy the properties and immediately transfer the property from my name to the LLC? Wouldn’t this eliminate problems associated with getting the LLC but also allow me to build credit and LLC history and at the same time protect assets?
What’s the difference between LLC, scorp, etc…? Is a pure LLC the way to go? I know that once getting a few properties you should divide them up into multiple LLC’s so that people can only attack specific assets, but again should they be strictly “LLC’s” or scorp or what?
Yea, I found the forms needed for filing for a new LLC, however there are about 10 different forms haha. How do I know which forms to fill out? I’m in TX. Is this best kept up to a lawyer or should a newbie such as myself be able to fill them all out w/no problem?
I guess next thing is for me to get a CPA so I know the tax changes I need to be aware of after the LLC is established.
I personally have found local banks to be very prudish when it comes to lending money. I don’t have the experience that Property manager has but that’s what I have found. I have much better results with internet banking such as the ones listed on certain websites. Locals are so full of nit picking requests that it sort of discourages you.
They great at saying NO we don’t do those loans or NO we need… Mike are you using S&L, commercials or Mortgage brokers?
I don’t use S&Ls or mortgage brokers. I use two small local banks for all my deals.
Real estate is a people business. I believe that knowing the right person is critical when you’re dealing with banks. Try to deal with the President, Vice-President, or Chief Loan Officer. If you don’t know these people, try to get a referral from a successful investor. You could also find out which organizations these people frequent and try to meet them there. These things don’t happen by accident.
My dad, who is also a business person knows the guy that manages the all the AmSouth branches in the south east, would he be able to pull some strings in order for me to get my first loan?
That sounds like a pretty good referral to me!