Hi. I’m a newbie REI. I’d like to know if it’s best to set up an LLC first? Once there are properties in the LLC, how can I make financial transactions within the LLC. For instance, if I wanted to take some equity out of a property to acquire more or make repairs or even for personal use. How is this done within the LLC? What are the legal and tax implications? I appreciate all input. Thanx.
Mike
Spend your money and time growing your business first. An LLC offers little if you have no wealth. Even when you own rental property, it won’t protect it and it won’t protect your personal assets if you personally manage the rentals.
What if I have a property manager? How can I protect my personal property? I’ve of something like a homestead exemption. What is that?
That will provide a strong separation, but is it worth the cost of 7-10% of the gross rent? Can you find a PM to manage a few units? Can you afford to pay the PM and still cash flow? Even with a PM, you still risk losing the LLC assets through your personal actions (e. g. car wreck).
Don’t own anything. You want control, not ownership.
It is a statutory protection for a personal residence and is stronger than any judge, any creditor, any LLC, and any other plan imaginable. Why do you think OJ still have his Florida mansion while everything else he owns is confiscated?
Sit with a qualified planner and work out a plan that makes sense for your situation. An LLC is just a tool and it is used with other tools to meet a need. How many tools do you own to fix things? I doubt all you own is one. The same thing applies to planning. Each tool (LLC, LP, etc.) has certain features that make it attractive in certain situations and useless in others. Used appropriately, they compliment each other and plug each others holes.
Don’t forget to include extra costs of LLCs. There is the annual fee, registered agent fee, and the possibility you will need to hire an attorney to do eviction and handle any other legal matter for the LLC. You also need separate bank accounts and have some formalities to keep the LLC distinct from yourself.
Hi BLL,
Thanks for your input,may I know what is the annual fee you mention for having LLC?
I set up LLC (myself and my daughter as members) to do real estate investing. I used the online LLC set up ,no planner ,no attorney involved.
Thanks
family
It’s the fee charged by the state. If you don’t pay it, your LLC doesn’t exist. There will be no difference between the members and the LLC.
How do you know your operating is any good? The cookie cutter junk on the Internet is pretty useless if you ever get sued.
BLL, curious to hear your background. I am interested in the information thread, however, I feel more confused now than before. I have a rental property + personal residence. I just formed an LLC using a company called The Company Corporation (online) that was recommended to me…
I am looking to protect my assets + look for future investments.
Questions:
Thanks,
Protect from what?
creditors - homestead and liability insurance
estate taxes - QPRT or GRAT
your death - life insurance
your incapacitation - disability insurance
Assuming the LLC owns the property: What makes your family member qualified? Is he an LLC manager/member or have his own company?
Paying with personal funds would be considered commingling.
I don’t think The Company Corporation did a very good job if you need to ask questions 2 and 3. Did you speak with an attorney? Were you given time with a CPA regarding taxation? Did the discussion of the LLC involve estate, business, financial, succession, and tax planning? If all they did was file some papers with the state and gave a canned operating agreement, you got ripped off. You cab do it yourself and get an identical level of protection.
Another word of caution:
Only transfer of title to your LLC makes it the property of the LLC. HOWEVER… recording a title change may trigger the note from the lender to become due in full. It’s best to call up the lender and ask if you are allowed to transfer title of the property to an entity - you can say it’s for estate planning purposes. Depending on your LTV, they may allow it, but make sure you have their permission in writing before you record the quitclaim.
In the past, lenders didn’t care about vesting (how you hold title) or if you changed vesting at some point after escrow closed. However, the mortgage world has changed and lenders are either more picky or hired people that won’t know they can allow it and will deny you anyway.
Has anyone purchased the Drew Miles wealth program? I have participated in tele-calls and remain interested, however, after some further research like anything there are pros & cons…
It is all about business tax strategies so you save giving your income to uncle sam.
Anyone a believer??
Heh, I knew Drew Miles way back when his newletters came via fax! It’s a good course. You may also look into Sandy Botkin’s Tax strategies for real estate investors.
any tax strategy can be implemented whether an LLC or not. There is nothing about LLC’s that magically generates deductions; business expenses are always deductible irrespective of what tax form you use.
the choice of whether or not to use an entity should be part of an overall asset protection and tax plan. it becomes more important when other members/partners are involved. Even then, the heavy lifting is done in the operating agreement.
How come these gurus and experts never make an appearance at the conventions and seminars for continuing education? Why don’t they ever talk with the lawyers who actually work with state legislatures to draft laws and testify before Congress? How do they keep current when they spend all their time on the road hawking merchandise and boot camps? Do they learn changes in the law through osmosis or magic?
they don’t have time for that. they’re too busy depositing all the checks from people who attend their seminars.
I must say, the two of you (BLL & mcwagner) are not only knowledgeable and generous with your time, but also incredibly patient. They need a frequently asked question section on this board.
Thanks, equity. I don’t really mind answering the same questions. I’m just glad to dispel much of the bad advice floating around the Internet and convention circuit.
Hello:
How do you go about establishing your home as a ‘homestead’ from a legal perspective? I agree that the LLC will not protect you from personal liability (i.e. negligence), that’s what is insurance is for. Howqever, I would like to protect my personal property from that one creditor that may decide to pursue a judgement in excess of my insurance limit.
Thanks.
File a homestead with the registry of deeds or the recording office for your area.