LLC strategy - asset protection & business credit


I am a new investor. My dream is to make enough passive income to stay home with my children. I enjoy reading the contributions from the experienced investors like you and hope one day I can learn enough to help others as well.

I live in NJ and just closed my first property in SC with a down pay of $14K. Here is my action plan for next steps. Would you please let me know if I am on the right track?

  1. Keep the property under my name for now - this is because LLC loan has a much higher rate and requires higher down pay when I was looking for loans. The loan I got from a nationwide bank is under my name. I don’t think the lender, the insurance and the title insurance companies would agree to deed/transfer the property to a brand new LLC if I form one now, and I wouldn’t want to risk the loan being called and also paying transfer taxes if any.

  2. For asset protection of personal property - The mortgage on my home is on track to be paid off in a couple years, so I have a lot more equity in my primary residence than the new investment . Since NJ doesn’t have homestead protection, I bought a $2M umbrella insurance and a landlord insurance with 300K liability protection. I plan to manage the property myself because I am concerned about the indemnification clauses on the property manage companies’ contracts. It reads like I am responsible for their misconduct or negligence and will be responsible for any legal expenses to defense them. I don’t if I can trust them and know I will be a good landlord responsible for maintenance and repairs when needed.

  3. For business credit - to form a LLC taxed as partnership to manage my investment properties at different states (only one property now, but I hope to grow to 7 in 1-2 years). Get an EIN, a D&B #, a bank account and a business credit card, start deposit rents and paying mortgages/expenses with the bank account and the credit card to establish credits. Do this for 1-2 years.

Questions: Should I form the LLC in NJ, SC, Nevada, or Wyoming? Pros & Cons? Do I need to setup resident agents for each state I own investment properties? Should I hire attorneys specialized in real estate or asset protection to do this? I am willing to pay higher costs to establish good foundation, but I don’t know where to find good attorneys, do you have recommendations?

  1. At the end of 1-2 years, refinance all 7 properties to deed them to the LLC. Since LLC should have some credit history by then, the loan rate might be better and the LLC should have a stronger financial position to pay for the transfer taxes/costs. All the future properties can be deed to the LLC instead of myself.

Does this sound like a plan? Or am I totally off-course? Am I running high risks by not deed the investment properties to LLC at this time? You feedback is very much appreciated.

How do you plan to show the property to potential tenants if you live out of state and have no local property management? How will you let repair people in if the property is not occupied?
Your LLC will have to be registered to do business in the state where your property is located. If you form in another state, you’ll have to pay the required fees in the state of formation as well as any necessary fees to register the LLC in the state you’re doing business. If you don’t have anyone who can act as a registered agent for you, you’ll have to pay someone to do that for you as well.

RealDreamer - it is good that you are asking questions. It seems that you are doing your homework… I wish you good luck!

One comment on the above statement - if the property is in your name you need to pay the mortgage yourself. I wouldn’t let the LLC pay it - this may be interpreted as comingling funds, which may lead to a judge piercing the LLC veil. You need to be very rigorous on how you handle your money and the LLC’s money. You should keep them separate and be extra careful on how you transfer money between yourself and the LLC.

For example, my wife and I formed a LLC recently and we are placing an offer to buy a property this Friday. Yesterday we had a formal meeting to review the property, comps, cost of repairs, exit strategy, financing, etc. We decided to go ahead. We created minutes for the meeting documenting the decision to submit the offer and also approving the additional capital infusion in case the offer is accepted. As soon as we get the offer accepted, my wife and I will transfer the authorized funds from our personal account to the LLC’s account. The LLC will write the earnest money check and pay for all the expenses related to this property’s purchase.

Hope this helps.

Good luck!

Re-read Justin’s post. LLC needs to be registered where you live and where the property is located. You will also need a local PM and registered agent.

You also have an issue with fraudulent transfers given that you plan to make transfers for asset protection.

Thanks for your input. The reason I am not planning to use the property management in SC is because there already is a tenant in place and the tenant is responsible for all the maintenance with a new home warranty from the builder. I might hire a management company if I can find a trustworthy one with limited, not full indemnification clause.

BLL, Would you please elaborate why there might be fraudulent transfers issue? The purpose of the LLC is to provide housing to tenants and make reasonable profits from the services, not just for asset protection. right?

However, since I’ve purchased my first property using my own name, are you saying I should forget about transfer the property to LLC in the future and just keep it on my name until it’s sold? If that’s case, then should I form a LLC now and prepare to pay for the higher interest rates for loans to purchase new properties in the future? Should I form one LLC for each new property and have a parent LLC for managing all the properties? Also, please pardon my ignorance, what’s a local PM?

I’ll admit you may be able to get away without having a local Property Manager (PM from BLL’s post) because your property is currently occupied and also has a home warranty. Your plan should be ok until that tenant moves out. Sure they can mail you the keys, but then what? Who will show your vacant property?
The purpose of your LLC is to have an entity to conduct business and provide some limited liability. The “business” your LLC conducts is to provide housing to tenants, make reasonable profits, etc.
I’m wondering about your comments about the LLC loans having a higher interest rate.
Did you take out this loan in your name as an “owner occupied” property (say as a vacation home) to get a lower interest rate? If you did, that’s mortgage fraud since you’re renting it out. A non-owner occupied (NOO) loan will likely have a slightly higher interest rate than an owner occupied property, but it shouldn’t necessarily be a higher rate just because it’s to an LLC.

You, as the property owner, are responsible for all actions of your agent with respect to the property. No contract will remove that liability and most state require the LL to conduct maintenance and repairs. Tenants are only responsible for the damage they cause through abuse or neglect.

Transfers made with the intent to protect assets from lawsuits are undone by the courts.

I prefer to buy in the name of the entity directly. You need to do what makes sense for your situation. I don’t know enough about you to even begin to guess.

That is very expensive and has limited benefits. I think it causes more harm than good because it is so convoluted that people will think you are up to no good when they see it.

It’s a property manager that is located near the property.

Justin, j1dias and BLL,

Thanks so much for your advice. I have a new plan now:

  1. Hire a local PM (hey I know th jargon now :-)) to manage the SC property in my name. (Should I be worrying about the indemnification clause?)
  2. Keep the property in my name until it’s sold. (Continue the umbrella and liability protection from insurances)
  3. Hiring a NJ attorney (Should I hire an attorney specialized in real estate or asset protection or just any attorney? Or should I use a CPA’s services) to form a LLC in NJ.
  4. Purchase the next property and get the loan in the LLC’s name. Register the property in the state it’s located and get a registered agent in the state. Repeat the process for each new property if they are in different states.

Does this plan sound right to you? Any precautions a rookie should be aware of? Thanks so much. I feel like I might be a little bit closer to my dream.

Another question: Are there any value in forming the LLC in Neveda or Wyoming instead of NJ? A lot of people talking about it, what are the pros & cons in doing that?

WY and NV LLCs are fine if you own property in WY and NV, respectively. There is no real benefit for real estate investors to use them.

I suggest you research LLCs before you start using them. They are useless the way most people use them, especially those who buy kits and do it themselves. Nolo has some good books on operating an LLC, but there is nothing on drafting the operating agreement. You’ll need to find an attorney who actually defends or attacks them to do that. Unfortunately, they aren’t cheap.

A word of caution about going into too many different areas. Some states have very high LLC formation fees and annual fees. If you find 10 properties in 10 different states and set up 10 LLCs to operate in those states (or register the same LLC to operate in each of those states), it’s going to get expensive. 10 different LLCs will mean 10 different business banking accounts, 10 different businesses to files taxes for, etc…lots of paperwork. Even doing it the other way will result in lots of fees for you.
I’m not saying to not invest in more than one area. I’m just saying it will be much easier on you overall to find multiple properties in the same general area. So if that means you invest in 10 properties each in 3 different areas, it will be much easier on you than if you invested in 30 different states with one property each. Keep in mind that in each area you invest, you will have to put together a team in that area. You’ll have to find a new property manager, someone to mow the yard when the property is vacant, new handyman, new plumber, etc.
For LLC formation, you can fill out the required paperwork to file with the state. Nothing hard about that; you’re only filling in the blanks. The Operating Agreement (which isn’t technically a requirement, but HIGHLY recommended) is where you’ll need the most help. You can find info on here about how to run an LLC.