I’ve been researching the best way to set up my rental investment company. At first, would it be more beneficial to put everything under my name or would it be better to set up an LLC first? Financially, seems it best under my name for lower interest (I have a great credit score) because the LLC would not have any credit.
Does anyone have any suggestions?
Thanks,
Brian
If you are serious about starting a rental property business, then I would definitely start a LLC and buy the properties directly into the LLC. If you’re going to be in business, then run it like a business, not like a hobby.
Good Luck,
Mike
I was told that starting out with an LLC could be costly because, like a person, interest would be higher with no credit history. I have great credit, but very little money, if not zero, to put down. Would it be best for me to start out without an LLC to get the property and then put it into the LLC after I build equity?
LLCs do have expenses like registering with the state, registered agent fees, and an attorney review/draft of the operating agreement. There are also tax preparation costs if you can’t do them yourself. You won’t be able to represent yourself in most states and have to hire an attorney for any legal action, including evictions. Unless you have significant wealth outside of your real estate business, a limited partnership or business trust will provide the same benefits for much less cost. If you plan to actively participate in the management of the LLC, then you have created a way around the limited liability of the LLC and need something else to plug that hole. As to equity in the property, an LLC won’t protect that at all.
You have to weigh the costs of the LLC versus its benefits to decide if it makes sense for you. Each state has its own fees and tax structure.
I do not have any wealth. I grew up with parents that struggle paycheck to paycheck. I finished a Master’s degree in Finance and I have extremely excellent credit. What I don’t have is cash up front to help with this desire I have to build an investment portfolio with property. I’m just at the point where I’m able to save a bit of money, but not enough for a large down payment. What I believe is that there is a way for me to get started. I’ve always been a good researcher and question asker and I usually find someone that will help me, like this forum. This is great. Thanks.
I plan on setting up an LLC, but I don’t know which state would be best for tax purposes. Of the fees I’ve seen to set up an LLC (taxes aside), I don’t think they are really that much. It will be a single member LLC, so costs of the agreement would not be much.
I am thinking that it would pretty much be the same if I purchased property on my own, or if I set up the LLC and co-signed. At least it would get the LLC started. Does that make sense and does it sound reasonable?
Then you won’t get sued. Spend your limited funds building your business instead of protecting something you don’t have. Most lawsuits settle for the insurance limits anyway and very few ever exceed a few million dollars.
You don’t get a choice in jurisdictions. You must register the LLC in the state where it does business and the state where you reside.
Do you mean those DIY kits on the Internet? Using them is about as smart as DIY surgery, but they are OK if all you want to do is set up an LLC for later and don’t need real protection. Even then, I don’t think the benefits justify the costs.
Do you realize it only takes about an $11,000 judgment to pierce a single member LLC and the operating agreement is the only thing that has a chance to prevent it? Is this an area where you feel it is wise to cheap out?
SMLLCs are pushed because gurus know people are hesitant to do something that complicates their taxes. SMLLCs allay this fear, but reduce the LLCs benefits. You only learn this when a creditor starts picking apart the LLC.
I think it’s OK if your state doesn’t charge too much for an LLC. It’s a pretty bad idea if you live or do business in high cost state like CA. Does your state allow a manager to represent the LLC in court (most don’t)? If not, you will need to hire an attorney to do your evictions. Is that an expense you can afford?
You should do the LLC in the state where you will invest. If that is different than where you live, you do not need to register it in the state where you live.
Do not do a single member LLC. Recent cases have pierced these as simply an alter ego of the owner.
Good Luck,
Mike
Appears that LLC is out for now. It is only me and I have no money for anyone to come and get. Additionally, insurance should be okay.
So, the only question left is the business license. If I’m in CA and investing in CO and AZ, are licences needed in CO and AZ or all three states?
Also, are business licenses only by state? How about by city or county for real estate? Is this something I need to check out also?
I set up an LLC with a partner. She has the down payment, and the pre-qualification letter, is in her name. When we make find a property, can we put it in the LLC or do we have to put it under her name?
Newbie question here…
Since setting up an LLC is a lot more complicated than relying on those DIY kits, how do you pro’s recommend setting up one? Or rather, who do you recommend consulting with to set one up? Are there CPA’s or attorney’s that specialize in that? Any tips for how to find a good reputable you can trust?
Thanks in advance!
May be Mike is right for Ohio, but CA requires out of state LLCs managed by a CA resident to register in CA, even if the LLC does not own property in CA. They claim nexus based on the residency of the manager. Many state taxing authorities also take this position. Generally speaking, tax authorities take a position that will maximize tax revenue.
Business licenses are local. Check with city hall for business and occupancy license requirements. Some localities require pre-move-in inspections.
Have you local attorney and tax expert work with a national planner. An LLC is part of an estate plan. It doesn’t work well in isolation. It should be part of a comprehensive estate, financial, and tax plan.
May be Mike is right for Ohio, but CA requires out of state LLCs managed by a CA resident to register in CA, even if the LLC does not own property in CA.
Another great reason NOT to live in California!
Mike
Mike,
how do you do your LLC’s if not sole member???
Wife, parent, sister.
Mike
I have been told by attorneys and accountants that each property should be there own business/llc. That way if someone wants to sue the business owning property a they can’t come after property b,c, and d because they are owned by the same company. I actually have not done this myself yet, do you guys with multiple holdings do or have done this? Thanks.
There are legal theories to merge separate businesses owned by a common set of owners or managed by the same directors. Another issue is managing property yourself creates a way around all the LLC/business.
Mike,
What do you do to prevent foreclosure of the membership interest?
Jbaldwin,
You are correct that the most asset protection is provided when each property is in its own LLC. However, if you have a large number of properties, that becomes very cumbersome and expensive. Let’s say you had 50 rentals. Do you want to have 50 checkbooks? 50 LLCs to set up? 50 tax returns? It’s just too much. Some states have an annual LLC fee and that could get very expensive if each property had its own LLC.
I put several properties in each LLC. That’s definitely a tradeoff.
What do you do to prevent foreclosure of the membership interest?
BLL,
I don’t know that answer to that. In fact, I’ve never even heard of a “foreclosure of the membership interest”. Obviously, I need to do some research into that and see how I’m protected. Do you have any good references? Is this applicable in Ohio? In every state? Does the operating agreement protect against a foreclosure of the membership interest?
Thanks,
Mike
Mike,
Foreclosing on a membership interest occurs when a judge decides charging order protection doesn’t apply and gives a member/partnership interest to a creditor. Normally with an LLC or partnership, a personal creditor of a member/partner can’t seize the debtor’s interest in the LLC/partnership. He is limited to receiving any distributions due to the debtor member/partner. This is called a charging order and is very similar to a wage garnishment. The creditor gets paid when the LLC/partnership decides to make a distribution. Foreclosing on the interest means the creditor actually owns the interest and becomes a new member/partner with all the rights that go along with it.
The protection exists because the other members/partners would be negatively affected if this creditor became a member/partner. The creditor doesn’t care about the business. He cares about getting his money and would vote and act in such a way to make that happen, up to and including liquidating the business. Charging order protection protects the other members/partners from this situation. They were not a party to the litigation and should not be affected by the judgment. The debtor is protected inadvertently because the creditor must wait for the LLC/partnership to make a distribution before he gets paid. He gets no say to accelerate distributions and now has a powerful incentive to settle with the debtor.
Charging order protection would apply to someone like you who is integral to the operation of the LLC. Giving your interest to another party would adversely affect the business. If your wife, parent, or sister do not participate in the running of the LLC, provide no consulting advice or capital, or contribute nothing of value to the business, there is no affect to the LLC if the interest were given to a creditor versus limiting that creditor to a charging order. This is the danger when members aren’t involved in a meaningful way. They don’t have to actually run the business or participate in the day-to-day operations. They only need to provide something meaningful to the LLC that would adversely affect it if the member no longer provided it.
As to references, I like Adkisson and Riser’s Asset Protection Concepts and Strategies for overall asset protection discussions. Ryan Fowler wrote an interesting article on entanglement theory and executory contracts that uses some case law in his analysis. http://pfshield.com/apfund/apfundexecutory.htm
Some states limit a creditor to a charging order and some don’t. Even if Ohio’s LLC statute limits a creditor to a charging order, I would include executory language in the operating agreement in case a debtor is forced into bankruptcy where such protection may not apply. Personally, I use a holding company like a limited partnership to invest in the entity that owns the property or business. This method avoids the foreclosing issues, but like anything else it has its own.
I hope this helps.
Hello all,
I listened to a teleseminar last week hosted by Dave Lindahl and his guest (can’t remember name, sorry) had recommended the use of Land Trusts and the LLC owning it. He strongly advised having as many layers of protection as possible and had a good reason for it. If somebody is trying to sue you and they find that you have a ton of assets to go for, there will be a lot of incentive to go after you. However, if they can’t find anything on you, or it is just plain difficult, there is less incentive. I’m still a newbie so I dont’ know all the total costs of setting up and maintaining an LLC versus lawsuits, but it seemed to make sense to me. Basically, you want to make it look like you’re broke.
On another note to BLL - I think I remember the attorney also mentioning that the members of the LLC could vote NOT to give any distributions, thus avoiding the creditors.
Sorry for the vagueness, but it might be worth checking out.