Another newbie question. I have read about the importance of incorporating when you want to do REI. I understand if you are owning a business, such as a flipping business or you have a lot of properties on hand, it would be a good idea to incorporate. But if you are just buying one to two houses each year, slowly building up your portfolio, is it still common to incorporate each property under a separate LLC?
Thank you guys for taking the time to answer my questions, I really appreciate it!!
When we first started, I wanted to have a series LLC so I could put properties into their own LLC with an over-arching LLC for the whole portfolio. That idea didn’t pan out. We have all of our current properties in one LLC - one bank account - one tax return - etc.
I’ve seen strategies where people aim for a dollar value of properties to be held by an LLC before they start another one. For instance, you may say that after you have one million dollars worth of property in your LLC you’ll start another one.
Numerous LLCs made to hold only a rental house would be burdensome IMO.
You have to have some idea of the reason you think you want an LLC. In my opinion, an LLC for property you self manage has no real value at all. If you are planning on creating a single member LLC that will be treated as a disregarded entity, then I don’t see much (if any) benefit there either.
If you are thinking about using the LLC to shield your personal assets from your business liabilities, then ask what the LLC will do that adequate (and much less expensive) liability insurance on your property can’t do.
If you explore these questions with respect to your personal circumstances, you may decide that you don’t really need an LLC until your net worth is greater than the maximum amount of liability insurance you can purchase.
It’s not a necessity. I’m with Dave T. Just get more liability insurance. It’s gonna be rare to buy something like a triplex without personally guaranteeing it, so what would be the benefit of a limited liability corporation? Do you really want to walk away from a lawsuit against a corporation or LLC if you’re held personally liable for the mortgage? The mortgage company will come after you personally for walking away and defaulting on the payments when the shtf. Your best move is to get more liability insurance to cover those possibilities. And if you have liability insurance, what’s the value in an LLC?
Now, if you could get mortgages without personal guaranteeing it, that’s a different story and in that case I would recommend setting up a limited liability company. But, I don’t see the point when you’re starting out and just small time unless you want to build up trade credit. Like I’ve used corporations to get trade credit cards from Lowe’s, Home Depot, etc. without PG, but it also costs me a lot of money to pay for an accountant and annual filing fees. And banks aren’t giving cash lines of credit without personal guarantees these days and corporate loan interest rates are astronomical versus loans in your personal name. Just try getting mortgage insurance without personal guarantees.
Limited liability companies and corporations are just another overpriced seminar you don’t need to waste your money on unless want to get involved in big projects, which it doesn’t sound like you need until you become involved in big projects.
Don’t overlook the fact that a Limited Liability Corp or any corp for that matter has a requirement to its own tax return each year whereas a trust has no requirements for its own tax return. I’m not suggesting any improprieties regarding taxes but why subject yourself to an additional contact or contract with the revenue service when you can do business in a trust?!!
There are many private letter rulings on this point. A trust will protect your assets and limit your liability, the same as a corporation, yet there is no tax return required for a trust.
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There are tax benefits for sure but even if you are not making money yet the ONE BIG REASON for incorporating is Asset Protection
Properties have a risk factor - as for example a balcony collapsed with a whole pile of people. If you owned the property then YOU have the liability for damages when sued by those injured or by the family of anyone killed. DO you want the risk of losing everything you have by failing to hold your properties in a separate LLC?
Other risks properties pose can be as simple as someone slipping over on a path, bumping their head on an awning, tripping over anything or just some deliberate accident so they can sue you.
Having more than one property in an LLC just increases the amount of assets litigants can go after. Once you have equity in a property best it is in its own LLC
There are zero tax benefits for incorporating. Business expenses are always deductible. Personal expenses are never deductible. Nothing about incorporating magically changed non-deductible personal expenses into deductible business expenses.
One exception is that an S-corporation that has sufficient cash flow to pay the shareholder a reasonable salary may be able to make distributions of cash above the salary free of social security/medicare tax. This does not usually happen in the real estate business.
Can we incorporate thumbs up on this page, kinda like fb or upvote or down vote a comment?.. pretty please. Rob, thank you for your input - I’m totally fascinated by the idea of using trust in place of establishing llc or corp. Mind to elaborate little more? Guugl search haven;t produced any results…
From this thread you can see that different investors use a variety of techniques and I will share that CPAs offer different advice, even within the same state.
What I found was regardless of the entity chosen(and you should chose one), what really keeps me safe is my insurance policies which all have umbrellas.
I got better coverage by choosing an insurer that is in the same city the property is vs a national company.
Redstar an LLC which is a type of corporation is a flow through entity! This means an LLC has exactly the tax benefits or tax problems of an individual tax return. Now an LLC can also file to be treated like a corporation and file tax returns like a C Corporation!
An S Corporation has some benefits of an LLC and some benefits of a C Corporation.
We incorporate to protect our assets and Net Worth from liabilities from frivolous law suits.
When I started out it was fine to own a few homes in my name, once I started having assets and building personal net worth it was worth spending the money to protect my personal well being!