Investment Property - LLC or something better?

[Stu Gotz]

A friend and I found a flophouse student housing investment property that we are interested in buying. We had initially thought an LLC would work best, but have found that financing through the LLC isn't the greatest. I'm curious how others have bought investment properties?

[juanrogera]

Hello fellow colonizer, welcome to the club. Profiting off of poor college students can be lucrative. The following is what my partner and I concluded when we started down a somewhat similar path.

Forming an LLC to have the LLC buy and hold the property didn't make sense. Financing was going to be difficult as the LLC doesn't have a credit history or proof of regular income. We instead purchased properties jointly as individuals. Between my W-2 and her 1099 income it was the most straightforward route in terms of financing. Each property has its own checking account from which all transactions take place. She and I "primed" the account by each putting $5k to cover (un)anticipated expenditures.

One benefit of the LLC holding the property is liability protection. To address this we maintain an umbrella policy on top of homeowner's insurance to address liability concerns (note: special insurance considerations for short-term rentals like VRBO).

Transparency and mutual understanding are key. While purchasing and holding the property as individuals, you may want to consider also forming an LLC with your friend for operational purposes. Clear understandings make for healthy ventures. Outline in the operating agreement how you intend to operate (sharing profits/losses, expenses, reserves, decision-making, etc.).

I am a cheesedick attorney but I'm not your cheesedick attorney and this isn't legal advice. We've gone from zero to six doors in the past year. It's been a journey and we're always learning something new.

[BmillsSkier]

Hello fellow colonizer, welcome to the club. Profiting off of poor college students can be lucrative. The following is what my partner and I concluded when we started down a somewhat similar path.

Forming an LLC to have the LLC buy and hold the property didn't make sense. Financing was going to be difficult as the LLC doesn't have a credit history or proof of regular income. We instead purchased properties jointly as individuals. Between my W-2 and her 1099 income it was the most straightforward route in terms of financing. Each property has its own checking account from which all transactions take place. She and I "primed" the account by each putting $5k to cover (un)anticipated expenditures.

One benefit of the LLC holding the property is liability protection. To address this we maintain an umbrella policy on top of homeowner's insurance to address liability concerns (note: special insurance considerations for short-term rentals like VRBO).

Transparency and mutual understanding are key. While purchasing and holding the property as individuals, you may want to consider also forming an LLC with your friend for operational purposes. Clear understandings make for healthy ventures. Outline in the operating agreement how you intend to operate (sharing profits/losses, expenses, reserves, decision-making, etc.).

I am a cheesedick attorney but I'm not your cheesedick attorney and this isn't legal advice. We've gone from zero to six doors in the past year. It's been a journey and we're always learning something new.

Pretty much all of this, however this dentist advises to form the LLC to acquire and hold each property.

Any lender is likely going to make you personally guaranty the loan anyway, so why not get the added liability protection the LLC offers instead of exposing all of your other personal assets to a potential claimant by holding the property in your own name (as TIC or otherwise)?

A client recently had a homeless person get shot on a shopping center he owns (held as TIC due to 1099 exchange) and his insurance denied the his claim for various reasons which meant he had to pay $650,000 to this homeless person when the lawsuit was settled. Granted, I'm not a courtroom jock so I have no idea what transpired in the case, but guess who and his partners were in our offices the next day looking to restructure how their entire portfolio was held?

[ill-advised strategy]

POTD!!!! ^^^

How about if you use that route to buy, then form an llc later and “sell” it to the llc for real cheap?

[Marshall Tucker]

Not an attorney but a CPA. When we bought a property on a certain costal island we now do short-term rentals on, my wife and I bought as tenants in common. THEN we put the real estate in an LLC we both own 50-50. We/I did this "more" for tax reasons though we thought the limited liability would be a plus. The RE closing attorney did the re-title to the LLC (I formed it "on my own") for about $250. Hadn't thought about an umbrella policy but we probably need to do that. I beleive if you start out trying to buy the property through the LLC, you have to finance as commerical vs. individual (paging Live2ski) and the rates are much, much higher.

[RootSkier]

That is obviously the easiest solution if you are paying cash but don't most residential mortgages (even for non-owner occupied) prohibit transferring your interest to any other party?

[Marshall Tucker]

^ there is an awful lot of fence-strattling that goes on in the "hey, lets get rich renting out property" scheme. As i say I'm a CPA and this is how I'd summrize it, maybe an attorney, or a lender sees something different.

So. Are you buying a second home, maybe joint tennant with someone else? If so, you get a low ass mortgage rate and the whole deal is a lot sweeter because the goberment and everyone wants you to own a home and create a lot of jobs, etc.

or.

Are you buying a property for commercial purposes. In which case we are going to rape the shit outta you to make up for our losses on the regular home buyer. Interest rates, insurance, everything.


give it some thought.

[SeatownSlackey]

That is obviously the easiest solution if you are paying cash but don't most residential mortgages (even for non-owner occupied) prohibit transferring your interest to any other party?

Correct because technically you are transferring ownership to someone other than the lender approved borrower.

Sounds like you're looking at SFR in a college town where you'll have multiple unrelated tenants. I'd look long and hard at the delta between conforming residential rates and the fibs you'll need to tell to get them vs paying slightly higher rates for either a commercial loan or investment loan to your newly formed LLC. The fact that your LLC is newly formed should not be an impediment for any competent lender. They'll simply rely on an appraisal to tell them what its worth and compare comps for rental and expense load to come up with a supportable NOI. If you're counting on over-achieving market comps by having individual leases to each tenant the lender is not going to give you credit for that on an acquisition, especially when it probably conflicts with the properties current zoning.

[RootSkier]

give it some thought.

Think about fraud?

[Marshall Tucker]

^ what fraud there champ?

[liv2ski]

Not an attorney but a CPA. When we bought a property on a certain costal island we now do short-term rentals on, my wife and I bought as tenants in common. THEN we put the real estate in an LLC we both own 50-50. We/I did this "more" for tax reasons though we thought the limited liability would be a plus. The RE closing attorney did the re-title to the LLC (I formed it "on my own") for about $250. Hadn't thought about an umbrella policy but we probably need to do that. I beleive if you start out trying to buy the property through the LLC, you have to finance as commerical vs. individual (paging Live2ski) and the rates are much, much higher.

If financing is needed, forget the LLC out the gate, you can vest into one after closing. Myself, we have a $1M liability policy in case something goes horribly wrong. I am uncertain a property vested in an LLC can be put in your personal trust, as I remember reading something goofy about LLC's when I previously read up on them. There was a reason why we blew the LLC off.

[Wapow]

Have your partnership lease the property to a co-owned LLC. LLC is the entity that rents to the public. Should be close to tax neutral, given the pass through nature of the LLC. Also, you need a partnership agreement/LLC management agreement. It's likely more valuable in the long run than having an entity as the lessor on your properties. Even if a somebody with a claim against your LLC can't reach past it to your assets, they can still attach the assets of the LLC. In this case, it would be your real estate, which is a great asset to attach a lien to.

[Danno]

If the OP is not totally fucking confused at this point, he's not paying close enough attention. We have lawyers, CPAs, mortgage brokers, and slumlords all giving conflicting advice, and all doing so in an authoritative manner.

Ladies and gentleman (there's only one here), I give you... the internet!

[tgapp]

If the OP is not totally fucking confused at this point, he's not paying close enough attention. We have lawyers, CPAs, mortgage brokers, and slumlords all giving conflicting advice, and all doing so in an authoritative manner.

Ladies and gentleman (there's only one here), I give you... the internet!

https://youtu.be/k1BneeJTDcU

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[Woodsy]

Prolly better value in BCC

[liv2ski]

If the OP is not totally fucking confused at this point, he's not paying close enough attention. We have lawyers, CPAs, mortgage brokers, and slumlords all giving conflicting advice, and all doing so in an authoritative manner.

Ladies and gentleman (there's only one here), I give you... the internet!

Danno, free opinions are worth what you paid for them and are only used as a starting point for your own thorough investigation. Honestly though, just get the $1M liability umbrella coverage and never look back. The annual LLC Franchise Tax due in California is $800. That paid for my umbrella coverage.

[RootSkier]

Danno, free opinions are worth what you paid for them and are only used as a starting point for your own thorough investigation. Honestly though, just get the $1M liability umbrella coverage and never look back. The annual LLC Franchise Tax due in California is $800. That paid for my umbrella coverage.

$2 million umbrella. Inflation's a bitch.

[Core Shot]

Local banking.
LLC don’t matter.
Personal guarantee on mortgage required. But they don’t care about the holding company.

[easyrdr]

At my peak I owned 7 rental units held in 7 different LLC's. If I had to do it over I would do it the same. Liability sucks, protect yourself.

And in my opinion everyone should have minimum $1million dollar umbrella policy, it's cheap and worth every penny if shit hits the fan.

[BmillsSkier]

LLC don’t matter.

This is patently bad advice.

[Core Shot]

This is patently bad advice.

I meant LLC don’t matter for financing.
If your local bank knows you.

[VTeton]

LLC and if someone else is involved in ownership. You better have an operating agreement with a buy/sell/liquidation provision for when shit hits the fan.

Assume shit will always hit the fan!!!

I've worked on thousands of LLCs. I've seen the fights etc.


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[BmillsSkier]

I meant LLC don’t matter for financing.
If your local bank knows you.

Ah, I gotcha.

LLC and if someone else is involved in ownership. You better have an operating agreement with a buy/sell/liquidation provision for when shit hits the fan.

Assume shit will always hit the fan!!!

I've worked on thousands of LLCs. I've seen the fights etc.


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This.

[goldenboy]

This came up on bigger pockets recently. One point they made was that if it's your personal property and the property value increases, you can use that equity to remodel, or buy another property, etc. As an LLC, you're looking at your cash flow, and you're probably maxing out expenses for taxes, so you might not be able to tap into that equity.

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[BmillsSkier]

This came up on bigger pockets recently. One point they made was that if it's your personal property and the property value increases, you can use that equity to remodel, or buy another property, etc. As an LLC, you're looking at your cash flow, and you're probably maxing out expenses for taxes, so you might not be able to tap into that equity.

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Then again, when you expose your personal bank/investment accounts, cars, primary residence, personal property of you and your spouse to liability by holding the real property in your name as an individual (or general partner, or tenants in common), you may think differently about the ability to tap in to that equity.

Especially in jurisdictions that allow special, punitive or exemplary damages.

At most you should be at risk of losing the underlying sole asset of your single purpose entity LLC, the investment property, not the rest of your life's savings.