Buying Real Estate with an LLC: Must Watch

carlton should i buy real estate in my name should i buy real estate in my llc what happens if i don't have an llc when i buy real estate i don't even know like i can't even tell you that these are the typical questions that come up by most new real estate investors and it's totally fine to have these questions guys my name is carlton dennis welcome back to taxes made simple and today we'll be talking about whether or not it makes sense for you to buy real estate inside of your llc or if you should buy real estate in your personal name let's get started [Music] now in order to understand whether or not it makes sense to buy real estate in your personal name or to buy real estate in an llc we first have to understand what llcs are and what's the purpose of needing them for real estate so let's talk about that the first thing that we need to understand is what is an llc so let's get started an llc is a limited liability company you can either have a single member llc which is just one individual inside of this business structure or you can have a multiple member llc which is you and a partner or many partners either way an llc is a great vehicle for asset protection so let's talk about why real estate investors go down the road of wanting an llc if you didn't know when you decide to purchase rental real estate you go on the title of the property the title of the property is just showing who owns the asset one of the things that you need to know about when you own rental real estate is that your information can also be public information really that's correct when you invest in a rental property taxpayers and individuals can view that property and its data online by pulling it up through the county assessor's office at this point in time they can obtain information about the owner of the property and when that property has transitioned from title to title from one individual to another individual what this means is if you purchase that property in your own name the tenant who is living in your property can go access the information about you and look you up to know who you are what you do where you live and what is going on with your situation and to me and to many of my real estate investors that is a scary picture and not a picture that we want to have happen with our rental real estate so how do we avoid falling into a trap in a situation where tenants can have access to our information online and have the ability to look up how much money we make and can even decide based on looking at this information whether or not they want to pursue legal measures against something that could have happened at that problem now before we jump into the llc and how it protects you i want to go back into what happens when you don't have an llc many taxpayers get umbrella policy insurance so i first want to talk about what umbrella policy insurance is umbrella policy insurance is a type of personal liability insurance that covers claims in excess of regular homeowners auto or watercraft policy coverage umbrella policies is the most common type of insurance that you're gonna get when you become a homeowner however is umbrella policy insurance liability coverage we want to break this down today in the event that you go through a lawsuit your umbrella policy assurance is going to be able to cover incidentals maybe there are some damages that occurred at your property maybe there were some things that might have broke this is exactly what an umbrella policy insurance is for but the umbrella policy insurance does not protect your information on the county's assessor's office and it doesn't make you less viewable to the tenant that is living in your rental property what this means is is umbrella policy insurance can cover incidents and accidents that could happen at the rental property and can protect you but it doesn't protect you from the tenant deciding to sue you and pulling your information online and knowing who you are what this is the most important aspect that leads into many lawsuits when the tenants know the person they're suing they're more inclined to make a lawsuit against that person they can physically see and if they are able to obtain your information we are living in 2021 they can research your social media accounts they can research your businesses your family members and know exactly how much income you possibly could be sitting on in order to make sure that you're not only protecting your cash flow your family's wealth we want to make sure that we have an llc an llc separates the liability from yourself and from your business when you are getting sued without an llc technically everything is liable that you own if you have personal bank accounts personal checking accounts iras things of that nature that are sacred to you they are liable in the event of a lawsuit however in an llc you are only liable to the extent of what is inside of the llc the assets and the debts inside of the llc this is a powerful key difference so let's just say that we decided to set up an llc for our rental property how are we protecting ourselves from those who didn't have an llc when they decided to invest in rental real estate i don't know you gotta ask them i don't know you gotta ask these guys i don't know first thing that we have to understand is when you decide to invest with your llc you have now taken over the title of the property as a business owner that could have a name different than the name of you what this is going to do is this is going to provide some ambiguity this ambiguity protects you in the event that clients are looking up your information online through the county's assessor's office if they go online and see that rental legacy partner builders is owning this rental property they may be hesitant to file a lawsuit the reason why that these taxpayers and tenants are more hesitant to file a lawsuit is because they are less likely to win against a company that may be bigger than themselves think about psychology and and your own personal feelings if you knew that google apple corporation woodson corporation johnson and johnson corporation owned the building that you were living in would you try to sue that company knowing that you're gonna go in to win or do you think when you sue that company there's a probably a good likelihood that this could be a legal battle for you and the people on the other side of the table might have more money to fight you and this is what typically protects the llc investor the llc investor is protected because they are investing with their llc now you might have come to know that it's pretty hard to invest with your llc when you go into your mortgage lender i don't know the reason why it's hard to invest with an llc is because an llc may not have business credit yet and may not have income reports yet when you do not have credit or income reports flowing through your llc it is going to be very hard to qualify to get a loan underneath your llc your lender may not allow it seriously part of the reason why is you may not have established what's called a paydex score a paydex score is similar to a social security score except for business a paydex score ranges from zero to 100 and when your paydex score is 80 or above lenders such as bank lenders have a great time lending money to you because they believe that you show a good transaction history and a good credit history inside of your business part of the reason why the paydex score is extremely beneficial for flipping real estate and wholesaling real estate is because you can borrow opm other people's money and be able to utilize this income to purchase additional real estate through your llc with the real estate that you're flipping and the profits that you're earning you're ending up working with house money and never utilizing your own money to make money this is when real estate can become very powerful this is when leveraging debt in real estate can become powerful so the llc can be a vehicle in which you can do this underneath in order for us to be successful in buying real estate in our llc we want to have a great relationship with our title and escrow officer part of the reason why we want to have a great relationship with the title and escrow officer is because in the event that we have an infantile llc an llc that has not been established for very long and our lenders do not want to lend to it because we don't have a strong enough paydex score and enough business credit we might need a title and escrow officer to help us process what's called a quick claim deed a quick claim deed is a legal instrument that is used to transfer interest in real property the entity transferring its interest is called the granter and when the quick claim deed is properly completed and executed it transfers any interest the grantor has in the property to a recipient called the grantee this is how a quick claim deed is done when you purchase real estate you can do a quick claim deed to title your rental property in the name of the llc before your property closes avoiding having your name on the accounting assessor's office online and protecting your asset this is one of the many workarounds that we leverage in tax strategy for our clients who are buying assets on a regular basis now one of the many questions that comes up when purchasing rental real estate is does it make sense to have an llc for every single investment property i want to address this question are you serious sometimes it will make sense for you to think about having an llc for every single investment property and here is the reason why i like to look at llc's like baskets of eggs every single time that i am putting an llc into my basket the basket is getting heavier and what that means is i'm taking on more liability the more rental properties i stuff inside of an llc the more liability i have if i have equity sitting inside of my llc this equity is at risk of being taken in the event of a lawsuit when you are being sued by someone and you have an llc you have separated your personal assets from your assets that are inside of your actual business so if i'm getting sued any assets that i'm being sued on are going to be the assets inside of my llc's if i have four or five rental properties sitting inside of my llc even though i'm being sued on one rental my other three or four rental properties are susceptible to also being involved in this lawsuit case i could lose money and possibly lose my other rental properties because i lacked the the wherewithal to think about setting up another llc so this is why we have to evaluate llc's very strategically if we place too many rental properties inside of one llc or if we have too much equity inside of one llc then everything can topple down in an event of a lawsuit now when does it make sense to have multiple properties inside of one llc this is when you're dealing with very very very inexpensive properties i'm talking about properties out in the midwest that you're buying anywhere between 50 to 100 000 and the tenants you're aware of who they are maybe single family homes with families in them there's less stress and part of the reason why i'm saying these cheaper properties you may group them into one llc is because establishing one llc may impede your cash flow from what you're receiving on the property i want to talk about the fees that you have to pay when you have an llc so i'm gonna pay you a hundred dollars we here live in the state of california the state filing fee here in california is eight hundred dollars just to have our llc on average if you have a single member llc you're gonna pay anywhere between six hundred dollars upwards to fifteen hundred dollars to file your tax returns so having an llc you're already gonna come out of pocket in excess of two thousand dollars is that impeding your cash flow on a fifty thousand dollar sixty thousand dollar property heck yeah buddy absolutely it is so this is why sometimes you might want to group two or three properties into one llc and wait until you develop more cash flow into more rental properties or you're in the realm where you can 1031 exchange into a bigger asset that you can place inside of one llc one thing is for certain is that we should always have an llc when we're investing in rental real estate because if we are in the business of investing in real estate then we're in the business of protecting our wealth and growing it strategically and there's ways to go about doing it the right way and there's ways to go around skipping the right steps not setting up an llc is skipping a step because you'll be hating yourself and kicking yourself in the butt when you get into a lawsuit and it was as simple as just setting up an llc to protect your children's bank accounts the college bank account and everything else you have going on with your family there is nothing more important with real estate than passing on legacy that's a reason why many people get into real estate i can grow passive income have generational wealth so i can leave a legacy so if we're trying to leave a legacy then it makes sense for us to take the correct steps to make sure that the legacy actually gets passed down to our heirs my name is carlton dennis and i want to say thank you so much for joining me on this video today on why an llc is important to have when you're investing in real estate and how to go about investing in real estate through an llc but if this video raised more questions i urge you to go back and look at my other rental real estate investing videos in my youtube channel and you're more than welcome to schedule a free consultation by visiting the link below if you like this video comment like subscribe and i look forward to seeing you on the next video take care [Music] you

Channel: Karlton Dennis

Views: 197,195

Keywords:

Id: 4gmHXlejdE8

Length: 14min 8sec (848 seconds)

Published: Fri Feb 26 2021