How Many LLCs for Rental Property Investing?

Welcome back to taxes made simple I'm your host  Karlton Dennis and today we are going to go over   how many llc's you need with  your investment properties   now if you're someone who already owns rental  real estate you may have already set up an   llc and you might be wondering if it makes sense  to have an additional llc for another investment   you could be purchasing or you might be someone  who hasn't purchased rental real estate yet   and you want to know if it makes sense  to buy a real estate inside of an llc   or if it makes sense to have an llc for every  single investment property so in this video   today we're going to talk about that we're also  going to discuss whether or not it's going to make   sense for you starting out to have multiple llc's  to build your wealth strategically let's dive in   now today i'm going to be behind my ipad share  with you guys a little bit more conceptually   why i look at llc's like baskets of eggs and  so we're going to jump over onto the screen   now when i think about asset protection the  first thing i think about is having a revocable   sorry for my spelling a revocable living trust and  part of the reason why i want to have a revocable   living trust early on is because i know that at  the end of the day if something were to happen   to me if i have children my wife i want to make  sure that my wife and my children do not have   to deal with the banks and wait six to 12 months  to figure out how the banks are going to disperse   my wealth to my children and how much the banks  could possibly take from the wealth that i   earned it would be really horrible if i got in a  position where my property that i worked really   hard to repair and improve and earn rental income  from that i wanted to pass off to my children   that it actually ended up going to the banks first  and that my children ended up actually paying   more taxes all because i didn't set up a revocable  living trust and it can also help your children   get the step up in basis so at the very least  we want to have a revocable living trust   everything else comes underneath the trust such  as llc's and assets underneath the llc's so what   i do directly after drawing a revocable living  trust is i like to draw a line down the page   i separate my assets from my operations why do  i do this well i'm a business owner and i'm also   a w-2 employee and i know that anytime that i'm  working for my money that is called earned income   it's different from passive income so i am on  the operational side as a w-2 employee and i'm   also on the operational side with my s-corporation  for tax alchemy now i also own rental real estate   and i also own syndication real estate and  the assets i own are sitting inside of llc's   so i keep those assets on the left side of my  page knowing that they're all passive okay now   let's just say we have multiple rental  properties right let's say we have three and   let's say these properties that we purchased are  in Indianapolis indiana and let's say i only put a   down payment of $20k down on a $70,000 property so  i paid about $14K for each of these properties so   let's say this first one here is $70k the second  one here is worth $70k and this third one here is   worth $70k okay now we can tell right off the bat  that these three properties in total have about   $210,000 worth of value right of course i  owe the banks i know the banks kind of have   a little bit of stake in my property as i'm  paying back the lenders there's about $210,000   here on the table between these three properties  now if i were to establish an llc for these   properties i have all three of my rental  properties sitting inside of one llc you may   say Karlton isn't that a little bit risky for you  to have all of these properties inside of one llc   because if something were to happen to this first  property and this tenant decides to sue you aren't   you likely to be sued and lose money from this  property you might have to sell this property   in the event of a lawsuit the answer is yes i  could but i have to realize something as well   in a perfect world i am going to have llcs for  every single rental property but i also have   to realize how to build wealth strategically  and in certain cases it may not make sense   for me to have multiple llc's for very cheap  low market properties that are only 70 000   knowing the cost associated with me having  llc so we have to take into consideration   the expenses associated with having this llc  right i have to file the tax returns for the   llc that's going to cost me anywhere between  600 to 1000 depending on who you go to you're   gonna have to pay the franchise tax for the llc  if it's in california that's automatically 800   right and then you also are going to want to  make sure that you're setting up the llc which   could cost you about a thousand dollars as well so  all in all in you could be at about 2 000 to 2500   just to get your llc operational and to have  it going on a yearly basis now between these   three properties they may be only spitting off  about two to three thousand dollars for you   a year and you might say Karlton well does it  make sense now for me to set up an llc for every   single property if i'm only capitalizing on two  to three thousand dollars a year in passive income   from the amount of money i'm receiving  from my property after paying the mortgage   after paying my insurance after paying all the  other things that i have to pay on this property   doesn't make sense for me to to cough up this  additional 2500 every single llc and the answer   is probably gonna be no so this is when we have  to start looking at llc's like baskets of eggs   how many eggs do i want sitting inside of one  llc which means how many rental properties do   i feel comfortable having inside of one llc in  the event that someone could come and knock over   my baskets of eggs and everything could be  liable and susceptible to being taken right   so let's go over another example let's say that  these properties that we had now instead of being   70 000 let's say we had a property that's  100k and then we have a property that's 500k   and then we have a property that's 1.2 mil  okay now we're in a situation that's a little   bit different before we're in a situation where  we have three properties but this total value   of these properties is upwards to 1.7 1.8 million  this is where i'm starting to get a little nervous   i have 1.8 million dollars worth of  assets all sitting inside of one llc   it's kind of getting hard for me to think  that this is a smart thing for me to do   and the reason why i'm saying that is because if  i'm someone who can afford a 1.2 million property   if i'm someone who can afford a half a million  property then i might want to look at separating   those two assets from my little 100 000 property  that really comes with about a 20 000 down payment   so my wealth here is all jumbled up inside of  this llc and if anything were to happen where my   tenant living in my 1.2 million dollar property  all of a sudden slips and falls or a light bulb   falls out of the ceiling magically and hits him  over the head and he decides he wants to sue me   he can now sue my llc for everything that is  inside of my llc the equity i own in my 1.2   million property my equity inside of my half a  million dollar property and the equity i have   in my hundred thousand dollar property all can  be susceptible whether the properties are in the   same state or they're all in different states  if i place the title in the name of the llc for   every single property i am now in a position where  i could get hurt so this is where we have to start   setting up some rules for ourselves when do we  start moving things out of one llc and separating   them to multiple llc's this answer is going to be  different for every single person and part of the   reason why is because it all depends on when you  bridge the gap to getting into rental real estate   you might be a person who is in your mid 40s  and now you're just now deciding to start this   whole real estate journey or you could be someone  who's young and doesn't have a lot of cash you're   trying to get into real estate so you can get to a  place where you have a lot of cash so the barrier   to entry determines when you're going to start  setting up llcs and whether or not you're going to   have multiple llc's as you're buying real estate  if i'm someone who's sitting on money and i'm in   a great position absolutely i'm going to have an  llc and buy my rental properties in an llc and   sacrifice the extra money the 800 to california  the the tax preparation fees to have my llc   knowing that i'm in a great position to start  things off the right way with the best asset   protection now if i'm someone who's sitting on  very little cash i want to take action and i want   to take action in the best ways possible insurance  is going to cover me for accidents and incidentals   it's not going to protect me in the event of a  lawsuit but it is going to cover me for accidents   and incidentals and i could still be liable in the  event someone tries to sue me i haven't separated   the liability from myself because i didn't set  up an llc but at least i have insurance right   and this insurance company can come in support  me help me pay for something in the event that   something arises as i'm getting started out and  as an investor and maybe as an investor early on   you're not buying huge apartment complexes  maybe just because you can't afford it yet   so you are buying some of these cheaper properties  in the midwest to develop your cash flow   before you maybe 1031 exchange or decide to  sell those properties to get into another one   so when you are acquiring real estate and you're  starting out one thing is for certain you do   need to have an llc but the next thing that  you have to take into consideration is what   are the expenses that i'm going to have to have  this llc and is it going to impede my cash flow   because i'm running a business and so that is  important we want to be a profitable business now going back to what we have here on the  recording keep in mind that we put the operations   on the right side so if you happen to have a  wholesale business or you're flipping real estate   this is considered active income not passive  income and part of the reason why is because when   you're doing wholesaling you're hustling you're  getting on the phone you're buying a motivated   buyer you're getting property under contract  with a seller and you're flipping a property   pretty much without ever owning the property that  requires work requires you getting on the phone   and requires you doing something wholesaling is  a job just like flipping's a job the difference   between flipping is you actually own the property  and you're making repairs and then you are the   person that's selling the property yourself so  you're part of the entire transaction but anytime   you're doing wholesaling and anytime you're doing  flipping you're going to want to do this out of an   entity structure as well most of my whole sellers  and most of my flippers start out with an llc   and then we switch their llc to an s corporation  when the benefits outweigh the cost and the   reason why i say we start out an llc and  then switch to the s corp is because a lot   of my clients who get started in wholesaling  or get started in flipping they have these   extravagant goals to become the multi-million  dollar flipper the person that they saw   on tv the tv show that they were watching they  they're so motivated to make tons of money in   flipping one thing you have to understand when  you're getting started flipping is you will learn   a lot getting started in flipping you'll have some  pitfalls you'll have some hurdles and you'll run   into some mistakes where you don't end up making  as much money as you thought you could make   rather than starting out as an s corporation and  filing taxes as an escort which is more expensive   and paying to have an S-Corp which is more  expensive we start out as an llc and then we   grow our income inside of our business typically  you want to get your net income after all expenses   to over 40 000 so we can start switching you  to the escort and you can take a salary out of   your business not only does it help you reduce  your self-employment tax which i've discussed   on multiple videos if you don't know what  self-employment tax please visit one of my   other videos but it will also allow you to get a  deduction when you decide to pay yourself now the   next question that's probably coming up in your  head is Karlton but now that i see that you have   this idea around not having too much equity inside  of an llc and that you view it as a basket of eggs   so where should i set up my llc should it be in  Delaware should it be Wyoming should it be nevada   i want you to understand something first things  first i'm an enrolled agent which means i have the   highest designation that the irs physically allows  but i'm not a tax attorney but any tax attorney   any type of attorney will tell you that it makes  sense to set up your rental property in the state   you own your rental property and part of the  reason why is because when you choose not to   you're categorized as a foreign entity to that  particular state which means that you're going   to end up still having to file the state filing  fee in that state you're still going to have to   pay the state filing fee in your original  state plus there's going to be additional   documents that we need to file inside of your tax  return that ends up making your tax return more   expensive with your cpa or your enrolled agent so  before just jumping onto the delaware and wyoming   train because you heard about all the beautiful  benefits they can give you and how your name is   going to be hidden underneath your mattress right  first do some homework on why it might make sense   to set up your llc in the state that you own your  investment property okay now it's different than   when you're operating as a wholesaler or flipper  where you live and where you reside is where your   entity structure is set up it doesn't matter if  you're doing online sales you're doing e-commerce   your entity structure is going to be set up in the  state that you earn your income and if you're in   nevada california texas then that's the state  where you set up your entity as a wholesaler   or a flipper now keep in mind llcs are just one  vehicle for asset protection on top or underneath   the revocable trust right so you have this layered  effect here kind of like a pyramid where the   revocable trust sits on top then there's the llc  and then you have your asset which is the rental   property underneath now real estate is going  to continue to be one of the best asset classes   to invest in you need to have a tax plan before  jumping into real estate if you have any questions   on whether or not an llc is right for you whether  or not you should be setting up multiple llc's   whether or not you should be considering delaware  nevada wyoming or texas feel free to schedule a   free consultation by visiting the link in my bio  with my team also if you like this video and you   want to learn a little bit more about real estate  taxes and how it all plays into you building   wealth feel free to like comment subscribe it'll  help out the youtube algorithm so i can continue   to create powerful content like this for you  i look forward to seeing you on the next video

Channel: Karlton Dennis

Views: 65,145

Keywords: llc, realestateinvesting, tax, taxstrategy, taxes, realestate, market, investing, investments, buyingproperties, LLC for real estate, do you need an llc, wholesale with an LLC, investing with an LLC, how many LLCs, putting property in an LLC

Id: 6QUYL-f7dKk

Length: 15min 52sec (952 seconds)

Published: Fri Apr 30 2021