Should You Get an LLC For Your Real Estate Business?

you know perhaps the most common question I receive from BiggerPockets members is should I set up an LLC for my real estate business it's a good question because I'm sure you've heard the horror stories of landlords and other investors getting sued by tenants and losing everything you didn't spend years learning about real estate growing your portfolio and figuring out how to be an effective landlord only to lose it all to some deadbeat looking to gain the legal system right however LLC's are also highly misunderstood in the real estate space because they're just so darn complicated what works for one person might not work for you and what works for you might not work for me well I could give you like the simple answer of talk to an attorney I wanted to have a little bit deeper so you understand this of course I am neither an attorney nor CPA so please take what I'm saying as my own personal opinion and get a qualified person to help you with legal discussions all right well my name is Brandon Turner author of the book on rental property investing and a host of the BiggerPockets podcast and in this video I want to walk you through the world of real estate in LLC's of course if you like real estate content be sure to subscribe to our Channel and click that little thumbs up button below this video letting the world know that this here is a good one all right now this video can be divided into really like three general chunks first I'm gonna explain what an LLC is and why they're so popular second I'll explain the downsides of an LLC and why you might not want one and third I'll walk through some other options you have for protecting your assets okay first let's talk about what an LLC is and what it isn't an LLC is not a get out of jail free card you can be sued with an LLC and you can lose everything an LLC is not designed to prevent you from ever being sued an LLC is designed to help you manage and contain the fallout from that lawsuit so according to the United States Small Business Administration SBA a limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and attacks efficiencies and operational flexibilities up a partnership according to the definition and LLC's benefits are threefold first limited liability if you were to get sued your liability then nor the damage to your wallet may be contained to the assets within the LLC not everything else you own in other words if an LLC is set up right and you get sued and lose the creditors problem won't be able to come and take your personal house to your car or garnish your w-2 job wages of course there are way as a judge might pierce the protection of an LLC and go after those things if every Iowa's not dotted and every T was not crossed all right the second part of the definition tax efficiency the LLC is fairly easy to handle during tax time especially if it's a single member LLC which basically means you own it or you and your spouse LLC's are known as pass-through entities which means the income and expenses flow magically through the LLC and are instead reported and paid by each individual member on their personal income statement there is no like corporate tax like a corporation may pay this can definitely make taxes easier and less expensive then let's say a big you know C Corp that's said while a single-member LLC does not require its own business tax return a multi-member LLC with partners does don't make that mistake now third operational flexibility an LLC is fairly flexible in terms of running it you don't need a thousand documents you don't need a bunch of stock issued it's fairly easy to set up fairly inexpensive depending on where you're at so it's easy to see why an LLC might be advantageous to a real estate investor I mean let's just say a tenant slips on the stairs BAM and broke their hip right the tenet decides to sue that landlord for neglect and the court sides with the tenant for whatever reason let's say your insurance doesn't cover all the legal penalties and you as the owner are required to pay five hundred thousand dollars out of pocket to the tenant ouch well if you own the property without an LLC the tenant could have your wages garnished and force you to sell all your properties and drive you to bankruptcy you probably end up eating cold beans out of a can under a bridge while pigeons sit on your shoulder it's not a fun place to be on the other hand if the owner of that property was Mainstreet Investments LLC then the LLC is the owner getting sued the courts could make you sell that property but they likely won't going to make you sell the other properties owned by other LLC's they won't take your primary residence you will be eating cold beans of course this example is a bit overdramatize and unlikely to happen and I actually don't mind eating cold beans but it does illustrate the fear that drives most investors to want an LLC however even though it sounds like it might be I might be encouraging you to go get an LLC right now hold your horses there are some other important factors to consider so LLC's can be awesome but let's talk about the problems with an LLC and real estate all right so LLC's are great I'm not gonna deny that however it might not be great for you there are some fairly important considerations to make before you jump into the LLC bandwagon that could affect your decision for example and maybe most importantly lending on an LLC is almost impossible for residential properties that's right if you plan on using a loan to acquire an investment property like a single or duplex triplex four-plex it's unlikely you can have an LLC on the property most residential lenders simply will not lend on a property inside of an LLC that makes you have to go to a commercial lender has higher fees higher rates shorter terms something you probably don't want to do now many investors simply transfer the ownership of the property into an LLC after purchasing the property in their own name but that does present some risks as well if the bank finds out and they probably will due to insurance reasons they get updated to that they might call your notdo because of the due on sale clause of course you didn't actually sell the property but you did transfer the title from one entity to your name to another your LLC now in the past this has never really been a problem as banks generally turn a blind eye to this but it seems it could change in the future and it's really only expected to get worse as interest rates go up so if you plan to go that route just I recommend speak with your bank get permission in writing to transfer the property into an LLC this is really the only way you'll be truly protected from that dreaded due on sale clause transferring from you to an LLC all right one other issue with an LLC will ask yourself what are you really protecting and spending all this time and energy doing new investors automatically think they need an LLC to protect themselves but when you're first starting out how much wealth do you really need to protect right then I mean think about it you've got a property here maybe two with very little equity you got car payments you don't have a six figures in the bank you want to go through all the trouble to protect your wealth now finally there are also a lot of additional documents and paperwork and hassle when working inside of an LLC just something to consider you know while LLC's are definitely easier than corporations when it comes to paperwork and taxes they still add a lot of complications to the mix this is especially true if the LLC contains several different unmarried members as individual tax returns are not enough you have to do you know business tax returns it's a mess setting up the LLC takes money as well maintaining it takes money filing taxes takes money and that property you're probably not making that much cash flow anyway think of this imagine spending two grand a year on this LLC and the cash the house only cash flows 1,200 a year yeah the LLC's can turn a good investment into a bad one right okay so now that you know some of the pros and the cons of LLC's let me dish out some cold hard truth here to all the new investors here's the thing that I've noticed people like to set up LLC's because it makes them feel like they're taking action but in reality they aren't in fact the idea of an LLC is probably the number one excuse people have for not taking action I see it almost every day on bigger pockets I want to invest in real estate but I don't know what to do about an LLC so I'm gonna sit on the couch and eat cold beans now help sir right the truth is people use the concept of an LLC as an excuse so they don't have to take action because it's easier to say I don't have an LLC yet so I can't go and invest but it is to say I'm scared but that's often the truth right yes LLC's are valuable yes I have them yes I recommend talking with someone about setting one up sometime however LLC's are no substitution for taking action if you don't have any well to protect maybe you don't need an LLC and when you find yourself building wealth and creating a sizable business well then maybe that's when an LLC will come in most handy for you by that time you'll be able to afford the proper attorneys and CPAs who can handle setting the LLC up right and maybe at that time they tell you that you really don't need one or maybe they you do need one or maybe they're gonna set you up with something completely different you're not gonna know unless you ask alright finally let's talk about some of the other options besides LLC's how do you protect your assets if you decide not to get one right what should you do instead of an LLC looking back at the three main benefits of an LLC there's the tax efficiency the limited liability and the operational flexibility so what other legal structure can help you protect yourself from losing personal money if you get sued and is easy to manage and pay taxes I'll suggest two things insurance and leverage let's talk about both number one insurance that's right good insurance can help you avoid eating cold beans under a bridge with the pigeon right get the right insurance and get enough of it talk to a good insurance agent about your options and let them know your fears they'll be more than happy to sell you the best policy possible to leverage when someone is gonna go sue you like what is their goal I mean honestly right to get as much money from you as possible of course that's why leverage can actually be a large help in protecting your assets by leverage I mean having like little equity at low down payments for example if you owe a 100k on a property and the property is only worth a hundred and ten K you are likely leveraged pretty high right people often look at that like it's a bad thing but an asset protection it's actually a huge benefit what kind of lawyer is gonna go go after someone spend hundreds of hours litigating and force them to sell their rental only to have no blood to be squeezed from that turnip on the other hand if you own a rental property free and clear and it's worth a hundred and ten K suddenly the idea of suing you becomes much more exciting for an attorney because they know there's a ton of money for them to take I'm not saying you should go up there increase the leverage on every property you own right that's all we have insurance but what I am saying is that when you're first starting out you're likely gonna be highly leveraged thus you're not a very big target for lawyers to come after okay so let's wrap this video up the question still remains should you get an LLC well you're not required to have one generally but I want to end this section with an answer that everyone hates I don't know talk to an attorney and a CPA CPA cuz only they're gonna be able to tell you if you're ready for an LLC you know it's a powerful legal entity but only if it's set up correctly and only if it actually benefits you and there's no easy way for me on this video to tell you what's the cases in your life however I would encourage you not to let the LLC question stop you from moving forward with your real estate ambitions don't let it be an excuse don't let the fear of a lawsuit stop you from achieving your dreams if you wanted LLC go get one go ask the right person now if you liked this video smash that thumbs up button hit the subscribe button and you'll get more content like this all the time for BiggerPockets com my name is Brandon Turner sign [Music] Tata

Channel: BiggerPockets

Views: 499,059

Keywords: biggerpockets, real estate, real estate investing, investing, rentals, rental property, investing in real estate, income property, bigger pockets, passive income, llc, should you get an llc, should i get an llc, llc for rental property, llc for real estate, llc for dummies, what's an llc, pros and cons of an llc, llc pros and cons, llc pros and cons for rental property, real estate llc pros and cons, what is an llc corporation, setting up an llc, how to protect your assets

Id: 9Ol2W8SE8b8

Length: 11min 15sec (675 seconds)

Published: Tue Jul 31 2018