Pros & Cons of Using an LLC For Rental Property w/ Matt Faircloth for BiggerPockets

a bigger pocket it's Matt so today we're going to talk about a question I see all the time on the forums and it's even beyond LLC's and what are they and everything like that should I form an LLC for every deal and this is a lot of people you ask a question like should I form an LLC at all right well yes the first but first answer to that question and what is an LLC a lot of the basic stuff that's all out there on the forums and other articles on that we're going to talk about forming an LLC for every deal you do and why you should and one should okay and i-5 pinyin on this I'm sure you see my opinion come out but there are schools of thought on both of them so let's review both schools of thought and we'll get into what I think about okay so the reasons why you absolutely should is if you've got different owners so that sounds like a simple thing but let's say you buy property a with you and your brother Juan and you buy properties B with just yourself or you and your wife or your raise an investor it comes in and sort of some private capital in your deal all those three scenarios are all in different setups and different ownership you should definitely have an LLC for each of those deals that has a different ownership breakdown different percentages different builder benefits different owner rights and responsibilities roles goals and consultation and all that for each owner for each LLC the operating agreement for the LLC will define all of those things yes absolutely if you have different owners right now you don't think about this but this is a good one if you are doing business in multiple states okay states in the in the Union on the Kin the country of the United States you should definitely have an LLC for any state because if you don't you will have to file the LLC that you're in as a foreign business entity in the state that you're working in and in some seats you'll have to have a mailing address in that state somewhere it becomes a pain in the neck so it makes sense enough to pay income tax from state you're registered as they ought to pay state income tax and state your business in so it can cause double taxation for your LLP and so it becomes simpler if you do if you form an LLC that's in the state you're chewing you're doing businesses that's number two now I do this sometimes sometimes I don't it depends on who I'm it actually depends on more on the owners on partner with but fix and flip okay now why would you want to form an LLC for each six inflicted UMass well I answer that question for you folks asking that I don't do it first of all the reason I don't do it on every slip is if it adjust my company just the Durocher group is doing the flip the DeRosa group is an S corporation and neurosis or group has w2 salaries that it pays and it also has business income and I have a video asset you guys will watch a wise way as corporations are awesome where I interview my CPA one BiggerPockets and he not talk about this I'll put into the show notes in the link you got some links to that conversation but that that's why you want to do flips not an analogy was using an escort because it's great tax benefits for doing flips in an S corporation if you don't have an escort but if you don't have W two salaries you're paying yourself and in business and come on top of that then you want to form an LLC for every deal here's why I asked that question earlier only let me answer that question okay if you sell one two three main street to a home buyer and that home buyer is happy to go on down the road and then you start flipping another property the first home buyer could have a liability claim they could have issues come up with themselves or something like that and if they go to purchase it closes down the ante that did that flip and that flip is now behind you and it's done you know and then you do a new flip it's district value for that property and it compartmentalizes the project and doesn't link one project or LLC to another if you were to have a liability claim okay and odds are if you have a liability you will can't hold it your insurance which is another thing we're going to talk about big-time you'll cancel your liability share an insurance or the property sold a while ago by the time if that property was sold so from its protection they closed the door and to you know close the project down it makes us have an LLC for every address it's a bit of a protection a bit of a level of protection that you can have in there I do it sometimes don't run all the time and most the time when I do it because this because I have a partner in the slip but it's something that some people do to compartmentalize the slip so that it's so that whatever happens on this flip can't affect other projects they may have going on or have done in the past okay so I said I okay now it's a big reason why people just let do L LTS on every deal and we're going to discuss this one in great detail but that's for asset protection the school of thought on that is if I own four five six Main Street and that's my rental because one two three main shoot was not flat remember that so four five six which is my rental down the road and I also own a property over here and couple other properties and if somebody were to sue me on a liability claim for a slip and fall on four five six Main Street that person could not come through and affect my ownership on the other property and take my entire portfolio right because the properties are all under one umbrella so they can't go through that LLC and you know go and pull that out a little fuse assets and everything like that right that's the school of thought it's asset protection compartmentalizes your assets so four five six main street and one two three high street and you know one through three second street are all in separate companies okay that is a cool stuff it was a base ten just a moment my friend but now here's the reasons why you should not get an LLC for every deal okay someone's biggest one and it's not required by law you'll have to you know the people in attorney or whatever it would tell you that you have to do it by law is wrong so not there's no law around having to form an LLC for everything you do because there's a there's also this is you know maybe why don't do it is for cost if you form an LLC for every deal there is a filing fee for that LLC at least and setting it up there is a CPA fee for filing at all these tax returns don t people debate well what about single member LLC's and stuff like that I think it's very easy to see through a single member LLC because it doesn't have tax term and so if that can be debated - if you like but you but typically it's not a single member LLC and it has some put several members the cost associated was maintaining that LLC from paying your CPA to ping filing fees to the state feature and can start to add up especially if you're buying a bunch of little small single-family homes or small Maltese or something like that this will become a factor okay now there's a dip in let's hope one other reason why you go with it why you want to not get an LLC for Abigail meaning you want to portfolio properties you want to buy a bunch of properties under one umbrella big reason why you want to do that which in turn means that you don't want to do an LLC for every deal that answer's no for that why would one who put them all under one umbrella or a larger umbrella is because it makes it easier to get loans believe it or not everybody talks about portfolio lenders and stuff like that if you're buying you know fifty sixty thousand dollar houses and renting them out it will be harder to get a lender that one takes fifty to sixty thousand dollar loan right myself a lot of people that are in my part of the world do the bird strategy to buy rehab rent out refinance repeat methods but you'll do it on a small portfolio of properties we'll do three four five six seven addresses at a time you couldn't do that if you're in it if you're doing an LLC for each one of those deals if you come if you portfolio the properties under one LLC I know whatever you're doing then you've now created a loan amount that banks will talk to you about banks don't want to lend fifty sixty thousand dollars they'd rather lend you three four five six hundred thousand dollars so why not create a load of that size we're appealing to them is the same amount of Tim that it worked but it's more fees you know they get to make more money and they get to meet their costs in their gold much easier I think if you have big loan versus a little small loan that it would be to do it on the side so consider that now here's the big conversation okay this is the asterisk Matt Faircloth a strong opinion about these things but about this also been my experience the the reason why is because this is not true okay is that there is that insurance will protect you just as well as an LLC will okay and it's not that it's not sure you don't get asset protection at all but you don't get any more asset protection I don't think in having multiple LLC's for every deal that you do for every single family home that you over for every rental property that you have there is no further asset protection you get in having each deal in one LLC then having a portfolio of properties under one LLC here's why okay if an attorney shoes your LLC because their clients you know a slip-and-fall and you know and I've been in business for 11 years I've had like three slip and falls I've had a tenant claim to piece of sheet rock fell off for stealing and hit her in the head we had a guy that's claimed he slipped and fell on carpet in his apartment right and he broke his back by the way you know this was he broke his back falling on carpet in his apartment okay and they have some of the liability stuff out there too so we've been unfortunately at liability claims many many times one time and that was has anybody else that I know did the attorneys suing try to pierce the corporate veil okay meaning to try you reach into the LLC and get a hold of the assets to try and propose on the assets or even further does it gets really scary to pierce the corporate veil and come after me personally to try and get my feel my home or my personal cash or my car or whatever which is what some people worry about that's why this whole LLC thing is they're like oh I don't wanted to come get my stuff to come get my house or to file bankruptcy because the tenants klipse insulting my property none of that's going to happen and here's why if my attorney friends out there I love you but attorneys are lazy and attorneys maybe they take just they do what they have to do and they're going to go after this they're going to go after insurance you have to generalize over the insurance and just every claim that I've had I even have one attorney just submit a letter that said a my clients can assume please submit this letter to your insurance company through we can work out an arrangement that's it didn't even want to me really they just sent a letter saying that hey words were going to sue you and send this letter to your insurance company can you believe that so I actually called the lawyer on that when it said hey if you're going to send this letter you might as was just unpacking so it's my insurance company easy to go ahead sue me and they did by the way you let it go you did it has a bogus claim but attorneys that have real conversations and you know people that have real slips and falls and stuff like that Nestle insurance is there for and so and there's large insurance policies do you have on your properties and by the way you have the larger these portfolios get the larger insurance policies you should get to cover potential general liability claims so you start out maybe you have a million coverage with two million aggregate meaning that two million is the most to sell cover for multiple occurrences right but if you have multiple properties you can up it to take two million or four million or go up there talk to your insurance your insurance agent about what the sale for multiple properties it even think of umbrella insurance coverage you can get you get a lot of insurance and it's going to be cheaper and running around with a bunch of LLC's right so insure my friends is the ridge the reason why and it's just the way the world works fortunately unfortunately that insurance will step in and take care of you way before an attorney or lawsuit is going to get through all these this LLC stuff and to go and try and take you know the equity to another property or put a lien and by the way it will take them years to do one of those foreclosure filings and to come and put a lien and closing a property and to come and get your stuff and everything like that it would take them years to do that where an insurance claim could take anywhere from six to nine months okay so maybe they're waiting maybe their time maybe they just know where the money is right so anyway that's why I say I recommend no for an LLP for every deal there's other poke out there we'd love to get into a conversation with you about it other schools of thought I know and I'm not a little wild well bless sometimes in my business but but I'd be happy to go into conversation with some you folks a little more conservative if this is a good thing to do let's let's talk about that so as always if you want to leave some comments down below I love to hear your thoughts yay or nay on this as always always got a shirt appreciate you guys watching and getting a conversation with us and have a great profitable week

Channel: Derosa Group

Views: 156,761

Rating: 4.8771329 out of 5

Keywords: bigger pockets, derosa group, llc real estate, rental property, pros and cons, llc for rental property, using an llc for rental property, using llc for rental property, the pros and cons of using an llc for rental property, real estate llc for rental property, investing in real estate with no money and no credit, rental property tax deductions, real estate llc pros and cons, llc for real estate investing, llc for real estate flipping, rental property investing, real estate llc

Id: edHaGYXhH1I

Length: 13min 50sec (830 seconds)

Published: Thu Mar 23 2017