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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 proper
Thanks for your comment Agueda Poczobut, have a nice day.
- Zonia Nakada, Staff Member
as a real estate agent you're probably really good at selling properties but you haven't probably thought much about how to save money on taxes or how to structure the business so that way that you don't end up in a bad situation for legal liability purposes so I have actually represented real estate agents before or when they've got into really hot legal trouble and the one thing that runs up time and time again about it is that somebody bought a property that had something wrong with it and what do they do they turn around and sue everybody right after they find out that the property went sideways now we're always gonna hope that your brokers insurance is gonna kick in to be able to help protect you but in the meantime if they decide that you intentionally misled somebody or did anything that's egregiously wrong in that and that's all their decision by the way your insurance won't cover you and this is where you need an LLC structure to step in to protect you so the LLC structure is very crucial to be able to give you that extra level of protection so you can know you can rest easy at night but even more importantly it's there to be able to help you save a ton of money on your taxes and let me show you how so what you end up doing is is that you form an LLC in the state of wherever that you're operating as a real estate agent and this company is gonna be the one that's gonna be your face to the world it's not gonna own any assets all its gonna do is be able to serve between as a buffer between you and the rest of the outside world so this is the one that's gonna send emails to people you need to hire any contractors to be able to do anything for you otherwise just gonna be known as like your face for everything that happens right it's also gonna be the one that's gonna take in any of the payments that are being made so if anything happens to this LLC you end up to the lawsuit your worst case scenario would you shut that LLC down you start up a new one you don't have to worry about that lawsuit freaking phenomenal right you hope the insurance is there to protect you but you don't have to rely on it in the meantime all the money that you have gets paid through to this LLC so if you watch me of my tax videos what you would know is is that if you're making over $50,000 a year what you would do is is that you would take this as an S corporation tax election and this is going to sell help save you on self-employment tax to be able to help you save at about 8% off of what you would normally be making your taxes now once you start making over one hundred and thirty thousand dollars a year there's more advanced structures to be able to use but most people fall into that 51 30 K range so that's what we're gonna focus on for here so one thing you can do is is help save yourself 8% of your taxes just so that one strategy alone as a real estate agent would you can also do is now you're an LLC right you have your own business here you're the only employee of your own LLC in this circumstance because your broker is actually hired your LLC to be able to do those services and what you're able to do then is also establish your own solo 401k which is going to be able to save you up to fifty six thousand dollars on your taxes every single year now with your solo 401k guess what you're able to do you can go make tax-free investments to go buy real estate and you can get financing underneath your solo 401k you can decide that you want to become a hard money lender and make ten fifteen twenty percent interest on the money that is all inside of your retirement account by loaning it out to other people through bridge loans mezzanine financing or the network of connections that you currently have so the net effect of this guys is that as you're making money into your LLC always be able to classify this LLC as an S corporation save you money on self-employment taxes as a real estate agent also consider using a solo 401k to help save you fifty six thousand dollars a year on your taxes just right off the top to be able to then turn around and make whatever investments you want to with that if you ever need to be able to get take money out you can actually loan yourself back up to fifty percent of the value of your solo 401k in cash directly to you so just because you put into a retirement account doesn't mean you're not gonna have the cash there I'm in case you ever need it so this is the number one strategy that every single real estate agent should be using right now to save money on taxes to protect themselves from liability hey thanks for watching this video if you want more high quality content just like this you can find it here in our youtube channel or going to our website royal legal solutions com we have a ton of free content from our blogs or videos the podcasts that I have been featured on whatever question you have we're gonna have it there for you you
Thanks Bruno your participation is very much appreciated
- Zonia Nakada
About the author
I've studied silviculture at Clarion University of Pennsylvania in Clarion and I am an expert in polymer physics. I usually feel chipper. My previous job was casino pit boss I held this position for 3 years, I love talking about volleyball and drone flying. Huge fan of Hayden Panettiere I practice vault and collect crater critters.
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