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hi Clint Kunz here and in this video I'm going to discuss the first LLC you should set up when you're looking to invest in real estate so with that let's get started alright guys when it comes to setting up limited liability companies there's a lot of information out there on the internet about setting up an LLC in your home state what type of LLC you should set up des Matta Delaware Wyoming you name it so I can see how it's can get confusing but here's what I want you to think about when you're going to create a business structure one of the first things that I always focus on is keeping my name off of title or off of that business unless I'm going to be out there actively promoting myself like Clint Coons com or you know Andersen business advisors where I want people to know that I'm associated with that business entity there is no reason why you should have your name tied to your limited liability company that is going to own rental real estate recently I was featured I didn't know this at the time on a segment on NPR where they were talking about privacy of limited liability companies and in this hour and a half long segment that they did discussing the fact that tenants cannot in certain circumstances find out who the owner of a limited liability company is that actually owns the property how troubling that is for these tenants who can't find this at find out this information now I didn't quite get the gist of the interview or the NPR program other than the fact to say that tenants need to know who the owners of the LLC is so that they can what harass them I mean if you have a legitimate claim you can always sue the LLC you don't need to know who actually owns it but they were making the point that yes we need to know who owns it and that people like myself they took one of my videos in an audio segment of it where I discuss using anonymity and they said these are the problems that prevent tenants from finding out who the true owners are because people can set up entities anonymously well guess what this is exactly why you should do it because you do not want tenants contacting you stepping into your life creating problems think on this let's say you have a tenant and they're disgruntled with you because you evicted them or you're about to a victim or maybe they want a new refrigerator and you're refusing to do it because they want the refrigerator with the icemaker you say you have a perfectly fine working refrigerator right now what could they do if they know about you have your personal information well simple they can get on the internet just trash your reputation what's to stop them nothing they can create multiple fake accounts start posting fake postings about you that other people will see your friends your business associates future tenants what could that do to your job you think you have me legal recourse against them no you could possibly get a temporary restraining order but that's gonna be expensive and time-consuming it may not be granted because you don't have proof that they're the ones actually doing it so it is for that reason when you're thinking about investing in real estate I strongly encourage you to create your structure so that people cannot discover who the actual owner is the way I go about doing this is I typically start with a Wyoming limited liability company that is gonna be the first LLC you set up and the reason why you're going to use Wyoming is because Wyoming does not list any information about the members or managers of that LLC now the Wyoming LLC should be used for residential real estate holdings all about to show you this in just a second if you're going to use if you're gonna be investing in commercial multifamily then I would go with Delaware and the reason why I look at these two structures is because with Delaware you're dealing with a different type of lender than you would be in Wyoming where you have single-family loans so there are different types of loans different types of lenders and so they look for different things when it comes to creating these structures so the way we set this up to protect your identity so someone cannot discover you if you first create your anonymity compliant we'll call it that an anonymity compliant LLC this can be in Wyoming it can be in Delaware let's just go with Wyoming here so I set up this Wyoming LLC that gives me complete anonymity so I'm the manager I'm the member of this LLC but no one knows that it's me because nothing's reported to the Secretary of State then when I go to create my let's say my Texas limited liability company up here here's the Texas LLC here's a Washington LLC right here then I'm gonna have these LLC's owned by this one Wyoming LLC so when you're creating them after you've set up this first base structure because this is gonna own all of your limited liability companies you don't need to do this one per once you have a whole bunch of Wyoming's just create one it will be the member in all of these the nation on the Texas Secretary of State's website will point to this company right here because that's what we're going to list when we file for our Texas LLC the name of our Wyoming LLC so if a tenant there in this Texas property right here they're disgruntled because you didn't buy in that new refrigerator they wanted that had the icemaker and the water dispenser in it and maybe the touchscreen so they decide well I'm gonna get back at you well who are they gonna get back at the limited liability company no they want to go you the owner to make your life uncomfortable so if they look up the LLC on the Texas Secretary of State's website it's gonna point them to Wyoming if they look up the Wyoming LLC it's gonna point them nowhere this is how you build out your real estate investing structure now this is on the residential side if it was a commercial property and I wanted to build the stuff out then this would be Delaware right here thought I'd be setting it up in so keep your business affairs private do not allow people to discover that you're the owner of these entities and a lot of times people say well Clint they're gonna know it's me because I'm managing the properties if you're self managing don't tell them you're the owner I mean one things often say is that if you're dealing with tenants yourself and you're self managing your properties and you're talking to them they're disgruntled about the owner well heck you can join them say you know what I think the owners a real sob myself I just manage the properties guy never responds to me so now you can kind of be one of them and they don't know that you own the property so they may look at you differently so this is how I go about creating structures I think it's very important the first entity you create in building out your limited liability company structure for real estate investing is going to start with an anonymity compliant LLC either in Wyoming or Delaware based upon the real estate you plan to invest in
Thanks for your comment Elfreda Getting, have a nice day.
- Oswaldo Camposano, Staff Member
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 odmaklojO your participation is very much appreciated
- Oswaldo Camposano
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I've studied histopathology at Shorter University in Rome and I am an expert in ergonomics. I usually feel ashamed. My previous job was airfield operations specialist I held this position for 17 years, I love talking about building and observing birds. Huge fan of Bear Grylls I practice ultimate frisbee and collect vintage cars.
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