patrick.net

I've looked into forming an S-Corp vs. LLC and LLC seems to be the way to go.

Is anyone buying their investment properties through an LLC?

If the opportunity is as a owner occupied multi-family, can you still purchase it under the LLC?

Thanks.

OnTheFence says

owner occupied multi-family

You mean up to 4 units only.
LLC is for your liability protection, but much more difficult to get financing.

Thing is with an LLC is that if its just you and your spouse it really doesn't offer any protection. Any lawyer capable of passing the bar will be able to pierce the LLC and go after personal assets. Yeah, they have to do a bit more work, but not enough to deter them if you do have any worthwhile personal assets. Stick cousin Louie or someone else in there with a small stake in the LLC though and that makes it harder to pierce.

For us was cheaper to just get a good umbrella policy and seemed to offer adequate protections, and as previous poster said, makes financing a whole lot easier not being a LLC.

@REpro: Thanks for your reply. What I mean by "owner occupied mulit-family" is that I would live in one of the units. It could be a duplex or larger, I don't believe there are any limits on the quantity of units and whether LLC purchases would be applicable or not.

I've heard it can be harder to get financing, I'm in the process of investigating it now with Wells Fargo. I'll keep the thread posted on my progress.

Thanks

@gbenson

Protection and separating my personal assets from business assets was a major goal of mine. Yes, starting out it would just be myself as the LLC. Surprised to hear it can easily be taken apart by a lawyer.

Can you go into a bit more what you mean by umbrella policy, any specific recommendations.

Thanks

Here is a pretty clear article on piercing LLC's written by an attorney:
http://www.rjmintz.com/misc/asset-protection-articles/piercing-the-llc-veil/
It's not impossible to set up an iron clad LLC, but it's a lot of work to get it 100% right, and judges are much more apt to pierce it if it's only you and your wife on the LLC.

An umbrella policy basically is just an general insurance policy that covers liability. You should talk with your insurer on specifics of what their policy does/does not cover. For example, if I accidentally crash my boat into someone and get sued, I'm covered. Specifically on real estate, if I am sued by a tenant or vendor doing work on my property, the first $2M of any judgement is paid by the umbrella insurance company. Needless to say, the insurance company is going to bring a pretty good litigation team to bear to avoid paying that $2M if I am sued. After $2M my personal assets are at risk though. It's a cost benefit analysis of my chances of being successfully sued for >$2M. Not always, but usually those kind of judgments are reserved for when someone did something pretty dumb and ignored blatant safety violations.

I have heard some argue that someone with umbrella insurance is a more attractive target to an attorney (deep pockets of an insurance company to sue and subsequently settle with), but IMHO an attorney would rather pick a fight with an LLC because the owner has to pay attorney's fees out of pocket, so an LLC will probably settle MUCH sooner than an insurance company will even if its for a smaller amount. All the opposing attorney has to do is 'run out the clock' with motion after motion when you are paying $600/hr to defend each one. Besides, even if I do get sued and the insurance company settles, they pay the bill, not me. Sure my rates might go up a bit, but it beats my LLC paying a $50k settlement out of pocket just to get a frivolous lawsuit to go away.

For us, umbrella insurance costs about $150/yr per condo, and $375/yr on a nice (3000sqft) 4BR SFH, so it's pretty cheap in the grand scheme of things, which probably is a good indicator as to how often they are successfully sued.

Not all companies offer umbrella policies. We have seen the best rates from Liberty Mutual and Safeco.

@SFace ~ Thanks for the reply.

Some Facts that hopefully will paint a better picture.

I've been saving for most my professional life ~11 years, never having bought real estate. After getting married last July I just experienced my first tax returns filled as a married couple, and they were 5X what I normally receive (no big changes in my income/investments). My tax person suggested that I might look into picking up some RE after reviewing my various positions. He went through a couple of models and I was surprised at how my returns would have been impacted (positively). My main motivation is not an improved returns, this just made the idea of owning some RE more realistic and within reach.

I've been looking at RE for a number of years, mostly on the outside, and always interested in a multi-family where I could live and still collect income to help offset the mortgage.

There are a few targets that I'm looking at and thought that it might be a good idea to explore various ways to purchase them with the key motivation (right or wrong) to protect my personal assets as best as possible, at was settling towards an LLC.

So, looking forward to starting a family, and being shown that owning RE is not as out of reach as I once thought, now seemed like a good time to see what was out there.

Questions:

If you purchase a home as an individual can you convert the title over to an LLC down the line, are there costs associated with that?

A couple of the opportunities have commercial space on the ground floor. If I opened up a business downstairs, does this point more towards purchasing the building under an LLC?

One property is being sold as is, with no inspections done..and are disclosing a sewer lateral compliance cost estimated at $4,800. The selling agent has provided a disclosure document. This is setting off red flags for me as a potential pit or problems. Would you typically agree to purchasing a home without an inspection?

Thanks in advance,

@gbenson
Thanks, this is some great feedback. I'll look into umbrella insurance a bit more.

OnTheFence says

If you purchase a home as an individual can you convert the title over to an LLC down the line, are there costs associated with that?

Just title, or title and mortgage? If the latter and you consider the lien holder calling in the mortgage a 'cost', then yes. You would be in violation of the terms of your mortgage and the bank could ask you to pay the mortgage in full or lose the property. The reason for it (as I understand it) is that it screws up the underwriting of the loan, so in essence, allowing it puts the bank's securitization of the loan in jeopardy. If you ask, they are guaranteed to say no or raise your rates and tack on all sorts of fees to reclassify the loan.

I know people who have done this and gotton away with it (during the hayday when nobody was looking) but its too risky now with banks being more cautious. You can move the title of the property over pretty easily and the bank won't get wind of it, but once you try and move the mortgage and any insurance, then the bank would be hard pressed not to see what you are trying to do and come after you.

On the flip side, if you moved the title, but not the mortgage, then per my earlier post, your LLC is no longer distinctly separate. You just negated the integrity of your LLC and might as well not have it at all.

LLC formation, yearly tax returns, yearly minimum tax, etc are costly and it can be pierced by a good attorney going after you for claims. Purchase a high 1-5M umbrella policy which is way cheaper and covers you for most everything.

The LLC is more for partnerships involved in multiple properties, or transaction that may have high equity positions.

Like if uncle Mort was going to help you finance the property he may get more protection out of an LLC. Now imagine you have a group of partners building a portfolio, the properties you all own may be worth millions, so you want to protect that.

That millions in equity may get you a better rate from a lender, I don't mean a bank, but an investor lender. Some banks may be coming back around, but they got pretty hammered by LLCs after the crash.

You are better off playing it straight, and getting the best insurance agent you can find. Get a good policy, and keep it up dated as you improve the property.

Get a personal residence loan. You're entitled to it from what you describe.

As far as a property that doesn't allow for an inspection, that's just BS. You should at least be able to figure the costs before you make an offer. Have you asked to see the property inside, and out?

Take a contractor buddy with you, and figure the sewer is shot out to the street. You can make your offer based on what you think it's worth minus the needed repairs.