Guides & Processes

Markets

🌴 Florida
🍑 Georgia
🤠 Texas
⭐ California
⭐ Illinois
⭐ Arizona

We are not lawyers, consult a professional as well because every situation is different. However these are some commonly answered questions we get

Limited Liability Company (LCC)

LLC stands for Limited Liability Company. An LLC is a legal entity that provides limited liability protection for its owners. If someone were to sue your LLC, your personal assets (like your car or house) would generally be protected from seizure to pay any judgment. Instead, only the assets owned by the LLC would be at risk.

Pros of Forming an LLC for Real Estate Investments:

Limited Liability Protection: As mentioned earlier, forming an LLC can protect your personal assets from any legal issues that may arise from your real estate investments. This can be especially important if you're dealing with high-risk properties, such as ones with a history of tenant issues or environmental concerns.
Tax Benefits: LLCs are considered pass-through entities for tax purposes, meaning that any profits or losses from the LLC are passed through to the owners' personal tax returns. This can potentially result in lower tax rates and increased deductions.
Professional Image: Forming an LLC can give your real estate business a more professional image. It can also help build credibility with potential investors, lenders, and tenants.

Cons of Forming an LLC for Real Estate Investments:

Cost: There are costs associated with forming and maintaining an LLC, such as filing fees, annual fees, and legal fees. These costs can vary depending on the state and the complexity of your LLC's structure.
Administrative Burden: LLCs require annual filings and record-keeping to maintain compliance with state laws. Failure to comply can result in fines or even dissolution of the LLC.
Limited Financing Options: Banks and other lenders may hesitate to lend money to an LLC, as it is considered a riskier investment than a traditional corporation. If they do lend, they will lend at a higher rate than if you were to put it under your name.

Should I get an LLC?

💼 If you’re starting out? Probably not

Depends on your situation. General advice is that if you do not have much equity to lose, it might not be worth it to get an LLC as the cost of an LLC may outweigh the benefits. For example, a 1 million dollar property could only have 35k in equity.

Obtaining a conventional loan for an LLC can be difficult. Residential loans are not available, and fees and interest rates tend to be higher than other loan types. Additionally, loan terms are often shorter than other loan types.

Getting liability and umbrella insurance is typically more affordable and offers the same coverage.

Recommended set up is that your LLC is masked first by a land trust in the state that the property is in, and then the LLC is set as the beneficiary

If you need a real estate lawyer, we typically recommend Ronald Rhode

What laws should I watch out for?

Responsibility of tenant injury

Negligence on repairs
Violation of health or safety laws
Failure to make necessary repairs
Failure to make a house habitable
Reckless or intentional acts, such as invasion of privacy or sexual harassment.
1/3 of homeowners insurance claims are due to dog bites (no aggressive breeds!)

Protecting tenants from crime

Locks, Lighting, Window locks
Background checks on multiunit buildings

Land Trusts

<aside> 💡 It’s an anonymous entity, but not the same legal protection as an LLC. Can be used to mask that you've got your personal property in an LLC.

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Grantor - Sets up trust

Trustee - Hold title and some power

Beneficiary - Owner, controller

Tenants pay money to the beneficiary, either your personal name or an LLC. Trusts do not offer legal protections in most states, except for Florida.

Mistakes to avoid

Setting up a trust is relatively inexpensive and there are no annual filing fees. A Florida land trust can protect beneficiaries if the main LLC gets sued.

It is important to never serve as your own trustee of the trust (for anonymity) and to sign up for a mailing address or PO Box instead of using your home address on the tax statement.

Additionally, you should not be the beneficiary of the trust and instead sign it over to the LLC.

You should not inform your lender, as this will not invoke the due on sale clause and will likely result in a title transfer fee.

Lastly, it is important to name the trust properly and not include the words “land trust” in the title. The type of trust should be a GRANTOR trust and it is best to name it under an address name to avoid confusion in the future. This will also help to avoid transfer taxes when moving properties into LLCs.