Hi, Clint Coons here with Anderson Business Advisors
and in this segment I'm going to discuss
how to form a limited liability company
for your real estate investing.
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Alright, let's get started.
Now, when it comes to setting up an LLC
for your real estate investment,
there's a lot of questions that go into
you know, what type of LLC I should set up,
where should I set up the LLC,
when should I set up the limited liability company?
Well I understand it can be tremendously confusing
when you go out on the internet and there's
thousands upon, hundreds of thousands of
articles and videos of individuals talking about
setting up LLCs for their real estate investing.
Well at the end of the day it really comes down to
some basic principles is the way I look at it.
So we want to know when, where, and how,
I need to set up that LLC.
So let's talk about the first one.
When should you be setting up a LLC
for your real estate investing?
Well the way I look at it is, what type of
real estate you intend to acquire.
If you're looking to purchase commercial
real estate, so if I'm going to buy
commercial property, alright,
then I want to set up the LLC now.
All right, you want to get that LLC
set up before you acquire the property.
Ideally you should make the offer
for that commercial property in the name of
the limited liability company.
Now if you're unsure what constitutes commercial property
it's more than four units.
So if you're buying something that has 5 units
or greater that is considered to be commercial real estate.
So, you would set that up now and make the offer
in the name of the LLC.
Now, if you messed up and you didn't set it
up before you made the offer,
don't worry, most commercial lenders understand that,
they want you to close in the name of the
limited liability company so you can set it up
after the fact,
but I think it's much cleaner if you have it set up,
ready to go ahead of time.
So, commercial you want to set it up now.
So, let's talk about residential, cause this is a problem.
All right, I run into this a lot
with people with residential.
If you have residential real estate,
you need to look at how you're going
to be paying for that property.
If you're paying cash for the property,
alright so let's break this up even further into things.
So if I'm paying cash, for my residential real estate,
then we go to now, so you'd want to set that up now
if your going to be paying using cash to buy it,
you're not using financing,
again, make the offer in the name of the LLC,
close in the name of the LLC when you're buying for cash.
If you're using a portfolio lender, okay,
so a portfolio lender typically is a community lender,
someone who is not going to be selling your loan,
they're going to hold the loan
and finance themselves internally.
If you're using a portfolio lender for residential
real estate then again, I would set it up now.
All right, so let's get that thing set up
ahead of time, knowing that I'm going to be using
a portfolio lender so I make my offer
in the name of the limited liability company.
Now if you're using Freddie Fannie products,
traditional lenders okay,
so I'll just call that traditional.
All right, if you're going to work with a traditional lender
then I'm going to say do it later.
Alright, there's no rush to set up that
limited liability company with a traditional,
if you're using traditional financing,
Freddie Fannie type products,
because you can't close in the LLC.
They look at this as a commercial,
an LLC would have to be a commercial loan.
The thing is under Freddie Fannie guidelines
if it's under, four units or less,
that's residential property,
you're not eligible for a commercial loan,
so you're forced into the residential side,
and therefore you can not close in the LLC
because that would have to be a commercial product.
So what happens here typically is that
with the residential Freddie Fannie,
what we're going to do is set up the
limited liability company after we close,
or even when you're getting close to closing
and you know your money's gone hard
it might be a good idea then to look at
establishing that LLC.
So after you close in your own name
and financing is secured,
then you'll deed the property into that LLC.
So it's not one of those things where
we're going to be able to close in directly.
All right, so that's the when.
Let's talk about the where.
Where am I going to create this
limited liability company?
Well for most part what I tell people,
when you're buying property,
residential real estate, commercial real estate
that you intend to use,
you know generate income,
then that property, that LLC needs to be set up in the state
where the property is located.
Now so this is for rental stuff,
flips completely different,
watch one of my other videos where I discuss flipping,
and I'll talk about using Wyoming
limited liability companies for your flips
because your not engaged in regular
and continuous business in a particular state.
But, when you buy property let's say
in Florida as a rental,
well you're going to hold that long term,
you're engaged in business there by collecting rent,
so it necessitates registration there.
Again, these are all general topics,
if you want to get more specific about your situation,
be sure to sign up for one of my free strategy sessions.
In the show notes you can see the link to
get that Strategy Session.
And the reason why I say that is that,
there's always nuances to this.
If you live in California you may not want to
create a California limited liability company
for your residential real estate.
Because you have eight properties
and you start doing the math
and you realize eight times eight,
meaning the franchise tax,
that's $6400 a year.
Don't worry, there are work arounds for that,
we can talk to you offline on a Strategy Session,
I don't have time to go into it here.
So, where do we want to set up these LLCs?
Typically it's going to be the state
where the property is located.
Okay, where the property is located.
That's where I'm going to create the
limited liability company.
Because it's doing business in that state.
Can't tell you how many people will contact me,
with this problem that they went to one of those
internet sites where, entity mills out of Las Vegas,
these companies that, you know,
you get a salesman on the phone, they're like
oh, you need to set up here in Las Vegas,
and here's all the benefits of owning or having
a Nevada limited liability company.
And where's you property?
Oh, it's in Illinois?
No problem, we'll set it up in the Nevada LLC.
Or if it's in Florida we'll do a Nevada LLC for that.
That stuff all works, you can do it,
but as soon as you try to evict your tenant, good luck.
Because your LLC's not registered to do business there,
didn't foreign file there,
they didn't tell you that little piece.
Because if they did then you would question
why did I set it up in Nevada to begin with?
Why am I paying two state fees
in order to protect this property?
I should've just gone to Illinois' at the outset.
Well the answer is because if you did that
then that company that set it up in Vegas,
they're not making any extra money off
of you on an annual basis.
So, they have financial incentive to set you up
in the wrong structures unfortunately.
So, I've seen people run into this problem,
they have the Nevada LLC owning property out of state
residential real estate, they try to evict the tenant,
they can't evict them because
that fact is brought up in court,
and then they have to start all over again,
pay back penalties and fees and things like that
for not being registered there,
so you just create a problem for yourself.
So, generally speaking, state where the property
is located is where you're going to create the LLC,
we're going to put that in quotes because,
in some situations we're going to use land trusts,
we'll use out of state LLCs and that's why you need
a Strategy Session to determine if that's
the right approach for you.
This covers about 75% of the
real estate investors we work with.
Now, when, where and how, okay the big one.
How do we create the LLC.
So if you watch some of my other videos
you know I'm a strong proponent of privacy.
In a recent, there's a video I talk about how New York
is looking to find out who the owners of LLCs are,
that they think that information needs to be made
publicly available to people.
In fact they actually passed a law
in 2019 regarding that, that you have to make
all real estate transactions involving LLCs,
all the owners information needs to be publicly available.
Now, my take on it, there's only one reason to do that,
and that is if you're concerned about it,
tenants can bring pressure against the owners,
even thought their legal recourse only rests with the LLC.
So when I'm creating LLCs and we're talking about the how,
I think you should always start with
an LLC that offers anonymity.
So it becomes a holding LLC such as Wyoming or Nevada
or Delaware, start with this holding LLC,
to begin with so this is step one,
and we'll just call this my anonymity,
Anon LLC right here that I own.
It's not going to hold the real estate,
it's there just to serve as a buffer,
to keep my affairs private.
But we like to talk about is
you can't sue what you can't see,
so that's a good way of thinking about this.
And then you're going to create the LLC in the state
where the property is located,
so this is state where property is located.
State of prop.
And it's going to be a member managed LLC.
So here's the how, how am I going to create this?
I'm going to create this as a member managed.
Member managed LLC.
So, the idea here is that when you set up this LLC,
if you did this number one,
which you should do,
then if anybody looks here, they see this LLC.
And if they see the anonymity compliant LLC,
they obviously don't see you because
your information isn't on there.
So this is the how.
You set this one up down here as a manager manged,
okay we gotta make sure that ones set up right,
manager manged, okay that's number one,
then you create your in state LLC
as member managed pointing back to that
manager managed limited liability company.
Now there's some tweaks you can put into it as well,
typically when we create these structures here,
it can be cumbersome to try to operate in this fashion
where this one is the manager of that one.
That's why we build in special officer provisions
inside of here, information that
does not have to be disclosed to the secondary state
because they don't collect it,
but it gives you apparent authority.
So you can operate out of this LLC as the president
to do everything you need to do,
on behalf of that company,
and that information isn't publicly disclosed anywhere.
So they come up with ways to always
try to collect more information,
we can always find ways to keep that information private.
As a good asset protection firm,
that's what you should be looking for
in the individuals you're working with.
Someone who understands real estate,
how to create these structures to meet your needs.
All right guys, my name's
Clint Coons with Anderson Business Advisors,
be sure to sign up for a free Strategy Session,
to make sure you're setting up your LLC the right way
to make sure that your assets are completely protected.
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