Welcome back to taxes made simple I'm your host Karlton Dennis and today we are going to go over
how many llc's you need with your investment properties
now if you're someone who already owns rental real estate you may have already set up an
llc and you might be wondering if it makes sense to have an additional llc for another investment
you could be purchasing or you might be someone who hasn't purchased rental real estate yet
and you want to know if it makes sense to buy a real estate inside of an llc
or if it makes sense to have an llc for every single investment property so in this video
today we're going to talk about that we're also going to discuss whether or not it's going to make
sense for you starting out to have multiple llc's to build your wealth strategically let's dive in
now today i'm going to be behind my ipad share with you guys a little bit more conceptually
why i look at llc's like baskets of eggs and so we're going to jump over onto the screen
now when i think about asset protection the first thing i think about is having a revocable
sorry for my spelling a revocable living trust and part of the reason why i want to have a revocable
living trust early on is because i know that at the end of the day if something were to happen
to me if i have children my wife i want to make sure that my wife and my children do not have
to deal with the banks and wait six to 12 months to figure out how the banks are going to disperse
my wealth to my children and how much the banks could possibly take from the wealth that i
earned it would be really horrible if i got in a position where my property that i worked really
hard to repair and improve and earn rental income from that i wanted to pass off to my children
that it actually ended up going to the banks first and that my children ended up actually paying
more taxes all because i didn't set up a revocable living trust and it can also help your children
get the step up in basis so at the very least we want to have a revocable living trust
everything else comes underneath the trust such as llc's and assets underneath the llc's so what
i do directly after drawing a revocable living trust is i like to draw a line down the page
i separate my assets from my operations why do i do this well i'm a business owner and i'm also
a w-2 employee and i know that anytime that i'm working for my money that is called earned income
it's different from passive income so i am on the operational side as a w-2 employee and i'm
also on the operational side with my s-corporation for tax alchemy now i also own rental real estate
and i also own syndication real estate and the assets i own are sitting inside of llc's
so i keep those assets on the left side of my page knowing that they're all passive okay now
let's just say we have multiple rental properties right let's say we have three and
let's say these properties that we purchased are in Indianapolis indiana and let's say i only put a
down payment of $20k down on a $70,000 property so i paid about $14K for each of these properties so
let's say this first one here is $70k the second one here is worth $70k and this third one here is
worth $70k okay now we can tell right off the bat that these three properties in total have about
$210,000 worth of value right of course i owe the banks i know the banks kind of have
a little bit of stake in my property as i'm paying back the lenders there's about $210,000
here on the table between these three properties now if i were to establish an llc for these
properties i have all three of my rental properties sitting inside of one llc you may
say Karlton isn't that a little bit risky for you to have all of these properties inside of one llc
because if something were to happen to this first property and this tenant decides to sue you aren't
you likely to be sued and lose money from this property you might have to sell this property
in the event of a lawsuit the answer is yes i could but i have to realize something as well
in a perfect world i am going to have llcs for every single rental property but i also have
to realize how to build wealth strategically and in certain cases it may not make sense
for me to have multiple llc's for very cheap low market properties that are only 70 000
knowing the cost associated with me having llc so we have to take into consideration
the expenses associated with having this llc right i have to file the tax returns for the
llc that's going to cost me anywhere between 600 to 1000 depending on who you go to you're
gonna have to pay the franchise tax for the llc if it's in california that's automatically 800
right and then you also are going to want to make sure that you're setting up the llc which
could cost you about a thousand dollars as well so all in all in you could be at about 2 000 to 2500
just to get your llc operational and to have it going on a yearly basis now between these
three properties they may be only spitting off about two to three thousand dollars for you
a year and you might say Karlton well does it make sense now for me to set up an llc for every
single property if i'm only capitalizing on two to three thousand dollars a year in passive income
from the amount of money i'm receiving from my property after paying the mortgage
after paying my insurance after paying all the other things that i have to pay on this property
doesn't make sense for me to to cough up this additional 2500 every single llc and the answer
is probably gonna be no so this is when we have to start looking at llc's like baskets of eggs
how many eggs do i want sitting inside of one llc which means how many rental properties do
i feel comfortable having inside of one llc in the event that someone could come and knock over
my baskets of eggs and everything could be liable and susceptible to being taken right
so let's go over another example let's say that these properties that we had now instead of being
70 000 let's say we had a property that's 100k and then we have a property that's 500k
and then we have a property that's 1.2 mil okay now we're in a situation that's a little
bit different before we're in a situation where we have three properties but this total value
of these properties is upwards to 1.7 1.8 million this is where i'm starting to get a little nervous
i have 1.8 million dollars worth of assets all sitting inside of one llc
it's kind of getting hard for me to think that this is a smart thing for me to do
and the reason why i'm saying that is because if i'm someone who can afford a 1.2 million property
if i'm someone who can afford a half a million property then i might want to look at separating
those two assets from my little 100 000 property that really comes with about a 20 000 down payment
so my wealth here is all jumbled up inside of this llc and if anything were to happen where my
tenant living in my 1.2 million dollar property all of a sudden slips and falls or a light bulb
falls out of the ceiling magically and hits him over the head and he decides he wants to sue me
he can now sue my llc for everything that is inside of my llc the equity i own in my 1.2
million property my equity inside of my half a million dollar property and the equity i have
in my hundred thousand dollar property all can be susceptible whether the properties are in the
same state or they're all in different states if i place the title in the name of the llc for
every single property i am now in a position where i could get hurt so this is where we have to start
setting up some rules for ourselves when do we start moving things out of one llc and separating
them to multiple llc's this answer is going to be different for every single person and part of the
reason why is because it all depends on when you bridge the gap to getting into rental real estate
you might be a person who is in your mid 40s and now you're just now deciding to start this
whole real estate journey or you could be someone who's young and doesn't have a lot of cash you're
trying to get into real estate so you can get to a place where you have a lot of cash so the barrier
to entry determines when you're going to start setting up llcs and whether or not you're going to
have multiple llc's as you're buying real estate if i'm someone who's sitting on money and i'm in
a great position absolutely i'm going to have an llc and buy my rental properties in an llc and
sacrifice the extra money the 800 to california the the tax preparation fees to have my llc
knowing that i'm in a great position to start things off the right way with the best asset
protection now if i'm someone who's sitting on very little cash i want to take action and i want
to take action in the best ways possible insurance is going to cover me for accidents and incidentals
it's not going to protect me in the event of a lawsuit but it is going to cover me for accidents
and incidentals and i could still be liable in the event someone tries to sue me i haven't separated
the liability from myself because i didn't set up an llc but at least i have insurance right
and this insurance company can come in support me help me pay for something in the event that
something arises as i'm getting started out and as an investor and maybe as an investor early on
you're not buying huge apartment complexes maybe just because you can't afford it yet
so you are buying some of these cheaper properties in the midwest to develop your cash flow
before you maybe 1031 exchange or decide to sell those properties to get into another one
so when you are acquiring real estate and you're starting out one thing is for certain you do
need to have an llc but the next thing that you have to take into consideration is what
are the expenses that i'm going to have to have this llc and is it going to impede my cash flow
because i'm running a business and so that is important we want to be a profitable business
now going back to what we have here on the recording keep in mind that we put the operations
on the right side so if you happen to have a wholesale business or you're flipping real estate
this is considered active income not passive income and part of the reason why is because when
you're doing wholesaling you're hustling you're getting on the phone you're buying a motivated
buyer you're getting property under contract with a seller and you're flipping a property
pretty much without ever owning the property that requires work requires you getting on the phone
and requires you doing something wholesaling is a job just like flipping's a job the difference
between flipping is you actually own the property and you're making repairs and then you are the
person that's selling the property yourself so you're part of the entire transaction but anytime
you're doing wholesaling and anytime you're doing flipping you're going to want to do this out of an
entity structure as well most of my whole sellers and most of my flippers start out with an llc
and then we switch their llc to an s corporation when the benefits outweigh the cost and the
reason why i say we start out an llc and then switch to the s corp is because a lot
of my clients who get started in wholesaling or get started in flipping they have these
extravagant goals to become the multi-million dollar flipper the person that they saw
on tv the tv show that they were watching they they're so motivated to make tons of money in
flipping one thing you have to understand when you're getting started flipping is you will learn
a lot getting started in flipping you'll have some pitfalls you'll have some hurdles and you'll run
into some mistakes where you don't end up making as much money as you thought you could make
rather than starting out as an s corporation and filing taxes as an escort which is more expensive
and paying to have an S-Corp which is more expensive we start out as an llc and then we
grow our income inside of our business typically you want to get your net income after all expenses
to over 40 000 so we can start switching you to the escort and you can take a salary out of
your business not only does it help you reduce your self-employment tax which i've discussed
on multiple videos if you don't know what self-employment tax please visit one of my
other videos but it will also allow you to get a deduction when you decide to pay yourself now the
next question that's probably coming up in your head is Karlton but now that i see that you have
this idea around not having too much equity inside of an llc and that you view it as a basket of eggs
so where should i set up my llc should it be in Delaware should it be Wyoming should it be nevada
i want you to understand something first things first i'm an enrolled agent which means i have the
highest designation that the irs physically allows but i'm not a tax attorney but any tax attorney
any type of attorney will tell you that it makes sense to set up your rental property in the state
you own your rental property and part of the reason why is because when you choose not to
you're categorized as a foreign entity to that particular state which means that you're going
to end up still having to file the state filing fee in that state you're still going to have to
pay the state filing fee in your original state plus there's going to be additional
documents that we need to file inside of your tax return that ends up making your tax return more
expensive with your cpa or your enrolled agent so before just jumping onto the delaware and wyoming
train because you heard about all the beautiful benefits they can give you and how your name is
going to be hidden underneath your mattress right first do some homework on why it might make sense
to set up your llc in the state that you own your investment property okay now it's different than
when you're operating as a wholesaler or flipper where you live and where you reside is where your
entity structure is set up it doesn't matter if you're doing online sales you're doing e-commerce
your entity structure is going to be set up in the state that you earn your income and if you're in
nevada california texas then that's the state where you set up your entity as a wholesaler
or a flipper now keep in mind llcs are just one vehicle for asset protection on top or underneath
the revocable trust right so you have this layered effect here kind of like a pyramid where the
revocable trust sits on top then there's the llc and then you have your asset which is the rental
property underneath now real estate is going to continue to be one of the best asset classes
to invest in you need to have a tax plan before jumping into real estate if you have any questions
on whether or not an llc is right for you whether or not you should be setting up multiple llc's
whether or not you should be considering delaware nevada wyoming or texas feel free to schedule a
free consultation by visiting the link in my bio with my team also if you like this video and you
want to learn a little bit more about real estate taxes and how it all plays into you building
wealth feel free to like comment subscribe it'll help out the youtube algorithm so i can continue
to create powerful content like this for you i look forward to seeing you on the next video