Do I need an LLC for my Real Estate Business?

About the Video

The talk focuses on the benefits of utilizing Limited Liability Companies (LLCs) in real estate investment, highlighting advantages such as asset protection, privacy safeguards, financial efficiency, and addressing the nuances of taxation intricacies.

Prefer to read? A full transcript is provided below.

Cort:

Hello and welcome to another edition of Wealthy and Wise. I’m your host Cort Christie from NCH. And today we’re going to be talking about LLCs in relationship to real estate for investors, for buying and selling properties for any type of real estate investing that you might be involved with. I have an expert with us today, one of our top advisors at NCH, David Vanlandingham who’s been working exclusively with real estate investors for over 15 years now.

David, welcome to the program. First of all, I’m excited to be talking about what we can do for our real estate investors. I know that is an area that you concentrate on and you’ve helped so many people who are involved in real estate. 

David:

Well, lots, lots of passion for it. You know, my story, my family had been involved since 1974.

And so I was kind of in the business, not really in the business a part of the business, but I was there observing the business while they were doing it. And they did a lot of things right. They did a lot of things wrong. But think about 1974. You didn’t have LLCs in 1974. Not in the United States anyway.

So yeah, it’s a great passion to work with real estate investors. There are so many different what is out there and avenues people can go down when they talk about structuring and we want to make sure they’re on the best path. And I can tell you one of the main things that we do here is we keep their structure very manageable, yet scalable and very financially efficient, which is a benefit, especially when you’re a new investor as well.

Cort:

Well, let’s talk high level first of all, and I do want to go into people that might have legacy real estate or something they inherited and it might have been in the parent’s name or maybe a piece of real estate that they held for 20 years. Let’s go back to that. But for the initial introduction here, why would somebody put a piece of real estate in an LLC if they’re an investor?

David:

Protection. Privacy, and protection.

There’s the two P’s right there. So, you know, in this day and age, when the economy is suffering, lawsuits go up and everybody is looking for an opportunity. So we must protect ourselves. And a lot of people think about putting the property directly in the LLC. We’ll get to that a little bit later. But you want to make sure that you’re protected when you’re making investments, you want those protected, whether it’s for just you or your legacy, whatever you leave behind, 

Cort:

That makes sense that we’re talking about, you know, all the what-if scenarios that might happen when you own anything. And in this case, it’s an extra layer of protection to hopefully keep you insulated from whatever risks or accidents could happen within your real estate or the properties that you might own.

Now, if we jump back into, you know, legacy properties, so you mentioned your families as assets, people that have owned real estate for years and years, and they’ve always had it in their name. I have family members that have investment real estate that they have held for 30 years and they have it in their name and I always try to coach them through that process.

They’re like, I’ve done it this way for so long. I’ve got insurance for that, you know, what do you tell somebody that’s done it this way for years? 

David:

Yeah, it’s tough, right? Nobody wants to hear there’s a better way, and they do in a certain way for 20 or 30 years. So really what you have to do is you have to break it down to the numbers of what they’re looking at.

More and more insurance companies are covering less and less. Right. So we have to look at it from that side as well. I can tell you I’ve dealt with it personally myself. My family’s dealt with it. I have clients dealing with it where things aren’t covered. Now a lot of people are working from home. And now there’s a difference from me working at home doing what I do versus somebody having a welding shop in their garage and the rental property, right? So there are different levels of liability that we have to look at. And that’s really the first thing that we want to get them to understand is that level of liability. And I can’t tell you how many times I’ve heard I’m not worried, their family. Boy, that can go down an uncomfortable path too. So even if they are family, we have to be careful about it.

Insurance does not cover everything. As a matter of fact, you review the policy and actually read your policy. Most people don’t. They would be shocked to see how much isn’t covered. You know, of course, the one that everybody talks about is a vicious dog, right?

A lot of these people are buying properties, you know, three or four states away and they’re kind of an absentee owner. They’re not driving by. They don’t know if there’s a dog there or not. It says no dogs on a lease. But, you know, do renters always follow the lease? That’s the question. 

Cort:

Right. Absolutely. Now, we know they don’t.

And, you know, when you think about owning property, you know, we had done some work on our home. And any time you start messing with your home, you know that there are codes, new codes that didn’t apply five years ago, ten years ago, twenty years ago. So you think of rental properties and if something happened in your rental property by a tenant and there’s a lawyer trolling for an opportunity, whatever, if there was a fire, if there was somebody got hurt, you know, maybe the staircase wasn’t designed properly, maybe there wasn’t a handrail or it needed to have a handrail, maybe the wiring in the house was into current code.

There’s going to be a lawyer out there who’s going to figure out a way to stretch the law or apply something that you might not think applies to you in your current situation because they’re trying to go after you for whatever that injury or that accident was. And trust me, they are creative and crafty. That’s their job.

And then they’re going into court in front of a judge that they probably, what? play golf with the weekend before, you know, or see at a cocktail party for the bar association in their town. They’re all friends. And so who’s going to lose when you’ve got the cards stacked against you? It’s going to be you. 

David:
Yeah, absolutely.

Because they always look at you as deeper pockets, that’s why. Right. So when it gets to the homeowner, they want to move against the insurance. They want to max out the insurance policy, and max out the umbrella policy because that’s the way it works. And then if there’s still money, they want to go after, they’re going after the homeowner because they think they have the deepest pockets.

And I can tell you, for somebody just starting out or mid-way through their real estate journey, their pockets aren’t deep. They’re constantly leveraging and leveraging to buy more properties. 

Cort:

So, David, are there times when an LLC is not the right type of vehicle to hold real estate in? 

David:

You can argue a couple of points on that. I would say we get this a lot with homeowners wanting to put their home in an LLC.

My professional opinion says that’s not always the best idea. Could you do it? Yes. Should you? And probably not, because it really belongs in a revocable living trust. The argument people make is, well, a revocable living trust doesn’t create any real asset protection. And I do agree with that. So it would it would really depend on individual circumstances, on what we would advise based on that.

Cort:

And there are some things in and I agree it’s, you know, very personal and also the homestead laws. Right. Like in Florida where you’ve got unlimited homestead protection, you never want an LLC because you will lose the benefits that you gain by the tax advantages that you get with that or the asset protection that you get with that.

So that’s massive. I think most of our clients, we always say, you know, the home is different. It’s not an investment. And you don’t look at it that way and you don’t put it in an LLC.

So what would be the difference then if somebody was coming to you and they said, Well, I’m a buy and hold, I’m a guy who wants to rent property versus somebody who flips properties that rehabbing houses that are jobs, you know, put some lipstick on a house and turn it over and make some money out of it as fast as I can.

David:

Yeah. I mean, the flippers, right? That’s why everybody’s watching the TV shows then goes “I can do that”. 

Cort:

Until they buy their first house.

David: 

I can tell you this from an experienced real estate investor. If your marriage can survive your first flip, you got a great marriage. So yeah, so. So really, it comes with two things.

Let’s just assume we’re still talking about an LLC as we’re talking about Nevada because of the asset protection and now what we have to do is go to the secondary level, which is taxation. So when we talk about actively investing where you’re doing wholesales and you’re doing flips, you want an LLC with a S Election, so you’re taxing it as an S corporation because it’s subject to short-term capital gains and it’s subject to self-employment tax, whereas rental properties, long term rental properties, most clarify that long term rental properties are not subject to self-employment tax.

And really, to be honest with you, it’s much easier from a tax side when you’re just getting passive income. You don’t have to deal with the self-employment tax and the 940, 941s . But the difference is we look at the definitions by the IRS as to what’s active, and what’s passive, and we build that structure accordingly. 

Cort:
Okay, So you want to pay attention to the tax aspects of what type of investment plan you have.

You mentioned long-term just wanting to be in an LLC that’s probably a disregarded entity for tax purposes where you’ve got that passive income. What about our Airbnb people? It gets a little more confusing. There. So basically what we recommend on the Airbnb side because most people think that is passive, more passive income. But IRS is really not in favor of that based on the duration of stays.

So typically what we do is we do a two structure, we do an active site, which is the operating company and that’s the LLC taxes the S corporation. So that is making the reservations as taking in the money, the deposits, and everything else where the property is now being held in the LLC that’s disregarded. The big reason for that is if you have a rental property inside of an LLC taxed as an S Corp it does not out of magically get the step up in cost basis upon death.

So if you pass away, you bought the property for 200,000, the day you die, it’s worth 800,000. Your beneficiaries are going to be subjected to that tax on that gain. So that’s just one reason. And the other reason is, obviously if you’ve got a short-term rental in an LLC taxes in SE corp and you pull it out to refinance it in some states, that’s going to constitute a transfer tax.

Cort:

So many things to be aware of. And you know what when it’s so personalized based on what people are trying to achieve what their goals are tax-wise or are they going to hold this as a family asset? Are they going to hold it for a few years and get rid of it?

What’s your advice? Where do they figure it out for themselves and what’s the best path for themselves? 

David:

So they have to really determine what type of investor they are. Right. Are they in it for appreciation? Right. So they’re going to let their property appreciate and then probably refinance, pull some cash out, buy another property.

That’s what a lot of people do. And then you’ve got the ones that want to retire and live off that passive income. So those are your cash flow. So you’ve got your appreciation buyers and you got cash flow buyers. The cash flow buyers, there may be, after depreciation offset some of the taxes, you know, they may be getting three, four or five, six or last month.

Well, now they’ve got to get X number of properties to replace that income of the job. So depending upon what they want to do, we’re going to advise them both on the structure side of it and the tax side. And that’s the beautiful part. Our clients really love working with us is the peace of mind that they know they’re getting the legal side of the structuring, but they’re also getting the tax side as well.

And typically that doesn’t work that way. I remember when I started, CPA lived on one side of the town and my attorney lived on another. They didn’t talk to each other. They didn’t know each other. They didn’t come together with a congruent plan for what we were looking for, for our business.

And I think that’s one of the key things that that we get here is both the legal and the tax side. 

Cort:

Yeah. And I think, you know, most people want to know that there’s some congruency there. It’s not one side saying one thing and another taking it down another path. And the nice part about what you do is advising, working with, consulting with because everyone’s strategy, their plan to be in the business, whether it’s short or long term, is so different that it does take, you know, some sit down time, some consultation time where you can really unpackage it, try to figure out exactly where this is going and then give them some direction as to what steps to take next when it comes to what type of taxation they should be going down as far as you know, whether they’re a disregarded or an S Elected entity. And I think it just don’t want to assume you’ve got it figured out because as you know, David, every situation is so different and it’s exactly why people love working with you because you give them the information that they need to know. You give them the path that they need to go down and you really give them peace of mind at the end of a conversation that this is the right way for them long term.

You also mentioned people who might have multiple properties. Is there a different strategy? Are they buying LLCs for every property that they might own? You know, what’s your recommendation for an individual who might want to accumulate ten rental properties?

David:

This is a great question because we get asked this all the time because, you know, some people it’s like almost they go to a web medical form to get diagnosed to what’s going on with them. And these non-doctors are telling them how they should treat their ailments. And the same thing in this industry is people will go on to these forums and say oh yeah, you need an LLC for every single property that you have. I think that’s overkill. I think that’s a lot of LLCs. I mean look, we sell LLCs. That’s not our goal is to oversell.

Let’s be smart about this. Remember I said manageable, scalable, and financially efficient. So let’s go back to that. So why not have one or two LLCs and then have each property in their own individual real estate privacy trust that creates that separation and doesn’t upset the mortgage companies as well, Because even if you’ve got ten properties and ten LLCs now, if those properties all have mortgages, you got ten shots at getting a dUE on sale letter from one of the lenders going, Hey, not cool.

We gave you this loan and now you just did an unauthorized transfer to this LLC. So we have to think about all of these different scenarios. And quite frankly, if my wife had to keep up with 38 LLCs, 38 checking accounts, 38 renewal fees, and 38 record books, she’d probably divorce me. 

Cort:

And it’s a lot of work and you do see a lot of folks out there putting out YouTube content or information online that says to insulate yourself from liability.Each property should be held in a separate LLC. And we’ve never believed that, you know, we will look at the size of the investment. We’ll look at how much equity is there and there are many factors as to how many LLCs you want to utilize or not and why not use real estate privacy trust, as you mentioned, as another way to sort of segregate each property, but hold that under one LLC is another strategy.

And I think that again, this gets into there’s no one size fits all model. You need to spend the time talking to somebody about what you’re trying to do and not just where you’re at today, but where are you going, and where are you heading with your strategy. We need you to see it all and understand it all.

Even if you might have other businesses, you might have other things that you’re involved with that we want to understand because it’s all going to play into the strategy for your real estate investing. And one of the things that we all know at NCH is we give away advice day in and day out at no charge. David, you’ve on thousands of calls from people who chose not to utilize our services for one reason or another.

But you bet on tens of thousands of calls where individuals have chosen to work with us and work with you specifically because of the direction, the advice, and the confidence that you give people when you have those consultations. And we love talking to people day in and day out about what the best strategies are to protect their real estate investments.

And I know that it’s part of, you know, what you’ve been doing for years and years and you get to meet really cool people day in and day out. And I know you and it doesn’t get old for you at all. 

David:
No, I mean, I love my clients. I mean, it’s been a great relationship and we’ve got such an incredible team here all the way through our advisors and fulfillment.

It’s just an amazing process. But yeah, I mean, yeah, everybody we talk to, you know, doesn’t move forward. And I mean those would be great stats if we did, but in reality, a lot of them do circle back and they go, Please don’t tell me I told you so, because they’ll come back to me after they’ve gone with another company, tried it on their own, didn’t do anything.

And then a business accident happens and they come to me and they go, What happened? What can we do? nothing. You know, we can’t do anything right now. You’re under a lawsuit that’s a fraudulent conveyance. So we have to sit back and wait. Don’t call me after your house is burned to the ground and ask me how much smoke detectors are.

Doesn’t make sense, you know, But we don’t rubber nose in it. We say, look, here’s how we fix it moving forward. And we’re we’re very good about that. But believe it or not, a lot of people who don’t come around the first time, they’ll come back to us eventually because of something that they’ve done or not done, and they’re looking to fix a situation.

I’d rather help somebody than fix something.

Cort:

Absolutely all day long. Fixing is not a clean process. It’s much easier to keep ahead and get on top of it going forward and take advantage of the opportunity to talk to any of our amazing advisors at NCH, and specifically ask for the one and only David Vanlandingham that just really does so well with all of our clients and gets incredible reviews and feedback because I think you care so much and you love what you do too.

So thank you for all you do for all of our clients, David. Because I know I appreciate that and I know they do.

David: It’s my pleasure. It’s not a job when you enjoy it and love it. 

Cort:
Fantastic. Well, thanks for giving us some feedback today on why LLCs are such an important fit for every real estate investor and the fact that they need to have a one-on-one consultation before they get too far down this path so they make sure that they do it right from the onset as opposed to coming to us later trying to fix something that becomes a real problem.

So thanks for being on the program today, David. I appreciate it. 

David:

Absolutely. I appreciate it. Thank you.

Cort:

Thank you. And for those of you tuning in today, thanks for watching. Another edition of Wealthy and Wise. I’m your host, Cort Christie. And please like and subscribe to our program really helps us. It also lets you know when the next great episode is coming up for you to learn a little bit more about some part of asset protection or tax strategies for small business or real estate investors. And again, thanks for tuning in.

With NCH, the state’s top business formation service, you can register your LLC in Nevada quickly and easily. Our specialists will help you choose the right entity for your company and understand why an LLC in Nevada is your best option. We’ll assist you with all necessary Nevada LLC forms, including the vital Articles of Organization, and help you comply with state regulations. In addition, we offer expert assistance with tax compliance, credit building, and payroll management. Schedule a private consultation to explore effective solutions to minimize tax liabilities and protect your wealth. Start unleashing your LLC’s full potential today with NCH.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.