Real Estate Investing - General

[DTEJD1997]

Hi guys -

Anyhow, since I'm considering this again, I'm looking for advice on how many of you have structured the legal entity. I had an LLC registered before but just did that mostly for tax benefits (pass through taxes at my low rate as opposed to corporate rates). Can you guys tell me the positives/negatives of doing an LLC, LP, C Corp, etc. from your knowledge and experience?

 

Zach:

 

This is definitely a topic that could sustain a whole thread.  There are books & courses designed with JUST this question in mind...

 

Basically, what you want to do is limit your risks from a catastrophe AND have a tax pass through advantage.  If you are dealing with relatively small amounts of capital AND relatively few principals who live in the same state, you could do a LLC, or a subchapter S company.

 

A chapter "C" company has the double taxation problem, BUT can have principals from different states and can handle huge amounts of capital.

 

As a rule of thumb, you want to stay away from partnerships...

 

If you are going to be doing anything with investors, it is DEFINITELY worth a few hundred dollars to consult with a competent attorney in your jurisdiction.  An ounce of prevention is worth a KILOGRAM of cure.

 

Here is tip...the legal market has COLLAPSED.  Many attorneys are looking for work (or out of work) and have mind blowing student loans to pay off.  So feel free to negotiate over attorney fees.

[moody202]

Hi guys -

Anyhow, since I'm considering this again, I'm looking for advice on how many of you have structured the legal entity. I had an LLC registered before but just did that mostly for tax benefits (pass through taxes at my low rate as opposed to corporate rates). Can you guys tell me the positives/negatives of doing an LLC, LP, C Corp, etc. from your knowledge and experience?

 

Zach:

 

This is definitely a topic that could sustain a whole thread.  There are books & courses designed with JUST this question in mind...

 

Basically, what you want to do is limit your risks from a catastrophe AND have a tax pass through advantage.  If you are dealing with relatively small amounts of capital AND relatively few principals who live in the same state, you could do a LLC, or a subchapter S company.

 

A chapter "C" company has the double taxation problem, BUT can have principals from different states and can handle huge amounts of capital.

 

As a rule of thumb, you want to stay away from partnerships...

 

If you are going to be doing anything with investors, it is DEFINITELY worth a few hundred dollars to consult with a competent attorney in your jurisdiction.  An ounce of prevention is worth a KILOGRAM of cure.

 

Here is tip...the legal market has COLLAPSED.  Many attorneys are looking for work (or out of work) and have mind blowing student loans to pay off.  So feel free to negotiate over attorney fees.

 

I agree on the LLC. For small investors, it a the best vehicle for asset protection without any tax penalties. If you are going to consult an attorney, look for specialization, go for a real estate attorney. Also -- depending on the topic, you will need to consult different attorney, one attorney won't cover all topics.

[yadayada]

The wage has not been risen at 7% a year either in the past 20 years...

 

Between 1975 and 2013, we have seen 7% annual appreciation in the Los Angeles area.  If you bought a 75K property in 1975, it is probably worth over 1M today. 

 

I agree with a lot of what you say, BUT do you think property in CA, especially L.A will continue to appreciate 7% a year for the next 20 years?  If so, that $1MM house today will be something like $4MM 18-20 years from now?  Wages have not been going up that fast...

 

Who is going to be able to pay $4MM for a somewhat above average house 20 years from now?  Heck, I am amazed there are enough people willing/able to pay $1MM for a house now...

 

In certain areas of the country, you can get a very, very nice house for $100k or $150k.  At some point, I would think business/buyers will start moving away from the high cost areas.  Granted, living in LA is better than living in Indiana or Michigan...but at some point the cost simply is not worth it...

 

You are starting to see this in the legal profession...work is being outsourced out of NYC and DC to Detroit and Minneapolis.  You can get plenty of lawyers willing to work for $25/hour in the midwest....so work is moving out of the high cost areas.  I think this trend will accelerate in the future.

isnt this all the more reason its not sustainable. Less and less people got to buy a house, so now the next 20 years that number will rapidly be even lower, untill a cap is reached. Who says that cap wont be reached 5 years from now?

 

Unless the chinese come in and start buying everything.

[DTEJD1997]

The wage has not been risen at 7% a year either in the past 20 years...

 

Between 1975 and 2013, we have seen 7% annual appreciation in the Los Angeles area.  If you bought a 75K property in 1975, it is probably worth over 1M today. 

 

I agree with a lot of what you say, BUT do you think property in CA, especially L.A will continue to appreciate 7% a year for the next 20 years?  If so, that $1MM house today will be something like $4MM 18-20 years from now?  Wages have not been going up that fast...

 

Who is going to be able to pay $4MM for a somewhat above average house 20 years from now?  Heck, I am amazed there are enough people willing/able to pay $1MM for a house now...

 

In certain areas of the country, you can get a very, very nice house for $100k or $150k.  At some point, I would think business/buyers will start moving away from the high cost areas.  Granted, living in LA is better than living in Indiana or Michigan...but at some point the cost simply is not worth it...

 

You are starting to see this in the legal profession...work is being outsourced out of NYC and DC to Detroit and Minneapolis.  You can get plenty of lawyers willing to work for $25/hour in the midwest....so work is moving out of the high cost areas.  I think this trend will accelerate in the future.

isnt this all the more reason its not sustainable. Less and less people got to buy a house, so now the next 20 years that number will rapidly be even lower, untill a cap is reached. Who says that cap wont be reached 5 years from now?

 

Unless the chinese come in and start buying everything.

 

I remember in the late 80's people wringing their hands and fretting about the Japanese buying up all sorts of real estate, Pebble Beach, Rockefeller Center, etc.  As a very young man, I was complaining about this to a much more experienced business man.  He laughed &  smiled, said it was GREAT! 

 

Are the Japanese going to pack up the real estate & take it to Japan?

 

If a USA investor/businessman is selling to the Japanese, he knows a LOT more about the local market, and made a nice profit.

 

So perhaps if the Chinese come in buying, that will be the sign of the market top.

 

In areas of Texas, you can get VERY nice houses for $150k to $200k if you are willing to go to the suburbs & exurbs.  Even less than that in Midwest.  If you are willing to settle for a "modest" house, you can EASILY get one for $60k in Michigan.

 

Commercial real estate is even less!

 

At some point, I would think that individuals/business start pulling away from the coasts.  Sure, California is nicer than the Midwest, no doubt.  Are you going to pay 10X, 20X, 30X to live & work there?

[sethatk]

I have heard it said it is best to form an LLC for each property. I wonder how to structure multiple LLC's, anyone have  experience here?

[Morgan]

I have heard it said it is best to form an LLC for each property. I wonder how to structure multiple LLC's, anyone have  experience here?

 

My understanding is that it isn't worth it in terms of accounting fee's unless they are large properties. It would get unruly I think to have 20 LLC's for 20 duplexes or something like that. If you have two large 100 unit complexes then yes, I could definitely see having multiple LLC's. In terms of pure liability, yes, a LLC per property will minimize the damage done in the event of a lawsuit. You should find the balance that makes you comfortable. 

[moody202]

I have heard it said it is best to form an LLC for each property. I wonder how to structure multiple LLC's, anyone have  experience here?

 

I hear this recommendation on a regular basis too but nobody has given me a good reason why one LLC per property. Sounds good to say but rationale is weak.

 

LLC is an asset protection vehicle so it really comes down to how you would want to segment your assets and exposure. There is a cost, with each LLC you end up paying annual filing fees and tax preparation that adds to costs not to mention paperwork to keep track of. 

 

If I was doing apartment buildings, I would put each one under it's own LLC. If doing single family houses/condos -- I would be comfortable putting 5-7 under each LLC.

 

Not that is helps eliminate the confusion, I am sure you see major private companies run as LLC's so clearly there is guideline of how big the asset is before you branch off into multiple LLC's or different kind of entity.

 

If you are a serious RE investor, land trusts are a good option to explore for personal holdings!

[jhcap]

Anyhow, since I'm considering this again, I'm looking for advice on how many of you have structured the legal entity. I had an LLC registered before but just did that mostly for tax benefits (pass through taxes at my low rate as opposed to corporate rates). Can you guys tell me the positives/negatives of doing an LLC, LP, C Corp, etc. from your knowledge and experience?

 

I have been investing in real estate for about 13 years. I own and manage single family condos, vacation rental properties and a multifamily property. I use a separate LLC for each property with a separate bank account. The idea is to create a legal barrier so that in the event you are sued by a tenant, they can only go after the assets of the business that owns the property that they occupy.

 

One issue is that unless you have significant cash to purchase the property with, the mortgage will probably be in your name as opposed to the shell company. It is my understanding that his could create a weakness in the corporate vail, but I am not an attorney.

 

I am not sure what the best legal entity would be if you were using OPM to buy real estate. This is a good question for a real estate attorney. I suspect that a hedge fund type structure with a LP managed by an LLC would work well, but again I don't know for sure and it may vary by state.

[fareastwarriors]

Anyhow, since I'm considering this again, I'm looking for advice on how many of you have structured the legal entity. I had an LLC registered before but just did that mostly for tax benefits (pass through taxes at my low rate as opposed to corporate rates). Can you guys tell me the positives/negatives of doing an LLC, LP, C Corp, etc. from your knowledge and experience?

 

I have been investing in real estate for about 13 years. I own and manage single family condos, vacation rental properties and a multifamily property. I use a separate LLC for each property with a separate bank account. The idea is to create a legal barrier so that in the event you are sued by a tenant, they can only go after the assets of the business that owns the property that they occupy.

 

One issue is that unless you have significant cash to purchase the property with, the mortgage will probably be in your name as opposed to the shell company. It is my understanding that his could create a weakness in the corporate vail, but I am not an attorney.

 

I am not sure what the best legal entity would be if you were using OPM to buy real estate. This is a good question for a real estate attorney. I suspect that a hedge fund type structure with a LP managed by an LLC would work well, but again I don't know for sure and it may vary by state.

 

Which state are you operating in?

[moody202]

Anyhow, since I'm considering this again, I'm looking for advice on how many of you have structured the legal entity. I had an LLC registered before but just did that mostly for tax benefits (pass through taxes at my low rate as opposed to corporate rates). Can you guys tell me the positives/negatives of doing an LLC, LP, C Corp, etc. from your knowledge and experience?

 

I have been investing in real estate for about 13 years. I own and manage single family condos, vacation rental properties and a multifamily property. I use a separate LLC for each property with a separate bank account. The idea is to create a legal barrier so that in the event you are sued by a tenant, they can only go after the assets of the business that owns the property that they occupy.

 

One issue is that unless you have significant cash to purchase the property with, the mortgage will probably be in your name as opposed to the shell company. It is my understanding that his could create a weakness in the corporate vail, but I am not an attorney.

 

I am not sure what the best legal entity would be if you were using OPM to buy real estate. This is a good question for a real estate attorney. I suspect that a hedge fund type structure with a LP managed by an LLC would work well, but again I don't know for sure and it may vary by state.

 

Has this structure ever been useful to you?

[jhcap]

Anyhow, since I'm considering this again, I'm looking for advice on how many of you have structured the legal entity. I had an LLC registered before but just did that mostly for tax benefits (pass through taxes at my low rate as opposed to corporate rates). Can you guys tell me the positives/negatives of doing an LLC, LP, C Corp, etc. from your knowledge and experience?

 

I have been investing in real estate for about 13 years. I own and manage single family condos, vacation rental properties and a multifamily property. I use a separate LLC for each property with a separate bank account. The idea is to create a legal barrier so that in the event you are sued by a tenant, they can only go after the assets of the business that owns the property that they occupy.

 

One issue is that unless you have significant cash to purchase the property with, the mortgage will probably be in your name as opposed to the shell company. It is my understanding that his could create a weakness in the corporate vail, but I am not an attorney.

 

I am not sure what the best legal entity would be if you were using OPM to buy real estate. This is a good question for a real estate attorney. I suspect that a hedge fund type structure with a LP managed by an LLC would work well, but again I don't know for sure and it may vary by state.

 

Which state are you operating in?

 

I operate in Wyoming. Wyoming is considered by many to be the most tax advantaged state in the U.S. No corporate or personal income tax unless you are a large energy or mining company. There are other tax advantages including very low property taxes, no real estate sales tax, no inheritance tax, no excise tax and several others. This is the reason why some of the wealthiest people in the country are buying property in places like Jackson Hole and trying to establish residency.

 

The fees for starting an LLC and filing annual reports are minimal in Wyoming. Only $130/year per company.

 

Fortunately I have never had to test my corporate veil.

[DTEJD1997]

According to my limited understanding, you can "pierce the corporate veil" in only a couple of ways...

 

A). defect in formation of the entity

 

B). Under capitalization of the entity

 

C). Fraud

 

D). Commingling of the entity

 

I will assume that all members of this board would never engage in C.  I will also assume that we all can satisfy requirements of A.  Especially if you use an attorney who has experience in these type of things.

 

So that would leave B & D.  Having a "normal" mortgage would not meet the test of under capitalization.  Back when I studied this, it would have to be something pretty egregious.  To pierce the corporate veil on this would be relatively rare.  Simply having a lot of leverage or debt would not be enough...

 

Commingling would be treating the entity like your own private piggy bank.  Withdrawing funds without declaring a dividend, shoddy or no record keeping, basically running your entity exactly like a sole proprietorship or DBA.  That the assets of the company and the primary shareholder(s) were frequently intermingled...

 

So, as long as you correctly form the entity, put in some amount of capital, AND run it reasonably correctly, I doubt the veil could be pierced.

 

Of course, this is just my opinion, and NOT legal advice.

[DooDiligence]

NYC renters got float, but no moat.

 

www.mpamag.com/news/new-york-city-renters-hold-more-than-1-billion-in-back-rent-243627.aspx

 

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This seems like a thread that should be revived.

[fareastwarriors]

NYC renters got float, but no moat.

 

www.mpamag.com/news/new-york-city-renters-hold-more-than-1-billion-in-back-rent-243627.aspx

 

---

 

This seems like a thread that should be revived.

 

Saw similar article in the WSJ too.

 

$1-2 billion for 9 months or so is a of money, yes.  But what was average total monthly rent collection pre-COVID? Hard to tell anything with both numerator and denominator.