To LLC Or Not To LLC?

Attorney Brad Jacobson Answers That Question

Do I Need An LLC?

A List Of Pros and Cons As Reviewed On the Replace Your Income Podcast

Pros of LLC

Potential Liability Protection:

The "LL" in LLC stands for limited liability, meaning that an investor's liability is generally limited to the amount invested in the property. This protects personal savings and assets from risks associated with property ownership.

Business Deductions:

Real estate investors can enjoy deductions on normal business expenses before allocating income to members. This helps in reducing taxable income and increasing the overall profitability of the real estate ventures.

Perpetual Existence:

The life of an LLC is not tied to the life of its members. This is advantageous for real estate investors who plan for the long term. The LLC can persist even if a member decides to exit or if the property is transferred.

Ownership Flexibility:

Real estate LLCs allow for flexibility in ownership. Investors can bring in partners, such as other investors or family members, without the restrictions imposed by other business structure.

Cons of LLC

Straw Buyer Scenario:

Changing the ownership of a property via deeding into an LLC is considered loan fraud—can be considered a “straw buyer” scenario. This was a major component to the Great Recession. Investors would get their friends to purchase a property in their own name and then they would get paid a few thousand dollars to deed the property into the name of an investor owned LLC. When the crash happened and banks went back to the original buyer they found that a new entity was now on title and their recourse became fuzzy. In the end, the original buyer was left with a property they didn’t want and payments they couldn’t afford and the threat of loan fraud to boot.

Due On Sale Clause Trigger:

Mortgage company could enforce “due on sale” clause—not very likely. I have never seen it happen. But it exists in part based on the previous bullet point. If they see that property ownership has changed they can call the loan due to protect their investment. But as long as payments are being made it’s not likely. I have a saying “everything is good until it isn’t.”.

1031 Exchange Problems:

An LLC cannot take advantage of the tax code allowing an owner to defer taxes via a 1031 exchange upon sale of the property.

Ease of Lending:

If you set up an LLC first and try to purchase property in the name of the business, it can be very very difficult and you will not get the same benefits of acquiring a loan in an individual’s name. Typically, a commercial loan must be paid over 15 years instead of 30 years and interest rates are typically 1%-4% higher and often with higher closing costs. One of the benefits of purchasing single family residence properties is you get these benefits. Commercial real estate requires commercial loans. Commercial real estate typically is any property with more than 4 units.

Watch Our FREE Training

Transform Your Financial life in less than 15 minutes!

Kickstart your tax-free real estate journey by watching our free training! Plus, get a free copy of the Micro Wins to Millions book – your guide to stacking small wins in real estate that lead to big success.

We respect your privacy. Your data will not be shared or sold.

Kevin Clayson & Steve Earl

DFY Real Estate, co-founded by Kevin Clayson and Steve Earl, empowers individuals to achieve financial independence through accessible real estate investing using their "Moneyball Real Estate System."

COMPANY

RESOURCES

No Investment Advice: The information provided to you by us is for information, education and instructive purposes only. We are not a licensed investment advisor and do not intend to provide you any investment advice. Although we may provide information and education relating to real estate investment approaches and where to acquire real estate properties, you should not construe any information, features, tools or other content provided by us as legal, tax, investment or financial advice. We are not acting as agent for any entity offering its securities. Nothing contained in the materials or the presentations provided to you shall be taken by you (or is meant to be taken by you) as a solicitation, recommendation, endorsement or offer by us or any third party to buy or sell any securities or other financial instruments. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information provided to you before making any decisions based on the information and services provided to you. In exchange for the services provided to you, you agree not to hold us or any of our employees or affiliates liable for any possible claim for damages arising from any decision you make based on information made available to you. No investment, legal or tax advice is given to you and you should consult your own licensed tax, legal or other advisors for such advice before you implement your financial decisions. No information that we give or provide to you shall be construed by you as a recommendation by us to invest the equity in your home or in any retirement or savings accounts. If you believe that any of our services provided to you are not consistent with the statements herein, contact us immediately so that we can clarify and/or modify any presentations to be consistent with this Agreement. You agree to indemnify us for any damages, losses or expenses that we incur as a result of any claims or statements by you that we provided services to you in violation of this section.