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Pros & Cons of Using an LLC For Rental Property w/ Matt Faircloth for BiggerPockets - YouTube
Channel: Derosa Group
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hey biggerpockets it's matt so today
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we're going to talk about a question i
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see all the time on the forums
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and it's even beyond just llc's and what
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are they and everything like that it's
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should i form an llc for every deal and
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this is a lot of people even asked a
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question like should i form an llc
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at all right well yes
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the first quest first answer that
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question and what is an llc a lot of the
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basic stuff that's all
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out there on the forums and other
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articles on that we're going to talk
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about forming an llc for every deal you
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do
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and why you should and why you should
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okay
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and i have my opinion on this i'm sure
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you'll see my opinion come out but there
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are schools of thought on both of them
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so let's review both schools of thought
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and then we'll get into what i think
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about it okay
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so the reasons why you absolutely should
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is if you've got different owners
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so that sounds like a simple thing but
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let's say
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you buy property a with you and your
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brother-in-law and you buy property b
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with just yourself or you and your wife
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or you raise an investor
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that comes in and throws some private
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capital in your deal
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all those three scenarios are all
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different setups and different ownership
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so you should definitely have an llc for
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each of those deals
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that has a different ownership breakdown
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different percentages different owner
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benefits different owner rights and
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responsibilities
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roles goals and compensation and all
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that for each owner
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for each llc the operating agreement for
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the llc will define all of those things
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yes absolutely if you have different
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owners right now you don't think about
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this but this is a good one
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if you are doing business in multiple
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states
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okay states in the in the union in the
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country of the united states
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uh you should definitely have an llc for
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each state
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because if you don't you will have to
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file the llc that you're in
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as a foreign business entity in the
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state that you're working in you'll
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and in some states you'll have to have a
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mailing address in that state
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somewhere it becomes a pain in the neck
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so it makes sense and also you have to
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pay income tax in the state you're
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registered in
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and you'll have to pay state income tax
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in the state you're doing business in
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so it can cause double taxation uh for
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your llc and so it becomes simpler
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if you do if you form an llc that's in
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the state that you
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you're doing business in that's number
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two now
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i do this sometimes sometimes i don't it
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depends on
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who um it actually depends on more on
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the owners that i'm partnered with
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but fix and flips okay
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now why would you want to form an llc
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for each fix and flip you do matt i'll
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answer that question for you folks
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asking that
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i don't do it first of all the reason i
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don't do it on every flip is
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if it's just my company just the derosa
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group that's doing the flip
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the derosa group is an s corporation and
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deroser group has w2 salaries that it
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pays and it also has business income
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i have a video out there that you guys
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want to watch on ys way as corporations
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are awesome where i interview my cpa
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uh it's on biggerpockets and he and i
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talk about this i'll put it in the show
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notes um
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in the in the link you guys can link to
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that conversation um
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but uh that's uh that's why you want to
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do flips not in an llc if it's using an
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s core because it's great tax benefits
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for doing flips in an s corporation if
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you don't have an s corp and if you
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don't have w-2
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salaries you're paying yourself and then
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business income on top of that
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then you want to form an llc for every
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deal here's why
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i asked that question earlier and then
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let me answer that question okay
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uh if you sell 123 main street to a home
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buyer
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and that home buyer is happy they go on
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down the road
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and then you start flipping another
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property the first home buyer
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could have a liability claim they could
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have
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issues come up with themselves or
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something like that and if they go to
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just it closes down the entity that did
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that flip and that flip is now behind
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you
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and it's done you know and then you do a
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new flip that's that's designated for
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that property and it compartmentalizes
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the project and doesn't link
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one project through an llc uh to another
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if you were to have a liability claim
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okay and odds are if you have a
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liability claim you will have cancelled
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your insurance which is another thing
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we're going to talk about big time you
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will have cancelled your liability share
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and insurance
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on the property you sold a while ago by
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the time that that property
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uh was sold so from it to protection to
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close the door
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and to you know close the project down
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it makes sense to have an llc for every
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address
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it's a bit of a protection a bit of a
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level of protection that you can have in
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there i do it sometimes don't do it
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all the time and most of the time when i
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do it it's because of this it's because
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i have a partner in the flip
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um but it's something that some people
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do to compartmentalize the flap so that
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it so that
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whatever happens on this flip can't
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affect other projects they may have
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going on or have done in the past
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okay said i okay now
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there's a big reason why people do flip
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do llcs
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on every deal and we're gonna discuss
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this one
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in great detail but that's for asset
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protection
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the the school of thought on that is
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if i own 456 main street and that's my
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rental because one two three main street
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with my flip remember that
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so four five six is my rental uh down
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the road
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and i also own a property over here and
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a couple other properties
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and if somebody were to sue me on a
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liability claim for a slip and fall
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on 456 main street that person could not
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come through and affect my ownership on
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the other properties and take my entire
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portfolio
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right because the properties are all
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under one umbrella
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so they can't go through that llc and
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you know
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uh go and pull that llc's assets and
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everything like that right
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that's the school of thought is asset
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protection it compartmentalizes your
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assets
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so 456 main street and one two three
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high street
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and you know one two three second street
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are all in separate companies
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okay that is the school of thought we
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will debate that in just a moment my
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friend
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um but uh now here's reasons why you
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should not get an llc for every deal
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okay
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number one biggest one is it's not
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required by law you don't have to
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you know the any attorney or whatever
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that would tell you that you have to do
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it by law
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is wrong so it's not there's no law
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around having to form an llc for every
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deal you do
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um there's uh there's also
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this is you know maybe why i don't do it
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is for cost
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if you form an llc for every deal there
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is a
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filing fee for that llc at least in
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setting it up
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there is a cpa fee for filing that llc's
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tax returns now and see people debate
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well what about single member llc's and
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stuff like that
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i think it's very easy to um
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see through a single member llc because
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it doesn't even have a tax return
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um and so that's that can be debated too
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if you like
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uh but the but typically if it's not a
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single member llc and if it has some
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several members the costs associated
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with maintaining that llc
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from paying your cpa to paying filing
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fees to the state that you're in
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um can start to add up especially if
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you're buying a bunch of little small
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single family homes or small multis or
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something like that
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this will become a factor okay um
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now there's uh then let's oh
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one other reason why you don't want to
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why you want to
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not get an llc for every deal meaning
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you want to
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uh portfolio properties you want to buy
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a bunch of properties under one umbrella
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big reason why you want to do that which
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in turn means
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that you don't want to do an llc for
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every deal so that answer is no for that
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but why you would want to put them all
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under one umbrella
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or a larger umbrella is because it makes
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it easier
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to get loans believe it or not
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everybody talks about portfolio lenders
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and stuff like that if you're buying
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you know 50 60 000 houses and renting
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them out
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it will be harder to get a lender that
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wants a fifty to sixty thousand dollar
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loan
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right um myself and a lot of people that
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are in my part of the world
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do the burr strategy the buy
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rehab rent out refinance repeat method
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but he'll do it on a small portfolio of
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properties will do
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three four five six seven addresses at a
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time you couldn't do that
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if you're in a if you're doing an llc
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for each one of those deals
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if you come if you portfolio the
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properties under one llc
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as this node would say that you're doing
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then you've now created a loan amount
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that banks will talk to you about banks
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don't want to lend
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50 60 000 they'd rather lend you three
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four five six hundred thousand dollars
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so why not create a loan of that size
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it's more appealing to them it's the
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same amount same amount of work
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but it's more fees you know they get to
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make more money and they get to meet
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their costs and their goals
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uh much easier if they give you a big
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loan versus this little
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small loan that it would be if you did
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it on this side so consider that
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now here's the big conversation okay um
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and this is the
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asterisk matt faircloth's uh strong
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opinion about these things but
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it's also been my experience the
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the reason why is because this is not
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true
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okay is that there is that insurance
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will protect you just as well as an llc
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will
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okay and it's not that it's not true you
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don't get asset protection at all
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but you don't get any more asset
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protection
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i don't think in having multiple llc's
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for every deal that you do
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for every single family home that you
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own or for every rental property that
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you have there is no further asset
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protection you get
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in having each deal and one llc
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than having a portfolio of properties
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under one llc
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here's why okay if an attorney sues
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your llc because their client you know
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how to slip and fall
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and you know listen i've been in
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business for 11 years i've had like
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three slip and falls
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i've had a tenant claimed a piece of
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sheetrock
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fell off her ceiling and hit her in the
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head
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we had a guy that claimed he slipped and
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fell on carpet
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in his apartment right and he broke his
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back by the way
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you know that's he broke his back
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falling on carpet in his apartment okay
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i may have some other liability stuff
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out there too so we've been we've
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unfortunately had liability claims many
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many times
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not one time and not one time anybody
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else that i know
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did the attorney suing try to pierce the
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corporate veil
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okay um meaning to try and reach into
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the llc
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and get a hold of the assets to try and
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foreclose on the assets or even further
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this gets really scary to pierce the
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corporate veil and come after me
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personally
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to try and get my you know my home or my
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personal cash
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or my car or whatever which is what some
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people worry about and that's why this
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whole llc thing is there like i don't
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want him to come get my stuff
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to come get my house or to have to file
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bankruptcy because the tenants slipped
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and filed my property
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none of that's gonna happen and here's
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why this my attorney friends out there i
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love you
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but attorneys are lazy and attorneys uh
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maybe they take just they do what they
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have to do and they're going to go after
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this
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they're going to go after insurance
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they're going to general liability
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insurance
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and just every claim that i've had i
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even have one attorney
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just submit a letter that said hey my
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client's gonna assume please submit this
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letter to your insurance company so that
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we can work out an arrangement
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that's it they didn't even want to sue
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me really they just sent a letter
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saying that hey we're going to sue you
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and send this letter to your insurance
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company can you believe that
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so um i actually called the lawyer on
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that one i said hey if you're going to
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send this letter you might as well just
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i'm not going to send this to my
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insurance company you need to go ahead
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and sue me and they didn't by the way
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you let it go
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because it had a it was a bogus claim um
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but
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attorneys that have real conversations
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and you know people that have real slip
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and falls and stuff like that
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that's what insurance is there for and
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so and there's large insurance policies
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that you have on your properties and by
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the way you should have
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the larger these portfolios get the
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larger insurance policies you should get
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to cover potential general liability
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claims
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so you start out maybe you have a
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million coverage with two million
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aggregate meaning that two million is
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the most that they'll cover
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uh for multiple occurrences right um but
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if you have multiple properties you can
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up it to
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say 2 million or 4 million or go up from
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there talk to your insurance
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your insurance agent about what's
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available for multiple properties
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there's even things called
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umbrella insurance coverage you can get
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you can get a lot of insurance
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and it's going to be cheaper than
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running around with a bunch of llc's
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right so insurance my friends
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is there is the reason why and just the
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way the world works and
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unfortunately unfortunately that
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insurance will step in
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and take care of you way before an
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attorney
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uh or a lawsuit is going to get through
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all these this llc
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stuff and to go and try and take you
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know the equity in another property or
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put a lien and by the way it will take
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them
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years to do one of those foreclosure
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filings
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and to come and put a lien for closing
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the property and to come and get your
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stuff and everything like that it would
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take them years to do that where
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an insurance claim could take anywhere
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from six to nine months okay
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so maybe they're lazy maybe they're not
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maybe they just know where the money is
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right
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um so anyway that's why uh i say
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i recommend no for an llc for every deal
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there's other folks out there
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love to get into a conversation with you
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about it uh other schools of thought i
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know
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and um i'm a little wild while west
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sometimes in my business but uh
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but i i'd be happy to go uh in a
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conversation with some of you folks a
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little more conservative and think this
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is a good thing to do
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uh let's let's talk about that so as
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always if you want to
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leave some comments down below uh love
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to hear your thoughts
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yay or nay on this um as always always
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guys i sure appreciate you guys watching
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and
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getting a conversation with us and um
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have a great and profitable week
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