How to buy properties in an LLC, how to form an LLC and how an umbrella policy works with an LLC.

by | Indiana real estate, Indy Anna, Real Estate Investing

How to buy properties in an LLC, how to form an LLC and how an umbrella policy works with an LLC.

Here’s how real estate investors can buy investment properties in an LLC and when to know if it makes sense, how an umbrella policy works as protection and other basics of investing with an LLC. 

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Now for today’s class on finding essential business rented commercial…

How to buy properties in LLC name, how to form an LLC and how umbrella polices work with LLCs.

Indy Anna explains;

  • How to form and LLC

  • What kind of buyers are best suited for this

  • Protection beyond the LLC alone

So, this question has come up in the past more than once, and I wanted to address it as it’s a little confusing for some folks.  So I asked some of our folks at BigReia.com/people to fill in the blanks and this class is what they came up with.

Many investors, even brand new investors will consider using an LLC to purchase a property under. This is due to the protection an LLC offers and not having personal responsibility attached to the property, as well as the tax vehicle it offers for pass through income. 

Why Delaware?

Most of the time, these LLC’s can be formed online by the individual who wants it set up, Delaware often being the State of origin. Why Delaware?

  • Easy and streamlined, affordable process 

  • Tax benefits and yearly fees

  • A separate court that deals with business dealings, making most cases that go to trial faster than in other States

There are a few other States that also offer similar benefits, but overall Delaware is the favorite historically speaking. Here’s just a few sites that can help you do this and we’ll include the links below as well;

https://www.zenbusiness.com/

https://www.incfile.com/

Also check out my class on how to set up your own LLC here.

You can do this yourself online.

Unless you’re using syndicated funds (aka family, friends, method of advertising for others) this is perfectly legal to set up yourself and do online. If you’re using syndicated funds, at least consult with an SEC attorney to make sure you’re not truly doing anything that will put you on the SEC’s radar. 

Now many folks will have not only one LLC, but a separate LLC for each property. The reason for this is that if Johnny Q. Public trips and falls on property ‘A’ and sues for damages such as medical bills, if he sues the LLC the property is held under, the owner himself/herself should be okay personally BUT the other properties attached the the same LLC might be at risk- like properties ‘B’, ‘C’ and ‘D’.

This is why having separate LLC’s for each property is more beneficial than one alone if you have multiple properties. 

Now this usually works best for cash buyers as far as a timeline goes- it’s much easy and faster to purchase a deal with a cash funded LLC, than to obtain financing through the LLC for a loan product in most cases. 

It’s not impossible to do, it simply takes longer and requires more of a profit/loss history, and can come with higher interest rates as well. Either way you go, it’s easier to obtain an EIN at formation for tax purposes from the start, as well as possible future financing down the line. 

What about for protection beyond the LLC?

Now here’s the protection beyond the LLC, and umbrella policy or umbrella insurance. This is separate from the LLC(S) and will come from your homeowner’s insurance provider in a lot of cases- it’s not homeowner’s insurance, just a lot of insurance companies provide this type of policy as well. 

This is an umbrella of coverage- meaning how you would pay in most cases for the suit portion of an LLC being sued. It’s your coverage portion to pay out- often these can go into the millions $- minus your deductible. 

Here’s one example of how a lawsuit with an LLC would work?

Johnny who’s very clumsy falls on property ‘A’ and sues Alpha LLC for $2M because he’s greedy and went with a big number for my example. 

Now savvy investor Tiffany has multiple properties, but each under their own LLC. Bravo LLC, Charlie LLC and Delta LLC and she has an umbrella policy for up to $3M on each. 

Well, Johnny is going to be pretty limited on getting to Tiffany personally as far as her personal assets go, as well as Bravo, Charlie and Delta LLCs because they aren’t attached to Alpha LLC.

The ruling may not matter.

So, even if it was ruled in Johnny’s favor for a $2M payout, Tiffany should only be paying the deductible on her umbrella policy out, as far as cash goes towards a settlement. 

Obviously much more ‘safe’ for Tiffany than to have one LLC sued that holds all of her properties as well as being on the line to come up with cash for a $2M payout from the LLC.

 Should you lend money to your LLC?

So how do you do this?  Most of the time it’s best not to lend money to your LLC apart from the purchase of the property itself to keep a complete separation of ownership established.

Meaning, it’s much easier to form an LLC, fund it and buy a property under the LLC than to buy a property in your personal name and transfer it to the LLC.  This is easier and also offers the most protection. 

You can apply for funding as I mentioned above, but it is important to keep personal separation of your assets and those of the LLC.  One mistake many new investors make is using their personal credit in a co-signed kind of way, which isn’t ideal for asset protection. 

How can you do this if you don’t have stacks of cash laying around then? 

Well, one way to do this would be to obtain funds from a cash out refinancing (BRRRR), and put those funds into that of a new LLC to acquire an additional property or even your first one. Again, funding the property purchase alone here, and keeping personal assets separate. 

You can apply for a loan through your LLC of course, but it will take longer, and there will need to be some sort of history for the bank/lender to use.  Business credit ratings and debts vs personal ones.

Applying for funding with your LLC.

Usually applying for funding through the LLC isn’t something that you would typically set out to do on your first property mainly because you would no history.  It would also be expensive with higher rates.

Having said all of this, there are some investors who will choose to simply have an umbrella policy and forgo the LLC process altogether. 

Tax Benefits.

This can take away from the tax benefits and having pass through income, and seems to expose the umbrella policy alone in asset protection, where having an additional layer is simple enough to do. 

The reason for this is simply the cost of yearly fees- again minimal in Delaware and some other States- as well as the fees/cost for setting the LLCs up from the start. In some cases if loans were used, it was due to obtaining a traditional mortgage loan.

So in summary:

I’ve covered how to purchase a property through an LLC

Who this usually works best for; what type of investor 

AND I’ve told you about the extra protection possibly beyond an LLC alone 

So that’s it, make sure to go BigReia.com and get our list of over 100 FREE ways to find motivated sellers, how to buy and sell companies at light speed and retire in the next year with over 30k/month coming in on auto pilot: BigReia.com go there and you’ll…

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