When to Form an LLC for Real Estate?

Last updated October 12, 2020

When to Form an LLC for Real Estate?

Let’s talk about a major mistake that real estate investors make: When to form an LLC for real estate.

When to Form an LLC for Real Estate?

Video Transcript:

Hey, folks. Matt Horwitz, LLC University. Hope you’re doing well. Let’s talk about a major mistake that real estate investors make in regards to set up their LLC. Just got a phone call today and we’ve gotten dozens and dozens and dozens of these phone calls. People phone in saying, “Hey.” They’ve done some research. They’ve learned that they need to set up an LLC for their investment properties so that they can protect their assets, but they already bought their property in their name. They think that just setting up the LLC is going to somehow magically protect their assets. That’s not the case. If you think about it, those properties are owned by you personally. Just setting up an LLC, it’s not affiliated with that at all. An LLC doesn’t protect anything you do magically, right? You’re setting up an entity. You’re creating an entity, you’re creating an entity by state statue. That entity, therefore, needs to own the property and do the business. What I mean by that is that when you’re purchasing the properties, you’re purchase contract, your agreement of sale, the deed, any financing, all of that is in the name of the LLC.

The LLC holds title to the property, not you personally. Got a phone call today from a guy in California who owns three different properties all financed by three different banks and wanted to set up an LLC to protect his assets. I said, “Yeah, just so you know, don’t go ahead and set the LLC up right now. What you need to do is you need to call each one of the different banks to see if he can refinance or transfer the title and how that’s going to affect the loan.” Once people kind of understand like, “Okay, cool. I realize that I need to transfer the title into the name of the LLC.” Right. They realize they need to do that. Sometimes it’s called a dollar deed.

Basically, where you are in the United States, it’s going to be sometimes the name of the deed may be called something different. There may be different fees, but essentially you’re going to be selling the property for one dollar from yourself to your LLC, but if you have financing and you have mortgages attached to those properties you can’t just knock it out and do it really quickly. You have documents and documents and mortgages and clauses and things that you signed at settlement. Just because it’s going from you to your own LLC, it doesn’t matter. To the finance company, it’s going from the seller to a different buyer, right? You need to pick up the phone, call the different bank and say, “Hey, look. I need to get this title out of my own personal name and put it into the name of the LLC.”

Now, some people are going to be out of luck because some banks may not allow it. If they’re going to be lending to an LLC even with you personally guaranteeing the loan, it’s no longer going to be residential loan. It’s therefore a commercial loan and commercial loans take place usually within a different department in the bank. They have different terms and they have different rates. You’re essentially refinancing the property in the name of the LLC. It’s a bit of a mess really. Hopefully, if you’re watching this video you’ve caught it before you purchased your property. You need to purchase your property and obtain your financing in the name of the LLC and order for that LLC to protect your personal assets.

However, if you’ve already bought property in your personal name and you want to transfer it to the LLC the biggest thing that’s going to hold you up is a mortgage. You need to talk to the lender. You need to talk to the bank. Let them know about your situation and see if you can go ahead and do a dollar deed or a dollar sale. Transfer the property. You’re going to have to pay some title fees. You’re not going to pay full blown transfer tax. In different places it’s called different things. Sometimes it’s called the common level ratio. It’s really, basically, cheap and affordable way to do the transfer tax because you’re basically selling it to yourself for a dollar. This is much more of a title based question than it is a LLC formation based question. You really need to be calling the bank and the title company to figure out what needs to take place. Just so you know, in order to get that asset protection you have to transfer those properties out of your personal name into the name of the LLC. That’s the sale of real estate. Needs to take place at a title company and if you have mortgages and finances in place you’re going to need to be refinancing or I’m calling it a transfer, but there may be a more technical name for that.

Hopefully, that makes sense. Hopefully, that helps. Hopefully, you’re watching this video before you’ve purchased properties in your own personal name. Even with strong liability insurance, you want to have an LLC. In worst case scenario, both of those together are really going to be your strongest combination. Just having one or the other is a weak scenario. You want to protect your assets to the fullest. Hopefully, this video makes sense. If you have any questions, you know where to find us. Thanks.

We get phone calls like this all the time:

“Hey, I just did some research and realized I need to setup an LLC for my real estate in order to protect my assets.”

The very first thing I ask is, “Did you close on the property already?”

Far too many real estate investors say “Yes.”

I shout through the phone: “Nooooooooooo!” (picture that scene in the movie where the main character just loses his best friend)

Okay, I don’t shout through the phone.

But instead, I have to help them get their head straight.

They’ve learned that they need to set up an LLC for their investment properties so that they can protect their personal assets, but they already bought their property in their name.

They think that just setting up the LLC is going to somehow magically protect their assets.

That’s not the case.

If you think about it, those properties are owned by you personally.

Just setting up an LLC does not automatically “attach” it to the property.

In fact, the LLC is not affiliated with the property at all.

I wish just forming an LLC magically protected all we do.  But nope.  It doesn’t work that way.

You’re creating an entity. That entity, therefore, needs to own the property and “do the business”.

What I mean by that is, the LLC is purchasing the real estate, not you. Your purchase contract/agreement of sale, the deed, and any financing… all of that has to be in the name of the LLC.

The LLC needs to hold title to the property, not you personally.

I got a phone call today from a guy in California who owns three different properties all financed by three different banks (in his personal name) and wanted to set up an LLC to protect his assets.

I said, “Yeah, just so you know, don’t go ahead and set the LLC up right now. What you need to do is call each one of the different banks to see if you can transfer the title and how that’s going to affect the loan.”

He was bummed by the wake-up-call.

My advice to him was to first call all 3 banks to see what they have to say.

Due on Sale Clause

Many banks will have a due-on-sale clause if the property is transferred to another name.

If they agree to the transfer, he’ll need to deed the property from himself to the LLC for $1 (often called a ‘dollar deed’).

Depending on what state the real estate is located, the name of the deed may be called something different.

There will also likely be transfer tax.  Now the transfer tax will not be the same amount as if it were a full-price sale, but it could be a couple hundred dollars.

After you speak with the bank, you’ll need to call a title company and double check on transfer fees/taxes and any other closing costs (there will be small miscellaneous title fees).

Now, some people are going to be out of luck because some banks may not allow the transfer.

To the bank, there’s a new buyer (the LLC)… and the bank may need to qualify the new buyer.

Even with you personally guaranteeing the loan, it’s usually no longer going to be residential loan.

It’s therefore a commercial loan (because of the LLC) and commercial loans take place usually within a different department in the bank.

Commercial loans have different terms and they have different rates.

You’re essentially refinancing the property in the name of the LLC.

It can be a bit of a mess really.

Hopefully you’re watching this video before you purchased your property.

Purchase Real Estate and Obtain Financing in the name of the LLC

To get full liability protection, you need to purchase your property and obtain your financing in the name of the LLC and order for that LLC to protect your personal assets.

However, if you’ve already bought property in your personal name and you want to transfer it to the LLC the biggest thing that’s going to hold you up is a mortgage.

You need to talk to the lender/the bank.

Let them know about your situation and see if you can go ahead and do a dollar deed or a dollar sale to transfer the property.

If you can, you’re going to have to pay some title fees.

You shouldn’t have to pay full blown transfer tax… but again, you’ll need to call a title company in your county/city to double-check on this.

Hopefully, that makes sense and is helpful.

And hopefully you’re seeing this video before you’ve purchased properties in your own personal name.

Even with strong liability insurance, you’ll want to have your properties owned by your LLC(s).

In worst case scenarios, both liability insurance and your LLC will really be your strongest combination for asset protection.

Just having one or the other is a weak scenario.

You want to protect your assets to the fullest.

Need help with your LLC? Have a professional LLC service file for you:
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Matt Horwitz
Founder & Educator, LLC University®
Forming an LLC shouldn't be so complicated. Our step-by-step guide will make the process a breeze – and no complex legal jargon! LLC University® teaches people how to form an LLC for free in all 50 states. We hope you find our free guides and resources helpful in your business journey.

78 comments on “When to Form an LLC for Real Estate?”

Disclaimer: Nothing on this page shall be interpreted as legal or tax advice. Rules and regulations vary by location. They also change over time and are specific to your situation. Furthermore, this comment section is provided so people can share their thoughts and experience. Please consult a licensed professional if you have legal or tax questions.

  1. I stumbled on to your site a bit late but here goes. I am purchasing two rental properties in Wyoming and live in Colorado. I have just set up an LLC in Colorado but have not yet conducted any business in Wyoming. The properties close to soon to change from my personal name on the title. I told I can, as soon as possible after closing, convert ownership to a Trust with the LLC as grantee. My question is before I start collecting money and set up a bank account, should I set up a Wyoming LLC and use that or do the foreign entity thing and use the Colorado LLC?

    Reply
    • Hi Bob, great question. The short answer is that you can do either a Domestic Wyoming LLC or a Foreign Wyoming LLC (the Colorado LLC registering to do business in Wyoming). They both will work. There may be subtleties between the two (in terms of tax and legal consequences), but I am not abreast on all those details. You could use our “knights of the roundtable” strategy and phone a few accountants and lawyers to find out though. Also to keep in mind, if you were to form a Domestic Wyoming LLC, that can be filed online with the WY SOS and the approval is instant. So that would allow you time to assign your purchase contract and take title in the Trust/Wyoming LLC. Keep in mind though, that if you have financing in place, the bank will likely not allow this. If that’s the case though, you can close in your name, then quitclaim deed the property to the Trust/Wyoming LLC. On the other hand, a Foreign LLC registration in Wyoming must be done by mail, and that will take 4-7 business for approval. If doing a Foreign LLC registration in Wyoming, you’ll need a Colorado Certificate of Good Standing, but luckily, the CO SOS has those available online for immediate download (which will save you some time). Hope that helps. Let me know if you have any followup questions.

      Reply
  2. I am a little late. I have 2 rental properties in my name. However there is no mortgage on both of them. Recently I have formed an LLC as well. Do you have steps to transfer the properties to the LLC. I want the titles to be warranty changed as well as recording done for the changes.

    Reply
    • All you’ll need to do is get in contact with a local title company and sell the property from yourself to your LLC. Hope that helps.

      Reply
  3. Thanks for the video. My wife and I purchased a rental property in a high traffic tourist town in SC and are currently using it for short term rentals. There is no mortgage against the rental property as we took a loan against our residence, which was paid off in full. Hope I explained that correctly. My wife is the CPA so she’s the brains of the organization. However, she doesn’t think it is necessary to put the rental home in an LLC. I, on the other hand, think its very risky not to. What are some of the ‘real world’ reasons that I can use to convince someone who has it all figured out?!?! Thanks so much.

    Reply
    • Hi Richard, sounds like a nice investment. And I hear your situation. I would suggest reading our asset protection article and then doing further research regarding liability issues in the context of real estate rentals. I feel that LLCs are cheap compared to the personal liability protection they offer. If you and your wife are sued and lose the case, your personal assets are at risk. Maybe suggest to your wife to call 5+ real estate lawyers and see what their thoughts are regarding liability. Hope that helps a bit :)

      Reply
  4. Great video. So glad I found your site. I am planning on turning my primary residence (which is in my name) into a rental property. I did contact my bank and they said that if I transfer the property into a LLC that the due-on-sale clause will be enforced. I have only lived in the property for 3 yrs and so I have barely made headway with getting my mortgage down. What other options do I have to protect my asset? Can I form a LLC and use it to manage my property (i.e., paying all the bills to start building credit for the LLC) until I have attained enough equity to transfer it into a LLC?

    Reply
    • Hi Shana, thank you! The “management” LLC will not protect you in the event of a lawsuit. It’ll still be you that is sued personally since you own the property. Best thing in your situation is liability insurance. You may also want to speak with a few real estate lawyers about the following. You could quitclaim deed the property from yourself to your LLC and not tell the bank. As long as you continue to make payments, it’s likely there won’t be issues. Of course though, there are certain risks, and this reply is not meant as an endorsement of such. Hope that helps.

      Reply
  5. Hi Matt,
    Just read the articles and watched your video on forming the LLC in your home state. Very informative and well, just simple, great, communication! I felt confident and settled on doing that. I have four rental properties that are owned (no mortgage) in Missouri. I live in California. At the VERY END of the video, you state: EXCEPT in the case of real estate! lol. I was scrambling to find the next article/video to explain and couldn’t find anything helpful. So, any more detailed breakdown / info on why form the LLC in the state where the properties are located? Any info or link to something you’ve done? thanks so much for any input!

    Reply
    • Hey Josh, thank you for the kind words :) And I totally understand about the “where’s the next video/article” part… we’ll soon be addressing these concepts in more details in separate videos and articles, but for now, here’s an overview of your situation.

      With rental property in Missouri, you’re legally “doing business” in Missouri, so that’s where the entities should be “formed” or “registered”.

      – “Formed” = formed as a Domestic LLC
      – “Registered” = registered as a Foreign LLC

      (related article: Foreign LLC vs Domestic LLC)

      In your case though, because you reside in California, things are different. For most people who reside in most other states, they could just form a Domestic LLC (or LLCs) in Missouri and be done with it. However, California law (both Corporate law as well as Revenue and Taxation law) is written in such a way that if you formed a Missouri LLC (a Domestic Missouri LLC) you would still be “doing business” in California, and therefore, you’d be required to register your Missouri LLC as a Foreign LLC in California. California has some of most strict laws in regards to what it means to be “doing business”. Something as simple as making a phone call from CA to your property manager in MO is “doing business”.

      And even if you don’t register your Missouri LLC as a Foreign LLC in California, you’re still on the hook for the annual franchise tax, as well as other California taxes. The California Franchise Tax Board (FTB) is very aggressive in hunting down those doing business in the state with unauthorized/unregistered LLCs and you’ll likely be subject to fines and penalties, as well as all unpaid annual franchise tax for all of the years you were illegally operating the Missouri LLC in California.

      So what’s the solution? Since a registration (or formation) needs to take place in California, do you go “California to Missouri” (Domestic CA LLCs registered as Foreign LLCs in MO) or do you go “Missouri to California” (Domestic Missouri LLCs registered as a Foreign LLCs in CA)? There isn’t a black and white answer to this, so I would recommend speaking with an attorney (or a few) to address your situation in more detail. One thing to consider (and to run by a real estate attorney) is what might be an ideal setup for you… one in which you’re properly registered to do business in Missouri as well as properly registered to do business in California.

      Since you have multiple properties, you’ll likely want to better protect your assets by setting up a different LLC for each property in Missouri. Here an idea for a structure: form 1 Domestic California LLC and have this LLC be the “parent” LLC (owner) of multiple “child” LLCs domestically formed in Missouri. This way, you are registered in both states where you’re “doing business” and you should only need to take care of one annual franchise tax payment in California (instead of multiple annual franchise tax payments for multiple LLCs). And it doesn’t matter if those multiple CA LLCs are Foreign or Domestic… you’d still owe multiple franchise tax payments.

      So, the rough news is that CA is strict and you’ll need to register/form an LLC there (and be subject to the annual franchise tax)… but this is the cost of doing business in CA. The good news is that Missouri is a very affordable state for LLC formation. At the time of this reply, the cost to form an LLC in Missouri is $50 ($50 if filed online; $105 if filed by mail) and there are no Annual Reporting requirements (no report and no payment). Hopefully this information was helpful and I’m curious to hear what you end up doing, so feel free to keep us posted :)

      Reply
      • Hi Matt,
        Thanks so much for the response. It has certainly helped narrow down the options. I am currently making some Attorney, CPA appts. to ask further questions about strategy, cost, etc. of setting up the LLC’s in Domestic or Foreign form in the California scenario. Will be happy to post conclusions for my situation at least. Thanks again!

        Reply
        • You’re very welcome Josh. I look forward to hearing about your progress! Thanks :)

          Reply
  6. Hi Matt,

    Nice concise video! So I have a bit of a different question for you. Let’s say I’m thinking about buying a property, but haven’t found what I’m looking for as yet… Then, all of a sudden, there it is! So I’m chomping on the bit to get a offer (contract) to the Seller.

    But IF I do that _before_ I set up the LLC, then your gonna yell at me!

    So here’s my question: is it possible to put wording in the Purchase Agreement (contract) which _initially_ has my name as the purchaser, but also allows (at closing) for the name to change to the LLC (which will be set up by that time)?

    Seems to me that such a *magical* clause could help someone who is _shopping_ for a property but doesn’t yet know if they will find something!

    Thank you!!!

    Reply
    • Hi Debbie, yup, of course. Many contracts are assignable unless their is a statement otherwise. However, it’s common for real estate investors to list the buyer as “Mary Doe and or assings”. Also make sure to strike out and initial any clauses that state the contract is not assignable. Hope that helps.

      Reply
  7. Hi Matt,
    I am in the mortgage business. Many people contact me rearding buying a small rental property and wanting a nice 30 year fixed rate loan. They are dismayed that the Fannie Mae and Freddie Mac will not lend to LLCs and are dismayed that I would offer a portfolio ARM loan…..
    Have you had this experience, please advise.

    Reply
    • Hey Mike, yes, very common for the Fannie and Freddie loans. I’d look for a referral relationship with a commercial bank or a bank with a small commercial loan division. They group the LLC-owned purchases into the commercial division, although most are still residential properties. Hope that helps.

      Reply
  8. Hi Matt, just wondering if you might be able to give some advice. My mother-in law purchased a house and paid cash to help her son out in a situation. He convinced her to create an LLc in Missouri. Her son is living in the house and was to make payments back to her. He has not and she wants him out. She has 99% of membership. How can she disolve the LLC and does he have a right to live there.

    Reply
    • Hi Charlene, it sounds like your mother-in-law bought the house and then formed the LLC… if that’s the case, the home is owned by her personally, not the LLC that was setup later. Either way, this falls into the realm of real estate law and contract law. We definitely recommend you/she get in touch with a lawyer to handle the eviction process. Hope you get to the bottom of things.

      Reply
  9. Hi Matt,

    I have a condo in California with no mortgage, and I’m planning to form an LLC in NYC where I am living and then place that CA condo in my NYC LLC. How complicated it will be? Do I need to pay the transfer tax?

    Thanks!

    Reply
    • Hi Sharon, you’ll need to speak with a title company in California for the details. Is this condo being rented out or generating income? If so, you’re doing business in California… meaning, that NY LLC needs to be registered as a Foreign LLC in California, or you form an LLC in California (LLC owned by you), or you form an LLC in California owned by an LLC formed in New York. California is very strict regarding doing business and paying annual franchise tax. I recommend reading what is doing business in California.

      Reply
      • Thank you Matt.

        Another question, let’s say if I won’t transfer the deed of CA condo to NYC LLC, can NYC LLC do some business on the CA condo, such as collecting the rental, finding the tenant etc. ? Or I still have to form a CA LLC to do this kind of property management, although I live in NYC?

        Reply
        • You’re welcome Sharon. If the NY LLC wants to do business in California, it should register as a Foreign LLC in California. Whether you form an LLC in California or register your New York LLC in California, you’ll still need to to pay annual franchise tax and comply with any other California Franchise Tax Board reporting requirements. It’s not about whether or not the LLC takes title to the property. It’s whether or not the LLC is doing business in the state. Hope that helps.

          Reply
  10. I am in Washington State, and would like to know if it is possible to create an LLC that would control two other LLCs. If this is possible, then this concept would be the same as Series LLCs, or Limited Partnership Corporation?

    Thanks,
    Eric

    Reply
    • Hi Eric, the word “control” can be a bit ambiguous, however, if you want a Washington LLC to own (be the Member) of two other LLCs, then yes, totally possible. There are some similarities between this and a Series LLC, but it’s not the same thing. Hope that helps.

      Reply
  11. I have a rental condo in Florida that I purchased for 160k 5 yrs ago in my personal name that is currently worth 300k. I just created an LLC but concerned that if I sell my property to the LLC for 1 dollar I will have capital gains on 300k when I sell it. If I make it my primary residence later could I still have first 250k exempt if I am sole proprietor of LLC? Appreciate your expertise!

    Reply
    • Hey Karen, we’re not as familiar with the tax details as we are LLC formation details, so this question would need to be ask to an accountant and/or a real estate attorney. I’m not sure if the tax basis carries over or not. Also, since your LLC will become the owner of the condo, I don’t think you can make it your primary residence. Therefore, I’m not sure about the 250k capital gains tax exemption. Additionally, there may be a few other strategies available in how you transfer title that provide asset protection and tax advantages. Feel free to share any of your findings as we’re curious to learn more. Hope that helps and thank you for your understanding.

      Reply
  12. Hi Matt, love your site. What if you already bought a property, and are now setting up LLC for real estate after the property has been bought but do not have a loan on the property? How would i handle this transaction? Thank you for your time and advice Lenee

    Reply
    • Thanks Lenee! If you still want the LLC to own the property, you’ll want to speak to your title company about selling the property from yourself to your LLC. Hope that helps.

      Reply
  13. Hi Matt,
    Thanks for video. It’s really helpful and informative. I’m planning to purchase rental property out of the USA. Do I still need an LLC in the USA?

    Reply
    • You’re welcome Fatima :) I have no idea about purchasing property outside of the USA.

      Reply
  14. Hi Matt,

    Love your site. It’s super helpful. I’m just starting out and am in the early stages. I believe I’ll be able to get the LLC created before closing and put the properties in the LLC ahead of time.

    My question is should I create one LLC for all rental properties I purchase or a separate LLC for each rental property I have? I’ll be registering within the state of Indiana where the costs are quite reasonable.

    My second question is my residence is in California. Do I need to register a foreign LLC in California for my LLC in Indiana since the income is generated in Indiana?

    Thanks so much for your help

    Reply
    • Hi Victor, thank you! Happy to hear that. As a California resident, you’re likely doing business in California, even though the properties are in Indiana. California has strict corporate laws and tax laws regarding doing business. I would look into forming an LLC in California and registering as a Foreign LLC in Indiana or vice versa. And whether one LLC that holds the properties is needed versus multiple is a conversation you’d need to have with a real estate attorney. There are pros and cons and you’ll want to dive into the details with someone. Hope that helps and thanks for your understanding.

      Reply
  15. Hi Matt, First of I love your site. Keep up the great work. so here’s my question. I am in the process of buying my first rental property in Buffalo, NY. its a 2 unit with tenants already living in it. I got my offer accepted and in the the process looking to close soon. I recently had a light bulb moment regarding liability and realized I need to protect my personal asset incase something happens so I decided to form an LLC and purchase It that way, I reached out to my lender and was told, since its now a LLC, They could no longer do the loan and that I should get a commercial loan to finance the property which will be difficult for me since my LLC is newly formed business. Therefore I spoke to a few attorneys and they suggested I purchase the property and transfer it to the LLC afterwards. it appears that the lender(bank) says its ok, Its possible to transfer the deed into the LLC name but the loan will still be in my name. Will that protect me if one of my tenants sues me. Or I have to get the loan in the llc name as well? Please advise what all I need to do if I go this route to ensure that I have 100% protection.

    Reply
    • Thanks Manny! Nice job on speaking to a few real estate attorneys. They are correct in that you can transfer the property from yourself to your LLC (via a quitclaim deed) and keep the mortgage in your name. The attorney(s) you spoke with should also be able to confirm that this will not affect the liability protection of your LLC in regards to potential lawsuits from tenants or visitors of the property. Hope that helps!

      Reply
  16. Hi, I have 2 questions. Myself and an investing partner is creating an LLC to buy rental property with. We’re buying the rental property with the LLC and he says we both will sign on the mortgage.

    1) Will both of us be able to sign on the mortgage?

    2) What is the correct way to sign my name on a mortgage when the LLC I’m a member of is going to be on the deed to the property?

    Reply
    • Hi R Michelle, 1) it depends on the lender. If you both want to be on the mortgage, it shouldn’t be an issue. 2) I’m not sure if the LLC is giving the mortgage (with you and your partner’s personal guarantee) or just you and your partner are giving the mortgage. You can speak with the lender and ask them how the mortgage and the promissory note are written up. Hope that helps.

      Reply
  17. I need to form my own LLC, Should I use my personal address, a UPS Mailbox or my brother’s address? I can’t cash flow the mailbox at this point. I need to know which is better for my Real Estate Investing business?

    Reply
  18. I’m in Connecticut. I did set-up the LLC earlier. I’m just waiting on the approval from the State. I hope that when my business start to expand I will have a place to run my business.

    Reply
  19. What about a quit claim deed? Let’s say my LLC purchases a property and later I’d like to refinance into a better loan / lender? Can I transfer ownership out of the LLC with a quit claim deed? And if so, how would that work?

    Absolutely awesome site, by the way!

    Reply
    • Hi James, yes, quitclaim deeds are used. You’d want to speak with a real estate attorney and/or your title company.

      Reply
  20. Hi Matt. You are awesome! Here’s my drama. Myself and 2 other relatives are planning to pool our recent inheritance to form an LLC to purchase rental real estate to create a passive income stream. Our intentions are to be more non interactive JV type investors within groups who purchase/upgrade/refinance out larger projects such as apartment complexes. We were hoping to keep each investment separate by possibly using a Series LLC. But we live in California where they do not yet allow a Series LLC. Also, more than likely, the properties we are looking at investing in are in a variety of other states. Do we set up our LLC in California then set up a foreign Series LLC in say Nevada, where we can separate each investment under that umbrella? It all seems a bit messy and we are worried about huge accounting and state fees. Do we even need to go this route when we will not be the sole owners of any of these properties?

    Reply
    • Thanks Mark! While we appreciate the question, this is far too detailed and complex for us to address. Best practice to discuss this with a few real estate attorneys. There are numerous ways to go about this. Thanks for your understanding.

      Reply
  21. Hi Matt, If I form and LLC and that LLC rents an apartment in the basement of the house I live in do I still have the personal liability protection I would have if this was an investment property? Thanks, Jackie

    Reply
    • Hi Jackie, at first read, your question is challenging to understand. I’ll try it in an inverse-statement format. I believe you are stating, and then asking: that having an investment property owned by an LLC provides personal liability protection from events that occur on the property… so are you asking that if your LLC rents a room in the house that you own, are personally protected form events that occur in the basement? Likely not. Since the property is owned by you. Is that what you were asking?

      Reply
  22. Hi Matt,

    Great articles. I learned a lot from it and have a couple questions. My husband and I own a rental property with no mortgage. The property was purchased in 2017 at $400,000. We transferred the title to a LLC for $1 in 2018. Is there any consequence of transferring it at &1 instead of $400,000. If so, how to correct it?

    Thanks,
    Monita

    Reply
    • Thanks Monita! Sometimes there is, it all depends on the municipality (county, city, town, borough, etc.) where you transferred title. Each municipal jurisdiction handles transfer tax (or an equivalent tax) differently. The quickest way to find the answer would be to speak to a title in your area. Hope that helps.

      Reply
  23. Thanks Matt on your reply. I will contact the county. I am struggling to find where to report the initial rental property contribution amount on IRS Form 1065 or Schedule B for our husband and wife LLC in NJ. Do you know where to enter that?

    Thanks,
    Monita

    Reply
  24. Hey Matt,
    Great videos. I will be renting my attic out as an airbnb. I plan to purchase extra insurance for liability purposes but is there any benefit to forming an LLC just for this small business? I do understand that as the owner of the house I will be liable – but for tax purposes would it still be beneficial to form an LLC?

    Thank you!
    Sarah

    Reply
    • Hi Sarah, thanks! From a tax standpoint, there will be zero benefit. Meaning, by default, both a Single-Member LLC (1 owner) and a Multi-Member LLC (2 or more owners) will be taxed as a pass-through entity by the IRS. So the owner(s) of the LLC will report the income and expenses on their personal income tax return. This is no different that just operating as a “non-LLC” (that’s not an official term), such as a Sole Proprietor or a Partnership. Alternatively, if the LLC elected to be taxed as a corporation (LLC taxed as a C-Corporation or LLC taxed as an S-Corporation), there could be tax benefits, but those likely won’t apply unless the business’ net income was roughly $70k to $100k, or more. Likely not to occur with one listing.

      Will there be extra liability protection with an LLC in place? Possibly. It’s best practice to ask something like this of an attorney. While you can form an LLC and connect it to your Airbnb account as the host, if something happened and you were sued, the plaintiff’s attorney will likely sue both the LLC and the homeowner (or just the homeowner). Will you be held personally liable or will the LLC? Hard to tell. All based on the details. The typical “it depends” answer. Will you be okay with Airbnb’s built-in insurance and your extra insurance? More than likely. However, that’s just a generic hypothetical response. Hope that helps though.

      Reply
  25. Hi Matt,
    Very informative site, I’ve learned a lot.

    1) Starting a new business and when applying for a LLC can I use my “nickname” I go by for the last 40 years or do I have to use my legal name on the LLC paperwork?

    2) How difficult is it to change a 1 member LLC to a multi-member LLC after say a year and what would be the steps to take?

    3) I also own two properties and lease one of them out. I purchased my orig home over 20 years ago and have been leasing for over 6 years now. I am thinking of buying a 3rd home and leasing out the one I live in now. What are the difficulties in your opinion of forming a real estate LLC and getting the 2 “personal bought properties” under the LLC umbrella?

    Thanks for your time.

    Reply
    • Hi TJ,

      Thank you! That’s great to hear.

      1. It’s best to use your legal name.

      2. It’s a bit involved. This is the general overview:

      – review LLC Operating Agreement to check procedure for adding an LLC Member
      – create a Resolution discussion the decision
      – prepare an Assignment of Membership Interest Agreement (you have to sell a portion on your 100% interest to the new Member)
      – amend the LLC’s Operating Agreement
      – amend the Articles of Organization or equivalent form (if applicable) with the state
      – notify IRS of change in tax classification (in your case, LLC is going from Sole Proprietorship taxation to Partnership taxation)
      – file an update with the state Department of Revenue or equivalent (if applicable)
      – update bank account

      3. It depends if there are mortgages involved. If there are, it can be a bit more complicated. Overview is to transfer title of the home(s) from yourself to your LLC. The steps are best discussed with your title company and/or a real estate attorney. You may have to pay a transfer tax, or equivalent.

      Reply
  26. Very nice information about LLC. Thanks a lot for your time and knowledge sharing.

    4 of us bought a property in ID and mortgage is on my name. We have created LLC is Wyoming with registered agent and in the process of creating child / Idaho LLC. Lender is OK to transfer the title to LLC. We are planning to link or list WY LLC as a member in ID LLC . So we will be in safe position if some tenents or visitors sue us. So here comes the question: no where mentioned 4 of our names listed in WY LLC official documents , so if any dispute arises between partners how to resolve? Does court allows plain operating agreement which we all have signed , look in to it and resolves the issue? Or do we have to legalize operating agreement for this matter?
    Thanks
    Raj

    Reply
    • Hi Raj, the LLC’s Operating Agreement doesn’t need to be “legalized” as it’s already legally binding. However, you can get it notarized if you’d like. The LLC Members aren’t listed on the Wyoming Articles of Organization so yes, the Operating Agreement is the document that governs the internal affairs of the LLC and can also be used for disputes among the Members. Once all the Members sign the Operating Agreement, they are agreeing to be bound by its terms. In resolving disputes, courts will first look at the Operating Agreement. If something applicable is not stated in the Operating Agreement, then state statute will apply. Hope that helps.

      Reply
  27. Thanks for sharing all this useful information!

    I was under the impression that this was very straight forward. I would take out a personal loan and after the house closes, I would move it to an LLC.

    After speaking with Bank Mortgage Corporation who is providing the loan, they said that it can’t be under an LLC but it has to be under my name. There seems to be many confusing steps and I was hoping you could help clarify it for me.

    What do I do if the bank I’m using doesn’t allow me to put it under an LLC? The agent said that the loan and title has to be under my name and not an LLC.

    Reply
    • Hi Brian, you’re welcome :) Once a bank is involved, it becomes a very different scenario since you have a promissory note and mortgage in place. Some people, under the guidance/advice of an attorney may decide to quitclaim deed the property from themselves to their LLC after closing. But depending on the details and the terms of the agreement (the promissory note and mortgage), there could be risk involved. It’s a bit of a gray zone, which is why we recommend discussing the details with a competent attorney if you really want to take title in an LLC and have personal financing in place. If you haven’t closed yet, you can also call around and see if any banks will issue the loan to your LLC. It’s important to note though, that the terms of the mortgage will be different (interest rate, loan to value ratio, etc.) and insurance will be different. Hope that helps.

      Reply
    • Thanks Matt and really appreciate you taking the time to help educate people

      Here is where I’m still a bit lost. I’m a first time home buyer but this is for investment purposes only as I plan on continuing to rent and not live here. I’d imagine most investors look to put the loan under the LLC for two main reasons. First it protects them in the event their tenant sues then and second to take advantage of tax breaks through the business.

      What is the common practice here. Is it to find a bank that will allow me to put a loan and title under an LLC or find a bank that would allow me to transfer it to an LLC after I’ve taken it under my personal name? Or is there something I’m still missing?

      Thanks in advance

      Reply
      • Hi Brian, if you are looking for FHA financing, you won’t be able to take title in an LLC. If you decide LLC is the route to go, you wouldn’t call the bank and ask about the quitclaim deed. That is usually done without giving notice to the bank. It’s not something we recommend, but it is something that is sometimes done, usually under the guidance of an attorney. There are still expenses you can write off without an LLC. But tax benefits with an LLC vs. tax benefits without the LLC gets quite detailed/technical and that’s a conversation best had with an accountant. Apologies we can’t offer more direction/specifics. There really isn’t a “this is the best way to do it” answer. Thank you for your understanding.

        Reply
  28. Good Morning, Thank you, great information on the site. I am (or thought I was) in the process of setting up an LLC so that I can have property purchased and potentially rented while keeping my name out of it. After doing additional research I found a site that says that some states list the members names while others will list the organizer. Several questions with this….I understand the LLC will protect my personal assets, but if it will still disclose my name, what is the benefit? It still opens you up to being contacted by the “customers/clients.” I live in a state (Florida) that does list the names of the members, can I open it up in a state (Missouri)that only lists the organizers name even if I do not live there?
    Thank you,
    R/

    kay

    Reply
    • Hi Kay, if you formed an LLC in Missouri, but the LLC is doing business in Florida, then you’re supposed to register your Missouri LLC as a foreign LLC in Florida.

      One alternative is to form a holding company (in whichever state you like). Then form a Florida LLC owned by the holding company. Then list the holding company as the AMBR (Authorized Member) in the Florida LLC Articles of Organization.

      Another option is to form a management company (in whichever state you like, but let’s say Missouri). Form an LLC in Missouri. All that LLC does is act as the LLC Manager for the Florida LLC. Then list the Missouri LLC as the MGR (Manager) in the Florida LLC Articles of Organization. Ohio could be another option. Basically a simple state with no LLC Annual Report.

      In either scenario, you’d need to hire a Registered Agent and hire someone to file the LLC(s) so your name doesn’t appear as the LLC Organizer or the LLC Registered Agent (or anywhere else). Hope that helps!

      Reply
      • Good Evening,
        Thank you, it helped tremendously.
        I’m extremely thankful I found your site before setting up the LLC. I was led to believe that the LLC would not show my name. That would not have been good to find out after the fact.
        R/
        Kay

        Reply
        • Yes, that wouldn’t be a nice surprise. We’re glad you found our site and we’re happy we could help :-) Best wishes!

          Reply
  29. HI! Thank you for sharing this useful information.

    I hope you can help answer this questions. My family remember owns multiple residential and commercial properties (no mortgages) and is currently doing his estate planning. We are wondering if he should set up LLC for his rental properties or if he should obtain liability insurance to protect his personal assets. This is a family run business, so we are not sure if it is necessary to create an LLC.

    Thank you.

    Reply
    • Hi Lishe, you are very welcome! In this case, it sounds like you are interested in asset protection and estate planning. You’ll want to speak with a few different attorneys (who practice asset protection and estate planning) and review the various options you have. There are many ways to structure something like this. Below is just one of many examples.

      You could setup a Living Revocable Trust (or another type of trust) with your family member as the Grantor. That Trust, in turn, can own an LLC “holding company”. That LLC holding company can own “child LLCs”. Each child LLC owns a different property. This separates liability among the various properties, centralizes ownership, and allows for the entire structure to pass hands following the death of the family member. Please note that the following diagram is oversimplified for demonstration purposes:

      Diagram of Trust owning LLC holding company

      Again though, there are a handful of ways to structure something like this and it all depends on the details. We strongly recommend you speak with a few different attorneys and don’t rush to make any decisions. Also, something likethis would be in addition to having liability insurance.

      Reply
  30. HI,
    I am currently getting ready to put an offer in on a quadplex in California.
    I did research that to purchase the property in LLC or in Land Trust +LLC. but all lenders are telling me that i must purchase the property in my personal name.. is this true? can you help?

    Reply
    • Hi Eric, the lenders can’t tell you how to purchase. What the lenders are telling you is that they are only offering financing to property held in your name. We recommend calling a number of banks to look at your options. A more advanced technique is to close in your name (and take financing in your name), then file a quitclaim deed and transfer the property to your LLC (or Land Trust). If that’s the route you take, we recommend speaking to an attorney (or a few). Hope that helps.

      Reply
      • HI Matt,
        thank you for that answer. That helps.
        another question i have is, i live in California. the property is California. whats the best structure that i can set up to protect my asset and not get slammed on taxes? California LLC? Nevada LLC? if you can help me understand a bit in terms of pros and cons?
        thank you so much!

        Best regards,
        Eric Kim

        Reply
        • Hi Eric, you’re very welcome. Because your LLC is doing business in California, you have to pay California taxes no matter where the LLC is formed. Furthermore, if you formed the LLC in Nevada, you’d have to register that Nevada LLC as a Foreign LLC in California anyway. If you reside and do business in California, there isn’t a legal way to avoid taxes that we know of. Hope that helps.

          Reply
  31. Hi Matt- thank you for all the explanations. I have a few of questions:
    (1) If I have different properties- would it make sense to call each LLC by the address of each property?
    (2) As a landlord, tenants pay using Zelle. Would it work with the LLC?
    (3) I guess the insurance company now needs to sign a new agreement with the LLC. Would that usually change the price of the insurance (dealing with a commercial entity- just like the lender may change the mortgage)?
    Thank you!!

    Reply
    • Hi Ayelet, you’re very welcome. 1) That is completely up to you. Some people like it for knowing which LLC is for which property (I find it administratively confusing). However, others don’t like to reveal the address in the entity name for privacy. I personally like a system that means something to me (like a code name, pattern, etc.), but doesn’t mean anything to others. 2) As far as we know, Zelle is primarily used for personal accounts, however some banks may offer business accounts connected with Zelle (although some have limitations). 3) There may be a slight change in insurance premium, but we cannot say for sure. You’ll need to speak with the insurance company. Hope that helps.

      Reply
  32. Hi Eric, California specifically assesses taxes and fees against LLCs registered in that state. Then there is personal income tax. Not all states assess taxes and fees against LLCs. An out-of-state LLC doing business in California would need to register as a Foreign LLC in California. So it’s 1 LLC, but that LLC has the authority to do business in two states. Said another way, that LLC will maintain two registrations. Any LLC Annual Report fees will need to be paid in both states. Any California LLC-specific taxes will need to be paid. Personal income tax will likely be apportioned to California.

    A California LLC doesn’t have to have the Members listed on the California LLC Articles of Organization, however, a Member or Manager needs to be listed on the LLC Statement of Information. Privacy can be achieved in California, but it requires a bit of extra work (like setting up another LLC to be the California LLC’s Manager, as an example). You’ll also want to hire a California Registered Agent and hire a company to form your LLC, so your information isn’t on the filing.

    Reply
  33. If I have a LLC with with 3 members(myself, wife and daughter) if I buy a property(seller financing) and later on I want to to refinance it, one of the member with the better credit score apply or all of them credit scores will be check to get a loan approved ? How that works?

    Reply

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