Epic Real Estate Investing - Should I Start an LLC Before Buying Investment Properties? | 771

Episode Date: September 10, 2019

Mercedes shares her understandings of putting an investment property under LLC and the ways you can do it. It is extremely important to understand if this is the right option for you! Therefore, tune in, and listen carefully. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. So you want to be a real estate investor, but you don't want to do the work. If there were only a way where someone else could do it for you, now there is. Tune in here each and every Tuesday on the Epic Real Estate Investing Show for Turnkey Tuesdays with your host, Mercedes-Torres. Hello and welcome, welcome to Turnkey Tuesdays brought to you by Epic Real Estate Investing. my name is Mercedes Torres, your turnkey girl, and I am lucky enough to be partners in crime with Mr. Matt Terrio, the guy who created the epic real estate investing empire.

Now, this show, Turnkey Tuesdays, is a real estate investing show for busy people. Busy people just like you who understand the importance of real estate just don't have the time to do it all themselves or the desire to learn every single. nuance. So this show was put together to help you jump into real estate investing, utilizing the turnkey model. So if this is your first time here, glad you made it. If this is not your first time here, my friends, welcome back. So you may be wondering for the newer investors out there if you should create an LLC before you start buying rental properties. Well, there's good news and there's bad news to that. The good news is that either way, no matter, you know, if you have

bought your first property or not, that doesn't matter. Either way, you'll always be able to transfer ownership of your property into an LLC if you create your LLC after you've bought your property. Now, I will disclose to you, my friends, as I share every week, I'm not an attorney that sets up LLCs. I'm not a licensed tax professional. I'm not a financial strategist. I am simply a real estate investor with my own portfolios of properties, several different structures, several different LLCs and trust models. And all I'm doing on this show specifically is sharing from my own personal experience and the experience that Matt and I have together with over, I don't know, 132 rentals at the height of of our career we had up to 180 rentals. Now with a combination of notes and other strategies, we're down into the low 100 rentals, but I'm sharing the information that has worked and that continues to work and then share what hasn't worked. And the hopes is that our experience, our insight will serve you and your situation. Now, I want to share this with you because you need to

really understand what's the best play for your scenario when you start investing in your situation? Because the reality is there is no cookie cutter answer or a one size fits all when it comes to building your portfolios, setting up your structures, and having everything smooth flowing if you're a full-time something else. Now, a majority of my clients are not, full-time real estate investors. Now, many of them become full-time real estate investors after they dabble in real estate for several years and figure out that their primary job is costing them too much money. But initially to get started, I always say, you know, there is no cookie-cutter answer because there isn't a one-size-fit-off. I will say, however, it is extremely important to

understand why you want to put properties into an LLC. Now, are you a part-time real estate investor? Are you a full-time real estate investor? Well, most of our listeners are part-time real estate investors and they start by dabbling into real estate. So you're full-time something else. You're a busy professional and you jump into real estate investing and you jump into creating passive income. because many of you need the tax deduction. Others understand the importance of it and want to do it because you saw a family member, your father, your grandfather, an uncle doing it, and you see the potential of it. You see how lucrative it could be.

So it's really important that you understand, first and foremost, why you're getting into passive income and more importantly, why you want to create structures for your properties. Now, when you become a real estate investor with passive income, you just need one property to do that. But dive into, am I creating an LLC because I strictly want additional asset protection? Do I need an LLC strictly for tax purposes? Or, you know, perhaps you're in a profession with your fair share of liabilities and it's in your best, interest to not have everything in your own personal name. Or are you a dabbling real estate investor that you know your vision is to create and build a portfolio of investment properties

so that you can quit your job? So really dial in as to why you feel you need an LLC for your properties. So my first suggestion is For that newer investor, the reality of why you're looking to put your properties into an LLC is really important. Because if it's strictly for asset protection, there are other and more cost-effective ways, easier ways, to establish a protection for your asset without the tax ramification or the tax filings or, or without the setup fees of creating an LLC. There's something called a trust model. Now, this is not a, again, one size fits all, but there is a model that I happen to like

because I feel it's easier, it's friendlier, and it's a little more cost-effective, and it allows you a little bit more control over your asset. If the reason you're wanting this LLC or thinking that the LLC is going to be your end-all, be-all for asset protection, my friends, you really need to consult a legal strategist or a professional in that field to advise you what the benefits are for asset protection under an LLC. With a trust model, I love the idea of putting your properties in a family trust, whether it's a revocable trust or irrevocable trust. I love the idea of putting your assets into a trust that is then owned by the LLC. The trust model offers massive ambiguity, and it also allows you the opportunity to assign a basic, beneficiary to the trust, in the event something is to happen to you.

So with this model, should something happen to you and you, for example, leave it to a spouse or leave it to a son or a daughter, the transferring of that asset once you have passed on, the maneuvering of that is a little bit easier than a trust in an LLC model. Again, my friends, it's not to say that the trust model cannot be owned by an LLC for additional protection, but it's a type of protection that is offered to your property that, in my humble opinion, allows you a lot more maneuvering of the asset and a lot more control than just an LLC model. Now, if you're wanting the LLC or you're thinking you need the LLC for tax reasons, again, this is where I strongly suggest a deeper look at your tax bracket and you should have an intimate conversation with your tax advisor or your financial strategist where you are able to dive into the nitty gritty of your financial situation and, you're a tax advisor and, you know, you know, you know, and what the LLC model can produce for you as far as tax shelter.

You need to have a really keen scope on your financial situation and determine if the LLC model is going to serve your particular needs. Now, that conversation with your financial strategies should be enough to tell you if the LLC model is going to be a good fit for you. you. Now, let's take a deeper look at this particular model. And again, it's important to consider when you own real estate, how you own the property. Did you buy the property outright and the property that you're considering to put into this LLC? Do you own it free and clear? Or do you have a mortgage on the property with your local bank, or maybe you have a private note on the property.

Maybe somebody is carrying the note for you. That somebody could be a family member, or it could be somebody that, you know, you just, a stranger, somebody that you just bought the property from. First, if you own the property free and clear, under your own name, yes, I agree. You do need to have an additional form of asset protection. Great idea. But if you're just starting out and only own a few properties, like one, two, maybe three, perhaps a trust model can be an easier fit. Now, I'm going to disclose to you that I did not start my first LLC until I had four properties. Now, the first three properties, I owned them. I owned two, free and clear, and then the third one, I was able to get.

a mortgage on it. And of course, back in the day when I started, I wasn't really sure on the LLC model. The trust model was not as common. And quite honestly, I couldn't find somebody to dive into the details of how each model would benefit my particular situation. So I urge you to consider when you own one, two, three properties, or when you're just starting out, really dive into why you're looking to create this LLC or this additional trust. Okay, so let's say you own a property or several properties and have mortgages on them. Now, as you know, I am a huge fan of leverage. And if you have conventional loans and you understand the Freddie and Fannie model where

currently in today's market, you can get up to 10 mortgages, 10, 10 conventional loans with only 20% down. So if you're taking advantage of that and you have mortgages on your properties, there is something that you sign with the entire 250 documents that you sign when you get a mortgage. I'm exaggerating about 250 documents, but you do sign a lot of documents. And one of those documents that you sign is called a due on sales clause. Now, this is something that was created back in 1971 when the money market changed. And basically, it was something that was created by banks that allowed them the extra comfort of saying,

you are never going to transfer title to the property without our knowledge. Now, the long of the short of it is if you ever read the due on sale clause documents, which usually is about, I don't know, seven to 10 pages of fine print. But the gist of it is that when you have a mortgage with the bank, the bank does not want you to transfer title. The reality of it is the bank doesn't want you to stop paying for the mortgage in a nutshell. So they created something back in 1971 that's called the due on sale clause that kind of makes you promise them that you are not going to transfer title. having said that, if you create an LLC and you transfer the property from your personal name into the LLC,

technically the bank can say you're transferring title, even if it's your own LLC, and they are able to call your loan due. This is called the due on sales clause. Now, I've been doing real estate for over 15 years, and I have never, ever seen or personally experienced a bank calling your loan due because you changed titles. The reality is the bank wants to know that you're going to continue to pay the mortgage. However, you do sign this document that does say that you were not going to transfer titles. So in the event that you are considering transferring your property that you currently have a mortgage with, a bank, if you're considering transferring that into an LLC, you may be affecting the due-on sales clause.

With a trust model, you are not transferring the title into a trust. you are simply putting the property into a trust completely different. The title in many cases remains the same and you are now creating a trust that is going to hold this property. A little bit different. So in one aspect, you are evading the due on sales clause if you do the trust model. So in many cases, it may serve you to do the trust model. model if you feel that the LLC model is not going to be a fit for you. Here's the other thing about an

LLC. And, you know, I have a love-hate relationships with LLC because they certainly are great for certain aspects, especially if you're a more seasoned investor and you are looking to build portfolios that you are later going to borrow against. And that's a whole different topic. But the gist of it is, once you put your property or properties into one LLC, again, there are advantages and disadvantages, but one of the disadvantages is once an LLC, always an LLC. That's kind of my short version of how I see an LLC, because let's just assume you have five properties in one LLC. And they're called, you know, they're under the ABC LLC. Okay. So, So now you have five properties that you own that are now under ABC LLC.

These all five properties are now under one structure and one umbrella. So let's just say in the unfortunate case that you get sued or one of the properties in the LLC gets a lawsuit, then all properties under that LLC are a lawsuit. affected. So that's one of the disadvantages of having an LLC and having all your properties under one LLC. So that's one disadvantage. The other disadvantages, let's just say you have all these properties in an LLC and now you go out and you do a portfolio loan. Now, this is a little bit more advanced of a conversation, but let's just say you now borrow against this portfolio that is under your LLC. If you decide to go that model and you decided that you wanted to sell one out of the five properties in this LLC that is now having an extra mortgage on it, you are not able to sell one of

the properties in the LLC because it is one of five that belong to this LLC. So it does kind of limit you to what you're able to do as far as the structure goes when you have properties under one LLC. So it is very clear, my friends, that the LLC model has its pros and cons and just like the trust model does. But what's important here, and one of the reasons I decided to do this particular episode is because it's really critical that you understand and weigh out what's going to be a better fit for your situation, for your scenario? Putting all of your properties into an LLC is not always going to be a better play for you. There are a number of factors that need to be considered before you jump into creating a structure that is going to either protect your asset or that's going to give you additional tax benefits.

for your particular situation. Now, while each one may have its perks and its advantages, the LLC model may not always be a fit for you, of which you should consider the trust model. And on the flip side, it could be that you absolutely need an LLC because you're a little bit more seasoned, you're a little bit more advanced, you're looking into creating portfolios, then the LLC model may be a better fit.

However, if you are just getting started or if you're getting ready to take your real estate to the next level, don't think, my friends, that you need to create the LLC first. Common mistake. I can't tell you how many people contact me and they're getting ready to get ready to get started to create passive income. Don't let the nuances of trust and LLCs and models and structures stand in the way of you acquiring an asset that's going to produce passive income for you. Just focus on buying the property

and creating passive income, own it, then talk about a plan or a strategy that's best going to serve the property and you. Again, as I shared, Matt and I owned a handful of properties, four properties, before we even jumped into any model. And the first two properties we owned were properties that we own free and clear. Now, sure, it is a risk having a property without any asset protection. But what I did was I bought extra insurance in the event that something is to happen to me or something was to happen to the tenant in the property that could expose me to a potential lawsuit.

So, my friends, if you're just getting started, if you're on property number one, two, three, maybe even four, don't think that the structure has to be created first. Think about the asset. Think about acquiring it and what's going to be the best play of the acquisition before you dive into the models. remember, you make money in real estate when you buy a property. So focus on buying the property, buying it right, and then focus on, okay, let's create a structure of some sort that's going to provide me with the necessary elements for my situation, whether it be asset protection, tax deductions, additional shelter, you make sure that you do it. it in a chronological order that makes financial sense for you. Again, I am not always a big fan of the LLC

model, but for newer investors, you know, I think there are other options for you as well. Now, hopefully, this episode afforded you food for thought, so to speak, to help you set up your models. As you know, my friends, there is really no wrong or right way of doing things. But many times, there are several ways of doing one thing, and you just have to learn what's going to serve you the most. Don't do things because you hear that, you know, so-and-so did it that way, or my Rhea group talked about doing it this way. Don't do it that way, my friends. Do it in a way that's going to make sense for you, even if it means taking baby steps. I can't tell you how many people suffer from analysis paralysis because they get stopped dead in their tracks

trying to figure out what structure they need to create for the property that they haven't even bought. Don't make that mistake, my friends. Buy the property first, then consider the best model for your situation. That's it, my friends, for today. And for this week, I hope you have a fantastic. week. And if you want to reach out to me and have an additional conversation of how to build that portfolio, how to create the proper structure for you, reach out to me. Send me an email at Mercedes at Epicrealestate.com. Myself or one of my staff members will reach out to you.

And who knows, maybe it'll serve us well to hop on a quick call to help determine what your next step is going to be for passive income. Until next week, my friends, make it an epic. week. Your portfolio has seen better days. But this two shall pass. And the best for you is yet to come. Together, we'll get you there faster. We're cash flow savvy. And we'd like to share some information with you that will show you how you can take control of your financial future and accelerate its arrival. Go to cashflow savvy.com. More building, less waiting. Cashflow savvy.com. is a part of the C-suite Radio Network. For more top business podcasts,

visit c-sweetradio.com.