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Read Transcript for “Should I Have An LLC Or C Corp For My Real Estate Investments?”
Once you start building your portfolio of properties, is an LLC or a C Corp a better way to save money? What are the steps involved and how do you do it? The first thing you need to do is to start doing deals and make some money.
“What’s the advantage of an LLC over a corporation when holding investment properties? I know one guy who forms an LLC for each property and then all the LLC’s are owned by a C Corp for taxes. What’s the best solution for the average investment property owner?” – Joe Linus from Mill Valley, California
Joe: I remember when I was first getting started, my accountant said to me, ‘Make at least $75,000 in your business before you start worrying about a corporation. Before that, you can just do it on a Schedule C on your personal tax returns.’ You can still take all of the deductions that you can take normally. It doesn’t give you much asset protection, so if you’re starting to hold property, that does become an issue. The corporation itself doesn’t give you a huge amount of asset protection, but it does give you some protection, and it does give you some tax advantage, so once you start buying and keeping those properties, it makes sense then to start putting them into a corporation.
Joe: I’ve got a lot of properties, and if I had a corporation for every single one that I set up, I would go crazy. So what you have to do is look at how many properties you have that have a lot of equity. You’ll be more worried about losing your equity than you will be about losing the property. If a property doesn’t have much equity, then you won’t be that worried about losing it. If you’re only losing 10 grand or 20 grand, or if there’s only 10% to 20% of equity in that property, there’s not enough equity for people to come in and foreclose because of a judgment.
Joe: They’re not going to say, ‘Oh, he has 5 to 10 properties in that corporation. Let’s foreclose on it.’ They’re going to say, ‘He has 10 properties in that corporation and each one of them have $100,000 worth of equity. Now he has a million dollars we can go get.’ That’s something they might go after. But if they look at it and see that, they’ll say, ‘He has 10 properties and each of them have $10,000 to $20,000 worth of equity, and if we sold them, it would cost us _x_ amount of dollars, and after we got them all sold and liquidated, we’d have nothing left. So, we’re not going to foreclose or try to sue him because there’s not enough money there.’
Joe: So, the big question is, what is your comfort level on how much you can lose? – if you’re willing to lose $10,000 or $100,000? It comes back to how much money you have. If you have a lot of money, you’re going to have more equity in these LLC’s. If you have fewer properties, you’re going to want to get a few more. But I wouldn’t split up any more than five. I have a lot more than five properties in LLC’s and I think that’s still a safe way to do it.
Joe: There is going to be some liability. You might want to consider liability insurance; an umbrella policy of some sort. It’s not that expensive. You’re going to have landlord insurance which is going to cover you on a certain level as well. There’s a lot of ways that you’re covered, and a lot of things that can go wrong, but I think that it’s much worse if you don’t do anything or don’t do any business at all.
Joe: My philosophy? – Just start making some money. Worry about the other process later. Go get an accountant later to look at your specific situation and make sure you’re doing it in a way that makes sense for you, because the job you have and all of those things, e.g. the income that you have, the other businesses that you have, etc., are all going to make a difference on how you do your taxes. I hope that helps.