Should I Have An LLC or C Corp For My Real Estate Investments? – Real Estate Investing
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Should I Have An LLC or C Corp For My Real Estate Investments? – Real Estate Investing


Joe: Hey, it’s Joe Crump again. Welcome back
to the program. This next question is from Joe Linus from Mill Valley, California. He
says, “What’s the advantage of an LLC (limited liability corporation) over a corporation”
(I assume he means C corporation or S 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: Well, the first thing is to start doing deals. Make some money first, because you
don’t need a corporation until you’re making some money.
Joe: I remember back when I was first getting started my accountant said, ‘At least make
$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. Now, the corporation
itself doesn’t give you a huge amount of asset protection, but it does give you some and
it does give you some tax advantage, so once you start buying properties and once you start
keeping those properties, then it makes sense to start putting them into a corporation.
Joe: Now, 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’ve got to do is look at how many properties do
you have that have a lot of equity? You’re more worried about losing your equity than
you are worried about losing the property. If a property doesn’t have much equity, then
you’re not really 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 may look and say, ‘Oh, he’s got 5 properties or he’s got 10 properties in
that corporation. Let’s foreclose on it.’ That’s not what they’re going to say. They’re
going to say, ‘He’s got 10 properties in that corporation and each one of them have $100,000
worth of equity. Now he’s got a million dollars we can go get.’ That’s something they might
go after. But if they look at it, and see he’s got 10 properties and each of them have
$10,000 to $20,000 worth of equity, and if we’d 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 if you’re willing to lose $100,000? Really, it comes back to
how much money you’ve got. If you’ve got a lot of money, you’re going to have more equity
in these LLC’s. If you’ve got fewer properties, you’re going to want to get a few more. But
I wouldn’t split up any more than 5. I’ve got a lot more than 5 properties in LLC’s
and I think that’s probably 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 there’s a lot of things that can go wrong, but I think that
it’s much worse if you don’t do anything or you 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 that 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, are all going
to make a difference on how you do your taxes. I hope that helps.

15 Comments

  • Admire’s Reef

    Joe, great info and thx for your time! I am in the process of getting things tied up and ready to roll with lease options and was wondering, do you know if this is 100% legal to do in Florida? Thanks buddy and talk with you soon!

  • Joe Crump

    @admirehomes Yes, it is legal in all 50 States and Canada. We also use this technique overseas in the UK, Australia, Europe and parts of Asia.

  • Admire’s Reef

    Thanks for the response joe…Im having trouble explaining this to my wife on the matter that she sees it in the aspect of not being 100% ethical, how might you explain the business to her?

  • Admire’s Reef

    The part where we as investors know going into the deal that less than 30% of the people will end up exercising their "option" to actually purchase the property, and we are still asking for large option money. We really want to get into this business but we want to also sleep at night i guess you might say, so we just want the most legit company with our name on it at the same time! Thanks so much Joe and your vids are great!!! We love them.

  • Joe Crump

    To understand why it makes sense for folks to pay a LO fee, even if they don't buy, you have to understand why folks want to own their own home. Being able to call it your own home is a big part of the American dream. Also, consider the fact that you don't own your own home when buy with a mortgage either. In fact, you might think those who sold homes during the boom put the screws to all the folks who wanted to buy at that time since the values are now so low. Anyway – something to consider.

  • Jose Farias

    @joseph4176 I am a canadian who is about to buy in the USA. What type of company should i open up if i do not want to pay taxes after to the canadian government? LLC??

  • Chris Radici

    I currently own 8 single family rentals in 4 different states. They are currently in my individual name(no LLC). I spent the money and took out more liability insurance per property plus a $2mm umbrella. I was advised to spend the money on more insurance vs. spend the money on setting up a LLC and the cost of the taxes each year. What do you think about this logic?

  • Joe Watson

    Hi Joe, Thanks for what you do. I guess I'd like to know why on earth would you be worried about foreclosures? Whether or not you're an LLC or C corp should not be the deciding factor if a bank wants to foreclose your properties. So, I guess you're talking about the many subject to homes you own? Is that right? Why else would banks come after you?

  • Dean Jantasan

    you fleetingly mentioned putting properties in to a C Corp but then only spoke of using a n LLC. If you intend to hold property long term you would never entertain putting them in to a C Corp as C corporations pay the regular corporation tax rates on the full amount of their capital gains. Also a reason why not to file taxes for an LLC as a C Corp. While LLCs remain flow thru the end beneficiary is taxed concessionally on capital gains at 15%

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