The Best Legal Entity for Real Estate Investing
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The Best Legal Entity for Real Estate Investing


What is the best legal entity
to buying rental real estate? That’s today’s video. Let’s dive in. Hi there. I’m Clayton Morris. I’m the founder of Morris Invest
and a longtime real estate investor. And one of the areas that we
don’t really talk about much, I think– because it maybe
doesn’t sound as sexy as, you know, the cash flow that we
get from rental real estate or the taxes that we save from
owning rental real estate– but how you structure
your business inside of a legal entity
in order to protect yourself is
incredibly important. You know, what if a
tenant slips and falls in one of your rental properties
and you have that property in your own name, John Smith? Well, the problem is,
if that tenant sues you and it’s in your own name,
and that rental property is in your own name, you could
be in for a world of hurt because now that
plaintiff, that tenant, can come after, not only
the rental property assets, but all of your
personal assets as well. So, John Smith, all of
your personal assets are now open because you
bought that rental property in your own name. Huge mistake. So is there a
better legal entity for owning real estate
than another one? Again, this is
something you absolutely want to consult with your own
lawyer and your own accounting team on. I am not a lawyer–
so full disclaimer– I’m not a lawyer and
I’m not an accountant. I’m simply going to tell you
the way that we have structured our business and our
rental properties at the behest of
lawyers and accountants. Again, I’m not a lawyer,
not an accountant. Regardless of any
of this, you always want to have
liability insurance. So make sure that you
have liability insurance on your rental properties for
your company, for your LLC, even if you’re in a
sole proprietorship. Make sure that you have
insurance, regardless of how you structure
your business and how you put your
rental properties into these different
legal entities. So what is a legal entity? Well, it’s simple. It’s a limited
liability corporation, it’s a sole proprietorship, it
is a C corp, it is an S corp. There are all of these
different characterizations for different companies that you
can buy properties inside of. Personally, we use a limited
liability corporation. The reason we do this is
because it limits the liability. So is there a best form of legal
entity to buy real estate in? If you talk to many high
level accountants or lawyers, they will tell you that owning
rental properties inside of an LLC is the way to go. Why? Once again it limits
your overall liability. Their advice to us has long
been own up to about $150,000 worth of value in one LLC. And then when you move beyond
that, set up another LLC. What does that mean? Well, that means if we buy
three rental properties, most of the ones we buy are
about $40,000 $45,000, $50,000, and you have three of them, that
adds up to $150,000 in value. So if we create an LLC– so we call it, I don’t know,
going to make up an LLC name, like, Camera Happy, LLC. Camera Happy, LLC, now owns
three rental properties and it’s capped. The value is about $150,000. Then my wife and I will
set up a second LLC for the other rental
properties that we purchased. So a limited
liability corporation, we set those up in
the states where we own our rental properties. So if we have three rental
properties in Indiana or three in
Michigan, we’re going to set up LLCs in
those states where those properties are located. Now I’ve worked with a
lot of foreign investors, for instance, a couple
of Canadian investors who’ve purchased
properties with our team. And one of the things that they
found out going cross-border is that owning a US
based LLC does not offer them the level of
protection that a C corp would. So Canadian investor buying
real estate in the United States setting up a C corp in order
to protect themselves legally– so that those assets
are in that corporation, and if they are sued,
then the corporation is really the only
chunk of this that’s on the hook for the liability– not their personal assets. So it’s very important
to talk with your lawyer, talk with your accountant,
and find out what legal entity is best for you. Once again, I’ll give
you our structure. We purchase our
properties in an LLC, which take about five
minutes to set up. They’re very, very simple to do. If you go to your department
of state’s website, so Indiana Department of
State, Pennsylvania Department of State, Delaware
Department of State– should be, you know,
state.delaware.gov. Go to the website. Right there on the website,
Start New Business. Click on that and
pick your LLC name, usually cost a few
hundred dollars to set it up right
on the website. There are all these other
website services out there. I would just ignore those. Just use, go right to the
source, do it cheaper, and go right to the government. That’s who’s going to
do it in the end anyway. Set up your LLC. Pick a name that you
like and go from there. So the way that my wife and I
do it is we have those LLCs. Then high level ninja
trick is that we then have those individual
LLCs reporting up to a holding company LLC. And that holding company
is in the state of Wyoming because it offers an
incredible level of protection. So now, those each
individual LLCs are reporting up to
a holding company. And that way it offers an
extra layer of protection. We’ll dive a little
bit deeper here in a future video on exactly
why the benefits of a holding company. But today I just
wanted to give you the overview of how
we structure it, and what are the best legal
entities to buy real estate. As Tom Wheelwright, the great
accountant, likes to say, you should never ever buy rental
properties in your own name. It’s just an absolute
disaster of a mistake to do that, to own those
properties in your own name if you get sued. You also don’t get any of
the tax benefits in the way that you would if you owned
them in an LLC or a company or another legal entity. So that’s a little
overview of “What are the best legal entities
to buy real estate in?” Again, click on
the videos below. We have a whole bunch
of other resources as we are diving more
deeply into how to structure your rental business. I’m Clayton Morris. Thanks so much for
subscribing to this channel. We really appreciate it. If you haven’t
already subscribed, please do because we have
videos that publish every week. Thanks everyone. We’ll see you next time.

48 Comments

  • Tony Milano

    Awesome info! I'm just getting started and love hearing how the pros set things up. People just don't talk about it. Thanks again.

  • wave

    but if youre buying a property with fha which is intended to be owner occupied. Wont the bank refuse to lend you if they see that ur buying it under an LLC ? You should be able to make the tenant sign a document that makes them responsible for their fall. Why should i be responsible if you fall ? smh

  • Daniel Ricany

    Hey Clayton. How does a lender treat an LLC when applying for a mortgage? Will there be any problems with getting a loan?

  • Eva L.

    Thank you for this video! Could you help to understand how do you go about due-on-sale clause? When the property is purchased with conventional mortgage lenders do not lend to LLCs. I would need to transfer the title from personal name to an LLC after closing which may trigger due-on-sale clause. Thank you!

  • shutterassault1

    Can you go more in depth with some of the details of getting conventional mortgages? If you are getting a loan through an LLC, don't you only qualify for a commercial loan then? Or do you get mortgage in your name, and then roll into an LLC somehow? Thanks. Been going through all your videos lately.

  • brian dvorak

    Clayton, you mentioned the importance of liability insurance. Are you talking about getting this insurance on each rental property, getting this insurance on the LLC entity itself, or both?

  • rick corbin

    Clayton, this is possibly something you want to cover if an investor has multiple exits such as buy and hold or flipping. Can you speak on when an investor turns enough flips how they can be deemed to be a dealer by the IRS over a simple investor. This has significant tax implications. Therefore it's important to have a legal instrument such as an LLC for flips and one for buy and holds. You don't want the buy and holds lumped in to that higher tax bracket.

  • C Mo

    Here's the scenario:
    Tenant sues the Rental Property Owner in the Court Trial for $400K, then Tenant wins the case afterwards.

    The following are the facts for the Rental Property Owner:
    – Rental Property Owner (Only have a Standard $300K Personal Liability coverages) from his regular ("Home Insurance").

    – Rental Property Owner (Do Not Have an Additional Personal Liability Insurance protection) such as ("Umbrella" insurance that covers up to $1 Million or $2 Million, etc, etc).

    – Rental Property Owner has (All of his Rental Properties protected/registered under an LLC Entity)

    ==========================================================================================
    The problem is that the Rental Property Owner (Only have the $300K Personal Liability coverages from his regular Home Insurance) therefore he is still (short of $100K) to make up the difference for the (Grand Total $400K that he needs to pay the Tenant).
    So, Initially the Home Insurance company will cover the Max $300K to pay the Tenant, however, there's still $100K difference that's still needed to pay the Tenant.

    Therefore, the Big Question of The Day from the above scenario:

    —Do you think the Judge will ("Mandate") the Rental Property Owner to pay the Tenant the $100K difference (Out From the Rental Property Owner's Own Personal Money)???

    —Or Having an LLC Entity, does it also Pay and Covers any (LIability Lawsuit"=in sense of $$$$$). Another words on the above scenario will the LLC Entity pay the Tenant $400K, in an event Tenant sues the Rental Property Owner.
    =========================================================================================

    Just wanted to get (your opinion) on theee above scenario. What's your 2 Cents on theee above scenario?

    Thanks for your time and effort.
    Have a Great Day
    C Mo

  • Deal da Real

    Great videos! I'd like to do this with my personal home that I plan to rent out. Will the mortgage company call the loan due? How might I possibly avoid this?

  • Justin Huggins

    Great information. I currently have a LLC in the state of AR, if I purchase in another state should I get a separate LLC for that state? I spoke to Larry last week and am looking to invest with your company soon. I am working on a cash out refinance to get the remaining cash and hope to purchase before the end of the year if possible.

  • D G

    Thanks Clayton for the great info and videos. However, me living in NJ I have been advised by other landlords that having an LLC for properties that you will manage and not have a property manager can be a hassle, as you cannot represent your company in court and must have a lawyer for even the most minute issues. Thus paying $500 a pop becomes counter productive. Also, an LLC can be pierced and the owner becomes personally responsible in some cases.

  • elias palacios

    the creation of an llc does not affect when I want to request a mortgage, or request a refinancing? is not difficult? or it becomes easier when you are just starting …

  • J. MEJIA- S

    1# IF PROPERTY BEEN ON MY NAME FOR LAST 3 YEARS , CAN I CHANGE IT WITH MORTGAGE COMPANY INTO A LLC.#2 IF I CAN CHANGE FOR YEAR 2017 , CAN I ALSO APPLY AS LLC…WITH STATE IF 10-11 MONTHS OF RENTAL ALREADY PASSED BY…? #3 IF I CAN'T CHANGE IT FOR YEAR 2017 , CAN SHOULD OR CAN I DO IT FOR NEW YEAR 2018 AS LLC..? 3# IF I GOT A LLC…AS CLEANING COMPANY ALREADY CAN I USED THSY KNOWIN IS NOT RELATED?

  • LOKHighest

    Great Video!! Can you do a video on forming the holding company llc and how you report all of your other companies to the holding llc???

  • LOKHighest

    For the properties that u buy in one state, after buying 3, you stated that you form another llc….So, say if you bought 20 other properties after the first 3 in the same state, are they all under the "2nd" llc that u formed??

  • LOKHighest

    Who do you hire to run your real estate business?? What kind of staff is needed to keep up with all of those llcs?? Thank U so much…

  • maunik desai

    Hey Clayton

    Looking forward to the live stream on Thursday feb 16th.

    Can you add the following topics,

    Trying to refinance/HELOC a under 50k home while using the Fund and Grow structure

    Asking this as its different from a 80k or a 100k home. We can approach a Portfolio lender if the mortgage is going to be more than 50k

  • Odysseas V

    What if you buy the property first in your name as a personal owner and then put it in the local you created after buying the property?

  • S9uar7y_R3AL

    Hello I remember a podcast I believe where you stated the company you use for law but I can’t seem to find it. Can I have that name?

  • Victor Mendoza

    How do you structure the website for these LLCs? if at all? Do you buy the domain names and just redirect them to the holding companies website?

  • salemdesigns65

    My question is this: if I obtained properties and transferred them to my LLC which is different from where I reside, who manages the maintenance of the properties far away? Do you own property manager LLCs for each group of LLC properties?

  • Sergio Aguinaga

    Hey Clayton, I have a question. So I have 1 rental property that was 75k in MI. Would you recommend me to put it in an LLC if that’s my only property considering the costs of having an LLC. Thank you.

  • Christ Opher

    Thank you so much! Question for you. I own one triplex in Oakland California which I bought in 2010 under sole proprietor. I plan on getting back on the horse and using my HELOC to finances more properties (under an LLC I have yet to create). My question is, can I get my current triplex under an LLC I create or is it stuck for life?…

  • Heru Jones

    Hey there Clayton, great video. Thank you. In terms of setting up the LLC in a particular city, would you recommend getting a virtual address to attach to the LLC? I'm figuring they'd want your LLC's address to be in the same state as the LLC, and being I don't live in that state a virtual address is the only way to go. Is this thinking correct, or is there another way to go? The virtual address is roughly $70 a month… Wont pay it if I don't have to. Thanks much

  • JJ May

    Under 7 minutes and this was possibly the most informative video on this topic by miles. I can't thank you enough for your lessons.

  • Brad L. H.

    I own a couple properties, switching them over to an LLC very soon. Should you start the holding company LLC first or can you add single property LCCs into a holding company LLC later?

  • Juan Restrepo

    I have one rental in Broward Florida and I will be doing this tomorrow. You videos are a god send. thanks. learning day by day

  • Agustin Jimenez

    I just watched another video on LLCs and the person in the video gave some cons on LLCs. Not many applied to your strategy but one that stood out to me is that he claimed that banks typically will not loan on a residential property owned by an LLC. If I plan on buying rehabbing renting and cash out refinancing a property owned by my LLC will I have issues at the refinancing stage? Thanks

  • Frank Peraza

    Hi Clayton, is your Wyoming holding LLC a single or multiple member? And for tax purposes, is it disregarded or a partnership?

  • Francisco john

    I have a question. I understand the LLC is to protect one’s personal assets from liability. I am working with a mortgage company, and for me to purchase under an LLC, I have to be listed as the responsible party for the LLC. Doesn’t that defeat the whole purpose of using an LLC?

  • Ryan Stevens

    I have 1 duplex and live in 1 side and rent the other. My lawyer told me it wasn't worth getting an LLC until I got another property. Hope he's right. He's one of the better lawyers in my town too. Uh oh…now I'm thinking…

  • Do4self 1

    Why would you hold the LLC's in a holding company? The question is what type of entity is the holding company?🤔

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