Pros and Cons of an LLC in Real Estate

Just like everything, a Limited Liability Company (LLC) can’t be perfect. We are going to do a comparison to give you a contrast so you can actually get the full-blown picture of what is it that an LLC can do and what is it that it entails or that it’s needed from you in order to maintain it. Here, you will find a list of pros and cons.

If you don’t know anything about LLCs, don’t worry. This is the right place to learn about them from scratch. In terms of pros, you get asset protection, tax savings and more. 

You can also build business credit. In terms of cons, what is it that you typically don’t hear about people talking in LLCs? One is the cost, so you have what they call the formation fees. That can vary by state.

What are the formation fees?

These are the fees you have to pay to the state to file them and the fees you’re going to have to pay your CPA or your attorney in order to create the LLC in the state.

Depending on the state that you’re doing business, it can range somewhere between $50 all the way to $2,000. If it’s a one-time deal, it’s not that bad because you’re getting access to all of these benefits as protection, savings, business credit. Imagine if you had a big portfolio of five, six, seven properties. Now, you do the math.

Is it in the state where you will typically need $2,000 for the formation or is it something as simple as $50? It all depends and you’re going to have to do the research and just simply shop around and talk to different real estate attorneys, different CPAs to figure out how much it’s going to cost you to create one in your state. Once you have that form, you’re going to have to renew it every year because it’s the cost of doing business.

You’re going to have to renew everything just like you would do with professional certification and how you have to take continuing education in order to maintain that certificate so you can stay up to date with all the rules and regulations

The only way for the states to know how many LLCs are actually “active” in business is by receiving the filing fee or the renewal fees. If they don’t get that, then they just simply think that, “Well, this LLC is just simply out of commission. It’s out of business. It’s no longer being used.”

It can range somewhere between $50. Maybe $400. You have to check this quantity with your real estate attorney or your CPA. In terms of renewals, it’s not just simply the renewal of the LLC itself, but there’s also the register agent

Register Agent for an LLC

For those who don’t know what a register agent means, it’s just simply an office or an address that you rent out from any of the legal offices so that you can use it as a business address for your LLC.

That’s how a lot of people manage to invest out of the state they live in. For example, if you’re someone who lives in New York City or New York State and then, all of a sudden, you want to invest in Nevada, you will not be able to just simply go all the way over there and have an LLC in Nevada. You will need an office. You will need an actual address over there. That’s typically the register agent.

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An LLC can give you many benefits and help you to save money on taxes

You’re not going to use the address of your property because you don’t want your tenant having access to that information. What they do is that a lot of the attorney offices give you access to a register fee. Those are usually over $100, depending on who you’re working with. That’s also another cost that you’re going to have to factor in, in each renewal. It’s the fee to renew your LLC and the fee to renew that register agent.

Imagine if you have four or five different properties and each of them are in different LLCs, then this is something that you will need to take into account. The next thing that you will need to consider when having an LLC, it’s everything administrative that comes with it. Administrative meaning accounting stuff.

You have taxes received like QuickBooks and anything that you will need to give your CPA or your accountant, then you’ll also have to keep on top of meeting minutes. 

For those who are not familiar with the concept of meeting minutes, that just simply means a record that you create to demonstrate that a meeting or the session was actually taking place because decisions need to be recorded. This is just for best practices.

This process shows that you are doing things properly. When you go and apply for a mortgage or a business mortgage the bank is going to require all the paperwork and they will notice if you have everything in place. If you had any meetings or sessions with the members of the LLC, they will see that as a very good thing.

That’s something you will have to maintain. If you have four, five or six LLCs, that’s going to be a lot of meeting minutes that you’re going to have to take place. 

Interest Rates in your LLC

One of the downsides of using an LLC to apply for a mortgage is that the interest rates are typically higher than the ones you will get under your personal, under your FICO, under your name. Because if you’re running a business, the expectation is that you are making money at this point and, therefore, you should be willing to absorb the cost or deal with the cost of doing business which is translated to high-interest rates.

LLC company

Usually, the interest rates for owning an LLC can be high

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It’s just the cost of doing business. You want more access to credit. You want $1 million in a mortgage as opposed to $200,000, then you have to be willing to pay for the high cost of interest rates. 

In essence, it’s all about having options and understanding what the pros and cons are and how you make an informed decision. 

The LLC and the Meeting Records

Meeting minutes are basically a record of the meetings that you host every time you meet with the members of your LLC. They are not mandatory, but they are necessary for good practices. It actually shows the IRS and shows any lenders that come your way that you are, in fact, managing your LLCs like they are an actual business. If you want to be treated like a businessman or a businesswoman it’s necessary for you to have that.

You can do as many as you want. In essence, what it does is just it records all the decisions that were made. You can make anything you want or you can record anything you want.You need to record the date that this meeting happened and the location and then the time. As part of the body of those meeting minutes, you’re going to talk about issues and then resolution.

What’s important is that you have the necessary information. If you’re still going to pursue having an LLC, then you’ll know what kind of administrative words, the amount of fees that comes with it, and whether you are willing or disciplined enough in order to keep up with it. It’s the cost of doing business. You’re getting great asset protection. You’re getting access to additional funding, credit and tax benefits.

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