Guided Real Estate Investing Podcast #29: To LLC or to not LLC?

Guided Real Estate Investing Podcast #29: To LLC or to not LLC?

Announcer: You’re listening to Real Estate Investing Talks, a SimplyDoIt podcast. Your journey to success in real estate investment starts right here, right now. Here’s Dani Beit-Or.

Dani Beit-Or: As always, good morning/good evening/good afternoon, depending on where you are. I know we have people joining us from multiple time zones including Europe, so it’s always nice to have this format.

My name is Dani Beit-Or, obviously. I’m based in southern California. We do this session every week on Friday 11:00 a.m. pacific time, almost every Friday.

The whole purpose of this session is actually to tackle questions that you have and answer a concern regarding real estate investing obviously, an opportunity to kind of engage a little bit, so I love this session. 

What I’ve learned actually is that a lot of people watch this on the recording, and I get calls after each session or the following days after each session. People tell me, “I watched your video. I didn’t watch you live. I watched the recording,” so it’s always great. 

If you are one of the people who is watching this on a recording, feel free to contact us. Feel free to put the questions and comments, and I’ll try to respond to them. 

Also, for you, the people who are here live, if you have questions regarding to the topic, questions regarding to other topics related to real estate, by all means, please post them, and I’ll try to answer them if I can or if I know. 

Today’s topic is probably, I would say, the number two question that I get. Maybe it’s really competing with the other one. My number one question is how do I get started? That I get from investors. This is really tight. 

Number two question is the whole topic of LLCs. I’ll put maybe a little bit of a disclaimer. I get a little bit worked out or emotional with this topic because it kind of bugs me. I’ve been hearing this question for years, and I think there’s a lot of ignorance regarding this matter of LLC. I’m going to try to make some sense. 

Obviously, I’m not an attorney, and you guys are always using an attorney to make those decisions when it comes to using entities, not just LLCs, entities because there’s a lot of reasons why you would consider using an entity, different reasons for different people. 

There’s reasons why you wouldn’t, and there’s benefits and cost and advantages and disadvantages, so I’m not going to give you a straightforward answer for your situation.

What I’m trying to accomplish is give you is, A, my experience from investing on a large scale, so kind of from the trenches so you know what to think about when considering this aspect and maybe inject some common sense into the whole thing.

Let me start by two things. Hey, Victor, good to see you. Number one. I think the whole concept of LLCs or entities starts with real estate investments collabs or groups or classes.

When an attorney comes on board- which I had those attorneys as well through the events that I have- and they talk about entities or LLCs and, usually, their mantra is, “You must have an LLC.” That’s usually what they say, “You must have an LLC,” no matter what. It’s a blanket answer. Whatever you do, you have an LLC.

Now, I’ve got to tell you that I’m questioning their integrity a little bit. It’s good to know about the topic, but I’m questioning the integrity because a lot of those guys, they go on stage, they start speaking, they teach, the better ones, the not so good ones, it doesn’t matter, and their incentive is really to sell some products or services related to the matter that will benefit them, obviously. That’s the first thing I want you to keep in mind.

Now, in reality, I think the whole concept of entity is a little bit more challenging because I would say it’s more related to what kind of investment you’re actually doing, and we’ll talk about that in a second, and what kind of risk or concerns you have with the whole concept of LLCs.

Now, let’s just start thinking about what kind of investment will maybe justify an LLC and what wouldn’t. If you’re making an investment in real estate that has a higher risk potential, then you probably want to consider using some sort of an entity such as an LLC or something else.

For example, a flip maybe is a more type of an investment that will justify using an LLC. Maybe if you’re buying a lower end property that has a potential risk with tenants and you’re doing it cash, it may require some entity on LLC.

If you’re doing commercial, that usually even is typically done with an LLC. The first thing you kind of need to start asking yourself is what is the risk? Why do I need an LLC to begin with? Regardless of the actual investment.

Are you doing an LLC or an entity? I’m using LLC as a generic name but an entity because you heard some attorney? Are you doing it because you’re trying to protect something specific? Are you doing it because you’re trying to hide something specific?

What are the reason or reasons you want to use an entity to begin with? Does your investment strategy really fit well with using an entity? That’s where you want to start with this whole concept.

In my world, most of the real estate we invest in and worked with investors in buying, it usually looks like this: a nice, single-family home in a nice community in a nice part of town in one of the big US metros.

For example, let’s just say some rental property in McKinney, Texas which is outside of Dallas, north of Dallas. Just using that as an example. Good schools, doesn’t have to be amazing schools, good area, potentially good tenants. That’s usually the type of investment we are doing.

And we’re buying it with mortgages. Most of the time, we’re buying it with mortgages. For this type of an investment, if that’s what you’re doing, the LLC may be a good thing to consider, But it’s going to be a little bit more challenging for the following reasons.

Number one, when you’re doing this type of an investment, which is with a mortgage, lenders do not want to lend to entities. 98% of lenders, let’s just put it this way, do not want to lend to entities. They want to lend to individuals on residential properties.

Right there, you have a challenge. Some attorney told you to open an LLC and start buying real estate, and then when you come to execute, you find out that you can’t actually use your LLC.

By the way, if you go to lenders that will enter an LLC, that means you’re compromising or getting not as good terms. Now the interest is going to be a little bit higher, maybe a higher down payment and so on. There’s always a balance here.

Residential banks or residential lenders don’t want to lend to an entity. That’s your first challenge right there. It’s the first thing you do.

Now, a lot of people in my career have told me, “That’s not a problem. I’m going to buy it under my own name. I’m going to set up an entity, and then I’m going to transfer title into the entity.” I’ve heard of people doing it. It can be done. It’s not a complicated process. Absolutely. When you do that, two things usually happen.

First of all, you’re tampering with title, and if you don’t do it properly, you may be putting yourself in some risk without knowing. You got to do it properly so your title stays intact or your title is not jeopardized. That’s number one. Very important, by the way.

Even if you’re transferring it from your own name to your family trust, you’re already tampering with title. Right there, you’ve got to be aware of that.

Number two, when you deduct transfer- it’s usually called quick claim– from your name to the entity, you actually automatically breach contract with the lender.

Lenders have– on their documents, on your contract, your mortgage contract, has a due-on-sale clause section, and there’s maybe four or five reasons why a lender would execute the due-on-sale clause.

One of those things– pick up any mortgage document and look them up, you’ll see it. I have. It’s been a while, but in simple terms, it says if you’re touching the title, you’re automatically in breach of contract.

Now, for many years, I’ve heard people doing it, and nothing happened. Some attorneys have some ways how to do it better. Do it this way to make the lender know. Don’t let the lender know. It doesn’t really matter right now. The fact that you’re doing it, contractually, you’re breach of contract. That’s the second problem.

Third problem, if the lender decides to execute the due-on-sale clause, they usually send you, when you do that, a letter that you have 30 days to pay the loan. Now, for many years, I have not seen people doing that on one end and then lenders are not doing anything about it.

In the past year, I have seen two cases which is not a small number, not related to us, but I have seen it. I’ve seen the later ones, and one of my friends told me that he got one too- and that’s a person I trust; he’s a close friend- that they received letters from the bank. They’re saying, “Because of what you’ve done with the claim, you have 30 days to pay the mortgage.”

What I’m trying to say here, first of all, between what the attorneys tell you in a classroom and the reality, there’s a gap. The ideal world and the actual world, there’s always a gap there. Right there, you’re a little bit in a challenge.

When I talk to investors and this question comes up, which it comes often, even in this week, it came at least once if not twice, I always ask, “Why would you even consider using an LLC? What’s the reason? Usually, it comes in two answers: I heard someone talk about it without knowing why, or asset protection.

What is asset protection? Usually, they don’t even know what that means for them. We all know what is asset protection in a general term, but specifically, what does it really mean?

Here’s what I learned over the years to do when it comes to this aspect of using entities or not. When you own a property, again, excluding higher risk type of investment such as a flip or such as a lower-end property or commercial or anything else, so if I’m just living or investing in the world of boring real estate, a nice single-family home in a nice community, in a good shape for potentially good tenants. Let’s just say this is my realm of investment for a second.

What I want you to understand is that before you start dealing with the question of yes, LLC/no entity, put that aside for a second. Most of us tend to forget the really important thing.

The first thing that is critical is that you get insurance on the property. You put insurance on the property, and you already have some protection. Make sure it’s a good insurance. That’s number one. That’s easy and relatively cheap.

Number two, you possibly add an umbrella insurance. Again, rather easy and super cheap. I think those two, you don’t even need to think about talking to an attorney and think about it and not do– This is rather easy and rather cheap without too much thought process. Get those two things done before even considering the LLC yes or no.

Number three, take care of your property. That means if something breaks, fix it. Remove any potential liability that comes up from the property before it becomes a real risk.

For example, don’t be cheap and start fighting with a tenant on some exposed wire that cost about 75 bucks, maybe 20 bucks to fix, and you’re finding who’s responsible for it while it’s an open exposure for someone to get electrocuted or worse.

Don’t be cheap and stupid about this. Fix it first. Eliminate the risk first. Fight with the tenant later. That should be your ultimate mindset. Make sure the property is in good shape. Fix it. Take care of it. Maintain it.

Listen, those properties that we’re buying are taking care of us financially. We need to make sure we take care of them. Every property has wear and tear, has repairs. It’s okay. It’s deductible, of course. Take care of it, and eliminate all the potential risk that comes with it.

If you’re using a property manager, make sure the property manager is doing for you. The fact that you’re using a property manager is not an excuse not to take care of those things.

Right there, by doing those three things- insurance, umbrella and taking care of your property- you’ve probably positioned yourself, I don’t know, in an 80/90 percent protection scheme or protection scenario for your own sake.

Those are easy, simple and cheap to do. I’m not saying super-easy because umbrella insurance which is an extra liability coverage- Someone asked me what is umbrella insurance earlier this week. It’s an extra liability coverage- may require some changing discomfort with your insurance carrier.

It may need some work to move things around and maybe switching an agent or a carrier. Deal with it. It’s worth it. It’s really worth it. Now, you have that taken care of- insurance umbrella and taking care of your property- then maybe consider adding the entity/LLC.

Now, in order to do so, what I would do is I would first talk to an attorney about it. By the way, I would bet any attorney will tell you, “Of course you have to have an LLC.” You’re never going to hear a different answer in my mind unless it’s someone really experienced and special, and once you open that door to the entity world, a whole corridor of options opens up.

Now, remember, entity costs money to set up, maintain, tax return and maybe some attorney fees, so it’s not cheap. It’s still somewhat of an insurance cost. The second thing is, remember that even with an LLC, you’re not necessarily– People think, “Oh, the LLC will protect me. No problem.” Not necessarily.

I think if you neglected to take care of your property, and it’s in bad shape or there’s a problem. You knew and didn’t take care of it. If there’s a lawsuit, I don’t know what to tell you, but I’m not sure that the real estate will protect you because maybe it’s going to be considered gross negligence.

I don’t know. Remember, I’m just an investor. I’m not an attorney, but it doesn’t mean, automatically, I have LLC protecting me. You still have to take care of the property. You still have to eliminate those things.

By the way, it’s common sense that you would. What I’m trying to say is maybe ask yourself what kind of investment you’re doing and if an LLC is a must, or can you do it without an entity or an LLC?

Dan, take care of your property: insurance, umbrella. I see a question about it. I will respond to it in a minute. Take care of the property, and then possibly consider adding some additional protection there of an entity which is fine.

Now, before I get questions, I want to tell you one thing that I’ve seen throughout my career of many years that always strikes me. It kind of made some common sense to all this that I’m talking about to begin with. 

Several years ago, I sat with one of my friends. I was on a property tour in Phoenix, Arizona. That’s probably 2010 or 2011. I meet with one of my friends. We always chat about life and real estate. 

He says, “You know, you’ve had those attorneys come to you. You’ve been aware of the LLC entity question that always comes up.” He says, “Dani, I have a question for you.” 

This guy has multiple properties. He’s a very big lender. He does a lot of investment properties.

He says, “Dani, I’ve got to ask you. Have you ever met or seen someone who’s been through a situation where the LLC have protected him and there was a lawsuit or someone if they had an LLC and they had a lawsuit, it would have protected them?” My answer to him was, “No.”

The minute he asked me that question, from that point, every time I’m speaking, I’m going to ask you that as well: live, webinar, small events, big events, colleagues, peers. I always ask people in the right setting, “Do you have a story? Can you share with me a story that you know, personally?”

Don’t give me a story of a friend of a friend of a friend of a friend. I’m not interesting in that. I want to know the details of where you were sued by a tenant or someone regarding your property and the LLC have protected you or, if you had an LLC, it would have protected you.

To this day, I only have one story that I finally find, and I’m talking about multiple situations and multiple events, many, many events that I’ve been and people that I talk to, I always ask this.

I’m asking this question to you guys as well. If you know of a story, share it with me here, directly or send it to me in a private message. I want to know. I really want to know.

But one person in one of the events that we had a few years back said, “Dani, I have a story. I have a property in Colorado–” which was not purchased with us, with Simply Do It, “and that property, someone walked on the lawn, not the tenant, and they broke their leg, and they sued us.”

I said, “Finally, a story. Finally. Finally, I get a story. What happened?” He said, “They sued us for $50,000. The insurance company settled with them for $25,000. Done.”

I said, “But you had an LLC protecting you?” He said, “No LLC. We didn’t need LLC. That was the situation. $25,000. We didn’t have to deal with it. We have insurance. All set.” Not exactly the story I was hoping for, but finally, a small story.

The point I’m trying to make is not the stories of those people. It’s the fact that I am unable to find that story. I’m sure it’s out there, but I’m really looking for it.

I’m really looking hard from multiple situations and multiple years for that story, and I still have not been able to find that story which tells me the chances of you running into a situation with a LLC that will protect you/won’t protect you are pretty small as long as you’re doing everything else properly. Insurance will take care of your property.

Sometimes, I see investors that, before even dealing with the investments, they’re moving spending time and energy on this entity question ordeal. Why? Why are you wasting all your energy?

By the way, when I had attorneys, multiple times, come and speak to other groups- we probably had more than 10 of those, 10 or 15 over the years- on the whole concept of entities and LLCs, I always ask them, “If I’m an investor, do I need to worry about the entity and asset protection first and find the property later or vice versa?”

Without  exception, they all say, “Dani, if you or anyone in this room focus on investing, when you own real estate, come to us. If you want to incorporate some asset protection mechanisms, come to us. We will work with whatever we have, but we will tell you. Focus on investing first, and take care of the asset protection, entities, whatever, second.”

That’s what I’m trying to say. I’ve got to tell you, I don’t think, from my experience, entities are not always required. Some situations are. Some situations aren’t. Don’t focus on that so much. For some reason, this is a topic that always, always concerns people. Don’t focus on it so much that it paralyzes you from actually investing. What’s the point?

I’m always surprised by someone contacting me and saying, “Hey, we have an LLC. We’re ready.” Like, “Why? Where is your LLC? How is this related to the property? What is your strategy?” “We don’t know, but the attorney says open an LLC.” “Why? You already spent money, energy, time.” It just doesn’t make sense to me.

That’s the message here. If I wrap it up or sum it up and then I’ll take the questions, number one, ask the question of an entity from the perspective of why do you need an asset protection or entity to begin with?

If the answer is, “I’m doing this type of an investment, and it makes sense to use it,” absolutely. Go ahead and do that. Such as a flip, for example. If you’re buying cash and not using a mortgage, absolutely use that. That makes sense.

But if you’re buying a nice, single-family home like we do- which we call it the most boring real estate that you could possibly have, a nice house, in a nice community, in a nice suburb, in a good school district. I call it super-boring real estate.

I love super-boring real estate. I think it’s great. It’s sexy. I find it very sexy. If that’s what you’re doing, maybe you don’t need to consider an entity altogether.

Then, regardless of whether you have an entity or not, make sure you take care of the property, you have insurance, and you have umbrella insurance.

To conclude, what I want you to take from this session is make sure if you really need an entity, and if you do or you’re not using an entity, take care of it, insurance and umbrella insurance.

With that said, I’m going to take questions. Before I take questions, I just want to say that I’m going to be speaking in LA, Orange County, San Francisco, and Silicon Valley in the coming month.

At the end of February, Orange County and LA. Beginning first week of March, I’m going to be in San Francisco and Sunnyvale. If you want to register, by all means, I just put the link, and you can register. Of course, tell your friends. You’re most welcome. It would be great to see you for once in person and not through actually a one-sided mirror so to speak. You can see me. I can’t see you.

We have two questions. You’re most welcome to put more questions in, and I’ll try to tackle as much as I can. Near is asking. Umbrella insurance versus your regular insurance. Is it an addition or instead?

Near, it’s an addition. You’ve got to have the basic insurance of your property which usually covers you for at least $300,000 in liability. Sometimes, maybe a little bit less than that, but usually the policy liability-wise covers you up to 300,000. You can go beyond that, but usually, that’s the minimum.

Then, an umbrella will come in, and the whole basic concept of an umbrella is to cover you from the $300,000 that the property insurance covers and up all the way to your coverage. A million/two/five depending on how much you’re covered.

I’m not an insurance agent, so I can’t go into explaining all of that in detail. I just want to give you the generality of it. I can tell you that, usually, umbrellas are relatively cheap. A few hundred dollars a year. Also, it depends on other factors of how many properties you have on one end.

Usually, umbrella wants to cover your vehicles and your own home before they’re even going to consider other investment properties. I think it’s a no-brainer. It’s so cheap, it’s a no-brainer. That answers you. It’s not one or the other.

At minimum, a basic property insurance and the top of that, the umbrella. Hopefully, Near, that explains. If it’s still not clear, let me know.

Near, who’s going for extra credit today- Thank you, Near- has another question. Are most insurance companies providing umbrella insurance? Any recommendation for a company that provides a better insurance?

That’s a good question because I don’t know what to tell you because there are so many insurance companies. The challenge that I have had with this question exactly some years back, I’m talking about many years back when I incorporated umbrella and insurance altogether and improved that on my end for my own portfolio was that most insurance companies do not cover multiple properties in the umbrella. They cover up to three, five or so on.

A while back, only two companies were doing I think up to 20. That was Farmers and State Farm. Up to 20 rental properties I’m talking about.

I’ve got to tell you, it’s been many years that I’ve researched that because the need was not there, so you want to research. Some things may have changed over that period of time, so you want to research that.

You want to ask any insurance carrier how many rental properties do they cover because if you buy multiple, then you don’t want to switch or have another insurance company to work with. 

That’s just something to think about when you’re asking them. That was one of my concerns was I need someone that can cover as many properties as they can because I know I have many of them. That’s the one thing that I want you to understand.

The other thing, when it comes to umbrella, usually, some insurance companies in the US, they don’t operate in all states. Let’s just say State Farm- I’m just picking that name- is working in multiple states, and you decide to go with them for the umbrella. 

You move over from whoever you’re using right now, your vehicle or vehicles and your house, into that new carrier. That’s usually what they want you to do first. Then, for some reason, I don’t know, let’s just say Farmers is not in South Dakota.

They are not operating there in South Dakota, but Farmers will probably– I can’t say for sure every company, but usually, they will cover properties that have insurance policies in South Dakota, but they can bring them into the umbrella.

When you’re buying another rental property or another property, you have to let your insurance agent know that you have another property, and they have to add it to the umbrella. It’s going to cost you a little bit extra, not a lot, and then you will cover it.

Every time you add a property or sell, if you don’t let your umbrella carrier know that you made that change, they’re not going to cover it just automatically. They don’t usually care if the property is in a state they are not operating as long as you have the basic coverage.

What they’re going to ask you to see is, “Show me the declaration page from your insurance company on the property, and then send me that dec. I will make sure everything is fine, and we’ll add it to the umbrella.” Hopefully, that answers your question here.

Guy is asking, “It make sense to have a property or strategy of investment before you need a structure.” I agree, “But it’s not so simple thing to generally dismiss the need for one.” I absolutely agree, Guy. I’m not dismissing. I’m just saying don’t be a herd. Don’t just go and have an entity. Think about what the need is. Absolutely.

Each investment strategy needs to be specifically tailored. I agree with that. Absolutely, Guy. I fully agree with you. That’s really what I’m trying to say. It’s not a straight yes or not a straight no. It’s related to your structure, your financing, your strategy, and the type of investment you’re doing.

Thank you for reinforcing that. I agree completely with your comment here. You get a like, Guy, for this, and of course Near, for extra credit. Good jobs, you guys. Thank you for the input. I appreciate it.

We’ll wait for another minute or so to see if there are any additional questions.

Okay. Very good, you guys. I think I don’t see any additional questions coming up. I want to thank you for taking the time on your Friday. I know people here are in different time zones, so I really appreciate it.

I want to wish you a great weekend, and I hope to get a chance to meet with you actually in person over a one on one meeting or one of my lectures coming up in the next month or so. The link is in the comments. You can click and check on the events and dates. Have a terrific weekend, everyone. Bye-bye.

Announcer: Congratulations. You are one step closer to success in real estate investment. You’ve been listening to Real Estate Investing Talks with Dani Beit-Or. To learn how SimplyDoIt can guide you through the real estate investment process and achieve nationwide success, visit us on the web at Thanks for listening.