SS177: Setting Up LLCs and Bank Accounts for Real Estate Investing

SS177: Setting Up LLCs and Bank Accounts for Real Estate Investing

When investing in real estate, many investors are confused about structuring their corporations and bank accounts. In this episode, Charles discusses how he structures his LLCs and bank accounts.

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Talking Points:

  • Entities and LLCs can get complicated and confusing, with so many different asset protection strategies out there. In this episode, I will explain how to structure your LLCs and bank accounts, whether you own one rental property or thirty.
  • I am not an attorney, accountant, or financial advisor. The correct way to utilize this information is to listen, understand my strategy, and then speak to your advisors to decide what works best for you.

Why are LLCs so Commonly Used When Investing in Real Estate?

  1. Limited liability protection. LLCs provide limited liability protection that typically shields its owner’s personal assets. LLC owners are typically referred to as members.
  2. Pass-through taxation. LLCs are flexible regarding taxation since they are treated as pass-through entities for tax purposes. Profits and losses flow through to the individual members’ personal tax returns. If you own an LLC by yourself, your profits and losses will be reported on your personal tax returns, minimizing hassles and tax preparation costs.
  3. LLCs are easy to manage. In most states, they are inexpensive to set up and renew. They have fewer formalities and administrative requirements than other entity structures.

 

Starting Out

When I began investing in real estate in 2006, I purchased my first two multifamily properties in my name. Years later, I Quitclaim those properties to an LLC, meaning I changed the ownership from my personal name to an LLC when I actually had some assets to protect with the help of an attorney, it cost a couple of hundred dollars, and I would suggest this same strategy with your first rental properties.

Unless you are purchasing commercial multifamily properties (5+ unit apartment complexes) from the beginning or you have a sizeable net worth, I would purchase your first rentals in your own name. The whole process will be easier and simpler, and you will most likely be able to obtain more competitively priced financing as well.

Now, you have just purchased your first rental property in your own name. Set up a separate checking account in your name that is strictly for that property. This account is only for that property’s funds, rent, and expenses. Possibly, if you purchase another small rental in the future, you can use this checking account for both properties, but the key is having a separate bank account for your first one or two properties.

Next, set up a savings account or money market account in your name for reserves. I actually had one savings account for years that was just for my real estate investing. I initially deposited funds into it for future repairs and future property investments. I added it to it regularly from my other business activities while also depositing a portion of the rent I received into it every month. The amount you add to it every month is really dependent on the condition of your properties but get into the habit of building the real estate reserve fund every month.

Lastly, depending on your state’s laws, you may need a special account for security deposits. We typically have another bank account where we put security deposits only but make sure you fully understand your state’s laws around this.

 

How Do You Open an LLC?

After you have purchased several units, I suggest forming an LLC. The number of properties you put into the LLC depends on your net worth and the value of the properties. If the properties have a lot of equity, I might put them in their own LLC. I suggest you have an attorney set up the LLC and quitclaim your properties, but you can find online services or do it yourself. For example, I use an attorney in my home state of Florida who only sets up entities, and they charge a couple hundred dollars all in. When I renew the LLC next year, I changed the registered agent from the LLC formation attorney to my attorney.

Either way, the LLC formation process is pretty straightforward.

  1. Choose a name – search your state’s Secretary of State website to find an available name
  2. Choose a registered agent. I would use your real estate attorney. They will be the party to be served paperwork if your LLC is sued. Some companies charge me to be an agent, but my attorneys have never charged me to use them as a registered agent.
  3. The articles of organization are created and submitted to the Secretary of State (your attorney will do this if you hire one)
  4. Drafting the operating agreement, also done by your attorney, but this document spells out the ownership structure, member responsibilities, profit distribution, decision-making responsibilities and processes, etc., and lastly
  5. Go to IRS.gov and obtain an EIN, or Employer Identification Number. Your attorney will charge you for this, but you can do it yourself if you want to.

Opening a Bank Account for your LLC

The process of opening a bank account for an LLC is very similar to opening a personal bank account, but you will need all of the documentation mentioned previously. You must bring this to the bank or provide executed scanned copies if applying online for an account.

Now you’re all set.

 

If You Are Self-Managing Your Properties

When self-managing your properties, you should set up a separate LLC for property management. This LLC will write leases, contracts, and vendor agreements. Your tenants will pay rent directly to the LLC, and you will pay all bills and expenses out of this LLC. The LLCs that own your properties will never do business with anyone. Remember that in most, if not all, states, non-licensed real estate professionals are prohibited from managing real estate that they do not own.

 

Net Worth Over $1 Million

Once your net worth surpasses $1 million, I would highly suggest you speak with an asset protection attorney. At this stage of your real estate investing journey, an asset protection strategy that involves only LLCs will usually not suffice. As the name states, LLCs are limited in their protection, and as your portfolio increases, you become more of a lawsuit target. Feel free to message me if this describes you, and I can introduce you to my asset protection attorney.

Transcript:

Charles:
Warren Buffett once said, risk comes from not knowing what you’re doing. Learn how to mitigate risks in real estate investing through proper LLC and bank account setup.

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing setting up LLCs and bank accounts for real estate investing entities and LLCs can get complicated and confusing with so many different asset protection strategies out there. In this episode, I’ll explain how to structure LLCs and bank accounts whether you own one property or 30, I’m not an attorney accountant or financial advisor. The correct way to utilize this information is to listen, understand my strategy, and then speak to your advisors to decide what works best for you. So why are LLCs so commonly used when investing in real estate? Number one is limited liability protection. Llcs provide limited liability protection that typically shields its owner’s personal assets.

Charles:
LLC owners are typically referred to as members two pass through taxation. Llcs are flexible regarding taxation since they’re treated as passed through entities for tax purposes. Profits and losses flow through to the individual member’s Personal tax returns. If you own an LLC by yourself, your profits and losses will report it on your personal tax returns, minimizing hassles and tax preparation costs. Three, LLCs are easy to manage. In most states, they are inexpensive set up and renew, and they have fewer formalities and administrative requirements than other entity structures. So starting out, when I began investing in real estate in 2006, I purchased my first couple multi-family properties in my own name. They were small multi-family properties. Years later, I quit claim those properties to an LLC, meaning I changed the ownership from my personal name to the LLC when I actually had some assets to protect with the help of an attorney.

Charles:
And it cost a couple hundred dollars. And I would suggest the same strategy with your first rental properties, unless you’re purchasing commercial multi-family properties, so five plus unit apartment complexes or any commercial properties for that matter from the beginning, or you have a sizable net worth, I would purchase your first rentals in your own name. The whole process will be easier and simpler and you’ll most likely be able to obtain more competitively priced financing as well. Really, the main thing here is just don’t waste time with all these different structures or all these things that are gonna be hindrances to you actually buying property. Go out, buy ’em little multifamily property, learn how to be a landlord, and then as you start growing some wealth, some income, then you can start putting together your LLCs and really a whole asset management plan. So now that you’ve purchased your first rental property in your own name, set up a separate checking account in your name that is strictly for the property.

Charles:
This account is only for the property’s funds and rent and expenses. Possibly if you purchase another small rental in the future, you can use the same checking account for both properties, but the key is having a separate bank account for your first one or two properties. Next is set up a savings account or money market account in your name for reserves. I actually had a savings account for years that was just for real estate investing. I initially deposit funds into it for future repairs and future property investments, and I added to it regularly from my other business activities while also depositing a portion of the rent I receive into it every month. The amount you add to it every month is really dependent on the condition of your properties, but getting to the habit of building the real estate reserve fund every month. Lastly, depending on your state laws, you may need a special account for security deposits from your tenants.

Charles:
We typically have another bank account where we put security deposits only, but make sure you fully understand your state’s laws around this and you follow it. So how do you actually open an LLC? So after you’ve purchased several units, I suggest forming an LC. The number of properties you put into the LLC depends on your net worth and the value of the properties. If the properties have a lot of equity, I might put them in their own LLCI suggest you have an attorney set up the LLC and quit claim your properties. But you can find online services or do it yourself. For example, I use an attorney in my home state of Florida who only sets up entities and they charge a couple hundred dollars to do it. When I renew the LLC the next year, I change the registered agent from the LLC formation attorney to my own real estate attorney.

Charles:
Either way, the LC formation process is pretty straightforward. Number one is you choose the name, search your state’s Secretary of state website to find an available name. Two, choose a registered agent. Usually when you’re doing it through any of these online services, they’re gonna put their name as a registered agent. If you can choose, use your real estate attorney as a registered agent or just have your real estate attorney set up the whole thing for you. And they’re gonna be, the agents gonna be who gets served paperwork if your LLC is ever sued. So it’s just important to know that, make sure that they are actually available to be served when you’re, when or if your LLC is sued. Three, the articles of organization are created and submitted to the Secretary of State. So your attorney will do this if you hire one and four, drafting the operating agreement also done by your attorney.

Charles:
But this document spells out the ownership structure, member responsibilities, profit distribution, decision making, responsibilities and processes, et cetera. And lastly, five, go to the irs.gov. Obtain an EIN or employer identification number. Your attorney will charge you for this, but you can go and do this yourself if you want to. Next is opening a bank account for your LLC. Now, the process of opening a bank account for your LLC is very similar to opening a personal bank account, but you need all the documentation previously mentioned, all the LLC paperwork, and you must bring this to the bank or provide, execute it. Scan copies if you’re applying online for an account. So now you’re all set. LLC set up bank accounts all set up. Hello, caveat here. If you’re self-managing properties, and I don’t wanna make this like overly complicated, but once you have several properties at the same time, you’re setting up an LLC to protect those properties.

Charles:
If you’re, if you’re self-managing, you should set up a separate LLC for property management. Now, this LLC, this property management LC will write the leases, contracts, and vendor agreements. Your tenants will pay rent directly to the LLC, this property management LLC, and you’ll pay all bills and expenses out of this property management. LC, the property specific lcs, the ones that own your properties, will never do any business with anyone. Remember that in most if not all states, non-licensed real estate professionals are prohibited from managing real estate. They do not own meaning that this property managed LC will just be for assets that you own. Another caveat for net worth over $1 million. So once your net worth surpasses $1 million, I would highly suggest you speak with an asset protection attorney at this stage of your real estate investing journey. An asset protection strategy that involves only LLCs will usually not suffice.

Charles:
As the name states, LLCs are limited in their protection and as your portfolio increases, you become more of a lawsuit target. Feel free to message me if this subscribes to you, and I can introduce you to my asset protection attorney. I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs@syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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