Do you need one to start investing? No
Should you consider opening an LLC or Corporation before you buys? Definitely.
Depending on your circumstances, an LLC may be a must-have. I am not a lawyer and I would highly recommend you do your research or talk to a lawyer beforehand.
If you ask me “Katherine, do you buy through an LLC?”
My answer is no. I made a conscious decision to not do this because of my circumstances. It made the most financial sense to me.
Hubby and I buy properties under our personal names. It is easier to finance, the interest rates are more favorable, and financing smaller properties is easier via conventional lenders. As a newbie is really hard to get financing under an LLC.
Our first set of investments, the duplexes, were purchased under our LLC, but our interest rate was 7.25% which is crazy high. We refinanced it under our personal names at a 4% interest rate. It was necessary because the properties were not cash flowing as much and couldn’t find anything better.
A couple of things that led to our decision:
We don’t have too many assets to our name as of now.
All of our properties have mortgages. Therefore, there is not much for anyone to take.
Our credit profile is on point.
We have high-paying W2 jobs and very little personal debt so lenders like us. Getting financing under our personal names is not difficult. An advantage of financing through an LLC is that most lenders don’t care for the individual’s income and some don’t even care for the credit score. I’ll touch more on the benefits of financing through an LLC towards the end.
We purchased umbrella insurance.
I had no idea what this was until recently, so apologize if I don’t do a good job explaining. This is the definition per Investopedia. “Umbrella insurance is a type of personal liability insurance that covers claims in excess of regular homeowners, auto, or watercraft policy coverage.”
So what does this even mean? An LLC is meant to protect you from liability in the event of a lawsuit. When you don’t have one, you are exposed. If a tenant slips and falls, they will sue you personally and everything you own under your personal name is up for grabs.
Your property insurance may cover some of it, but it may not be enough, so this is where the umbrella may come in handy. It may cover the difference. I found an article by Royal Legal Solutions that provides a really good and detailed answer to the “Do you need an LLC?” The article is called LLC or Corporation vs. Umbrella Policy: Which is Better for Real Estate Investors? Check it out here.
A couple of things to consider. You can only have 10 properties financed under Fannie Mae/ conventional financing to your name. Therefore, eventually, you might have to go throw LLC.
While it is more expensive, there is an upside to buying under an LLC. Liability protection is one.
Another big perk is that you can find lenders that only look at the property income to qualify. They don’t care about your personal income. These lenders just want to make sure the property can pay for itself. This is especially good for self-employed individuals.
These lenders also vet the property and if they don’t think the property is a good deal, they won’t give you the loan. In a way, they l reassure you that you have a solid investment. This is no replacement for making your own analysis. You must have your own property vetting process.
Most of these lending companies still look at your credit and give you an interest rate based on that. The better the credit, the better the rate. You may still get a loan even if your credit is bad, but you may end up paying a high-interest rate.
There are also small community banks that have what they call portfolio loans and they will lend to an LLC and have you as a co-signer. They will go through the whole vetting process as you would with a regular loan, but Interest rates will be more favorable.
So, no. You don’t need an LLC to get started in real estate so don’t let this stop you from taking the first step.