Reasonable legal fees to set up an LLC for real estate investing?

[wawot1]

I'm looking to buy a single family house investment property that I'd like to put into an LLC.

I just spoke with an asset protection / tax attorney firm and was given a price of $2750 to set up an LLC (or subscribe to a several thousand dollar package including other services with a "discounted" price to set up an LLC of $1500, once this package is purchased.)

I have no experience to compare this against - are these prices reasonable? Is this in line with what others have paid?

Thanks

[GIMD]

You do not need an attorney to set up a LLC, particularly when you are just starting out and the LLC structure is simple. There are many online services that will help you set up an LLC (IncFile, Rocket Lawyer, Northwest, etc.). I set mine up for the same purpose last year through Northwest Registered Agent and it was around $200. Later on, when you have multiple properties or multiple members in the LLC, you may consider getting an attorney to help draft your operating agreement; otherwise, you can stick to the standard template for now.

[White.Beard.Doc]

An LLC is an expensive way to go about this. And an LLC can potentially be pierced in a lawsuit if you do not maintain completely separate business accounts and follow other rules.

An LLC may make it more difficult to access a low cost, residential property mortgage to finance the property, and you could end up with a more expensive commercial mortgage with a balloon payment due, and hope that you can refinance with favorable terms when the balloon payment comes due.

Your LLC may need to purchase a separate commercial liability policy, adding to the complexity and expense.

Why not keep it simple and own the property in your own name, with a high limit umbrella policy that fully covers any type of personal liability, for your primary home, for any vehicles that you own, and also any liability related to the rental property? You can purchase a high level of umbrella coverage for one low premium.

[wawot1]

You do not need an attorney to set up a LLC, particularly when you are just starting out and the LLC structure is simple. There are many online services that will help you set up an LLC (IncFile, Rocket Lawyer, Northwest, etc.). I set mine up for the same purpose last year through Northwest Registered Agent and it was around $200. Later on, when you have multiple properties or multiple members in the LLC, you may consider getting an attorney to help draft your operating agreement; otherwise, you can stick to the standard template for now.

Thanks GIMD - I've looked into that a little too. I've listened to a few podcasts by asset protection lawyers who say "don't do it - you need a real lawyer to set this up". Granted, they're not unbiased. I guess I should look into this a little more carefully.

[wawot1]

An LLC is an expensive way to go about this. And an LLC can potentially be pierced in a lawsuit if you do not maintain completely separate business accounts and follow other rules.

An LLC may make it more difficult to access a low cost, residential property mortgage to finance the property, and you could end up with a more expensive commercial mortgage with a balloon payment due, and hope that you can refinance with favorable terms when the balloon payment comes due.

Your LLC may need to purchase a separate commercial liability policy, adding to the complexity and expense.

Why not keep it simple and own the property in your own name, with a high limit umbrella policy that fully covers any type of personal liability, for your primary home, for any vehicles that you own, and also any liability related to the rental property? You can purchase a high level of umbrella coverage for one low premium.

Thanks WBD - yeah, I've been reading up on the pros and cons of an LLC vs an umbrella policy. Aside from the financing issues you bring up, seems that one of the major downsides to just having an umbrella policy is the issue of anonymity in case of a lawsuit. A lawyer is probably less likely to go after an anonymous LLC, than a landlord with MD behind their name.....

[Tim]

Thanks WBD - yeah, I've been reading up on the pros and cons of an LLC vs an umbrella policy. Aside from the financing issues you bring up, seems that one of the major downsides to just having an umbrella policy is the issue of anonymity in case of a lawsuit. A lawyer is probably less likely to go after an anonymous LLC, than a landlord with MD behind their name.....

Remaining anonymous is a lot more difficult than setting up and LLC. Think about it, will you never have contact with the property or tenants contractors or utilities?
Likely you are going out of state as well. One LLC is not difficult for an attorney.

[White.Beard.Doc]

Thanks WBD - yeah, I've been reading up on the pros and cons of an LLC vs an umbrella policy. Aside from the financing issues you bring up, seems that one of the major downsides to just having an umbrella policy is the issue of anonymity in case of a lawsuit. A lawyer is probably less likely to go after an anonymous LLC, than a landlord with MD behind their name.....

But if they go after you and you have a big umbrella policy in place, you can likely sit back and relax knowing that the insurance company is going to take care of pretty much everything.

[StarTrekDoc]

Nuisance suits and ambulance chasing are the issues. Also a reason why we use a management company to minimize discovery. The easiest is trust + umbrella policy + management company.

As Gandalf the White said, LLC operations has very specific criteria in meetings, book keeping, and criteria in order to protect the members and managers in roles and decisions. Not only that, but places like California -- LLC have individual annual fees for themselves just because. LLC is a great way to protect, but lots of hoops. Read over lots of the setup as well as the maintenance.

[GIMD]

Thanks GIMD - I've looked into that a little too. I've listened to a few podcasts by asset protection lawyers who say "don't do it - you need a real lawyer to set this up". Granted, they're not unbiased. I guess I should look into this a little more carefully.

Yes, do read up on it. Creating and registering a LLC are not difficult to do on your own. An attorney will always tell you that you need a lawyer. You may want to consult a CPA to ask about a proper tax structure for the LLC though. Whether to place your property in a LLC or in your own name is a popular topic that pops up frequently if you peruse any real estate forum. What WBC said is absolutely true. There are several limitations to purchasing a property under a LCC and financing your first property may be the most challenging limitation since initially the LLC has nothing to its name and you won't have access to cheap residential mortgage loans. However, many people continue to place their properties in LLCs because there are several benefits. Beside the usual reasons of wanting an extra layer of asset protection and privacy, a LLC is a business. That means you will less likely mingle personal and business transactions when your property is in the LLC. As a business, the LLC will have its own line of credit. Another thing to consider is your goal for real estate investing. Are you interested only in residential property? What about commercial real estate? Triple net lease? Do you see yourself partnering with any other investors? If the latter, you should create an LLC now to start building your business line of credit instead of as an afterthought down the road.

[Larry Ragman]

Yes, do read up on it. Creating and registering a LLC are not difficult to do on your own. An attorney will always tell you that you need a lawyer. You may want to consult a CPA to ask about a proper tax structure for the LLC though. Whether to place your property in a LLC or in your own name is a popular topic that pops up frequently if you peruse any real estate forum. What WBC said is absolutely true. There are several limitations to purchasing a property under a LCC and financing your first property may be the most challenging limitation since initially the LLC has nothing to its name and you won't have access to cheap residential mortgage loans. However, many people continue to place their properties in LLCs because there are several benefits. Beside the usual reasons of wanting an extra layer of asset protection and privacy, a LLC is a business. That means you will less likely mingle personal and business transactions when your property is in the LLC. As a business, the LLC will have its own line of credit. Another thing to consider is your goal for real estate investing. Are you interested only in residential property? What about commercial real estate? Triple net lease? Do you see yourself partnering with any other investors? If the latter, you should create an LLC now to start building your business line of credit instead of as an afterthought down the road.

Just for the record one does not need to establish a LLC to operate rental properties as a business as opposed to an investment. There are just certain rules the IRS expects the business owner to follow. As for the LLC vs. sole proprietorship, that is a personal choice. The LLC provides less liability protection than many think it does for the reasons WBD lays out, and it imposes cost as well as additional rules. Every time I’ve considered converting my properties to an LLC for reasons of liability or business structure I conclude it isn’t worth the bother. Just operate as a business (my wife manages the properties, but my answer would be the same if we used a management company) and have insurance on each property as well as liability insurance. I also don’t see a lot of value in having the properties in a trust since revocable trusts are pass through, but I understand some owners prefer an additional layer of anonymity.

[Larry Ragman]

Thanks WBD - yeah, I've been reading up on the pros and cons of an LLC vs an umbrella policy. Aside from the financing issues you bring up, seems that one of the major downsides to just having an umbrella policy is the issue of anonymity in case of a lawsuit. A lawyer is probably less likely to go after an anonymous LLC, than a landlord with MD behind their name.....

Maybe. At minimum the lawyer would know the owner has the rental property as an asset and it almost certainly carries a liability policy. If there is an issue and the facts support some liability based on the condition of the property, the lawyer will take the case regardless of whether or not you have MD after your name. Look, courts are rational. There is a fairly standard range of damages that might get awarded. Property insurance plus umbrella will cover it.

[Tim]

Side note, virtually any loan will require a personal guarantee in addition to the property security. Liens identify the bank, the loan documents have your personal guarantee as an addendum. The LLC is a separate legal entity from you personally. Might be named anyway. Two defenses might be needed. Keep your own umbrella, regardless.

[GIMD]

Larry Ragman Yes, you can certainly operate a business outside of a LLC. I only mean to say that under a LLC, you are more inclined to operate it as a true business. In my opinion, the main problem with the LLC is the cost and difficulty associated with obtaining financing. if one can overcome this hurdle, the other issues (some extra cost for liability insurance, state annual fees, etc.) are relatively minor.

Tim Personal guarantee for a loan to purchase property in a LLC should be the last option in my opinion. This would defeat the purpose of liability protection and privacy of purchasing under a LLC. It's better to raise cash and start small. Once the LLC has enough income and assets under its belt, it can have its own line of credit and guarantee its own loan.

[dennis]

Larry Ragman Yes, you can certainly operate a business outside of a LLC. I only mean to say that under a LLC, you are more inclined to operate it as a true business. In my opinion, the main problem with the LLC is the cost and difficulty associated with obtaining financing. if one can overcome this hurdle, the other issues (some extra cost for liability insurance, state annual fees, etc.) are relatively minor.

Tim Personal guarantee for a loan to purchase property in a LLC should be the last option in my opinion. This would defeat the purpose of liability protection and privacy of purchasing under a LLC. It's better to raise cash and start small. Once the LLC has enough income and assets under its belt, it can have its own line of credit and guarantee its own loan.

I've been investing in multifamily and single family residential for 15 yrs and have yet to find a bank that will loan without a personal guarantee, no matter how many assets an LLC has. Non recourse loans are possible but difficult to get unless you have a large enough purchase that it qualifies for a HUD or Fannie loan. Insurance companies also do non recourse but have expensive fees. For a single family like the OP wants a bank will require a personal guarantee.

[jfoxcpacfp]

I'm looking to buy a single family house investment property that I'd like to put into an LLC.

I just spoke with an asset protection / tax attorney firm and was given a price of $2750 to set up an LLC (or subscribe to a several thousand dollar package including other services with a "discounted" price to set up an LLC of $1500, once this package is purchased.)

I have no experience to compare this against - are these prices reasonable? Is this in line with what others have paid?

Thanks

Absolutely not. Sounds like you visited one of those package upsale sites. God forbid it was recommended in one of these miracle real estate courses. In general, you can DIY unless you are wanting to register in a state, like WY, that has series LLCs, then I’d probably use a (much more reasonable) attorney. NY is also kind of a PITA. The anonymity issue - you have to go through multiple layers of complexity to actually achieve it and, in general, most people aren’t as interested in your business as you think they are.

Think about it - people go to so much trouble for these ROT (Rule Of Thumb) things then don’t think about owning a vicious dog that is excluded under their HO/PUP’s and end up with a lawsuit. Or their kid bullies somebody on the home computer and the person commits suicide. It is almost impossible to avoid all risks - you just need to think them through and take action to mitigate. And make sure you are taking the appropriate action.

Had estate planning meeting with client this week. They had put trusts in place in the early 90s. They don’t appear to accomplish anything that they expected and now dealing with an ILIT that was pretty much unnecessary in the 1st place, along with an RLT that is little better. Get good advice, ask questions, and don’t be intimidated by the the owner of the most prestigious firm in your area.

Agree with others that PUP (Personal Umbrella Policy) coverage could be the cheapest and simplest solution.