The Real Estate LLC Mistake That Could Cost You Thousands (Rookie Reply)

0:00If you are sitting there right now trying to decide whether to buy your first house hack before your income changes or whether the rate window you call for today is worth jumping on even if the deal if the deal is worth of the deal if you're not doing. that exact question today. And if you've ever Googled, do I need an LLC before I buy a rental property and ended up even more confused than when you started, we're cutting through all of that noise and giving you a straight answer.

0:31This is the Real Estate Rookie Podcast. I'm Ashley Kerr. And I'm Tony J. Robinson. With that, let's get into our first question for today. So this question comes from the BiggerPockets forums and it says, I'm 23 years old and I'm currently planning to house hack my first property in the St. Charles, Missouri area with my fiance. I'm primarily looking for a multifamily property, a duplex, ideally, since my fiance isn't comfortable with renting out individual rooms in a single family home. We're getting married in a couple of months, but I'm hoping to buy before then because Missouri's first place program offers below market interest rates for first time buyers who make under 96 ,000 in household income.

1:09I currently earn about$92K, so once we're married, our combined income will push us over that limit and we'll lose eligibility. The first place non-DPA option offers rates around 5.25%, which is a full percent lower than what I likely get on a standard conventional loan after we're married. The issue is that the St. Charles market is extremely competitive, and I'm struggling to find any duplex that will cash flow even modestly once I factor in long-term expenses like management, maintenance, and vacancy. Right now, we're in a great situation, renting a house with a friend and only paying about$800 per month total for our share.

1:46Financially, there's no urgency to move, but I feel pressure to lock in this rate window before we lose eligibility after the wedding. My question is, number one, does it make sense to buy now just to capture the 5.25 % rate, even if the first property doesn't cash flow well? Two, how do you personally weigh below market financing versus waiting for a truly cash flowing deal? And three, in a market like St. Charles, where duplexes are rare and competitive, would you consider breaking even or slightly negative cash flow acceptable for your first house hack if it's a strong long-term location? All right, lots to kind of unpack here, but we'll kind of break it down for each question.

2:25But I think the first thing, and he didn't quite clarify this, but in the question he says that he's having a hard time finding a deal that'll cash flow. I'm struggling to find any duplex that will cash flow even modestly once I factor in long-term expenses. And then he also goes on to say they're spending right now$800 per month for living. So I think the way that I look at this mathematically is not necessarily how much cash flow will this house hack produce, but how much will your living expenses change, right? So if going into this duplex, right, or this house hack situation, even if it's not positive cash flow, if you're able to take your living expenses from$800 a month to$200 per month, that's still a net gain of$600 every single month that you didn't have before, not to mention you're getting the appreciation and the loan pay down on this property as well.

3:26So I think I would just maybe clarify what do you mean when you say the deals aren't cash flow? Because honestly, in a lot of house hacking situations, you're not typically living, quote unquote, for free. You're just significantly subsidizing the cost of your living. Yeah. That was the first thing I was going to point out too as to were you expecting to live there for free and to get cash flow where that can definitely happen, but is a lot harder to get. And I think you broke it down perfectly as to how to actually compare it apples to apples to what you're paying now with rent and how you're able to maybe reduce your expenses, but also the other benefits that come along, the mortgage pay down, the appreciation that comes with that too.

4:11The next thing that he had asked that we want to look at is how do you personally weigh below market financing versus waiting for a truly cash-flowing deal? I think we kind of answered that as to this possibly could be a truly beneficial deal for you. If you were looking at just like a standard investment, I would probably not take the deal knowing that I could get this discounted financing rate just to be able to buy something. And I would wait to cash flow because it's not my premier residence. It's not expenses I'm already paying in my household. I would want the deal to at least break even or be able to cash flow to cover itself.

5:02I wouldn't want to come out of my own pocket for my first investment to be able to cover it just because I want to lock in a 5.25 % interest rate. But the situation for house hacking is very different. That I think you could make it work for you and not cash flow because it is, you're going to be your primary residence. The next question here is, so that area is really competitive for duplexes. And again, he talks about the cash flow and how do you find a property that has a strong location but may have negative cash flow on it, I think he's thinking of the appreciation play as to whether it's okay to take negative cash flow because it's going to be appreciating in that location.

5:52You're going to get that benefit from it. But I think as your house hack, it also has some personal preference to it as to where you want to live and what type of property you like. I do think that you probably will have an advantage making offers on duplexes because you will most likely be able to offer more than an investor because this will be your primary residence and you'll already be getting a lower interest rate on financing. Yes, an investor could come in with cash or whatever, but they're going to most likely want that property to cash flow. So I could see your offer being more, you could be able to offer more because you're accounting for your own living expenses with the property.

6:39The only hiccup I could see is if you're using a VA loan or FHA loan, the seller not wanting to deal with the inspections that come along with that. I think the only last thing that I'd add is maybe be a little bit more creative around what house hacking looks like. Like if your fiance has already said like, hey, we don't want to share rooms in the house we're living in, that's fine. But maybe there are other options aside from a duplex. Can you find a single family home that maybe has an ADU in the back? And either you guys can live in the main house or you can live in the ADU and rent out the main house.

7:13I don't know if there's maybe finished basements in that part of Missouri where, again, either you're living upstairs or they're living downstairs. But I think there are maybe other ways aside from just, it's got to be a duplex that you can still execute on this idea of house hacking. Yeah. Sometimes you'll see houses listed as an in-law suite that actually have a whole separate unit that you could rent that out. And it's usually separate. The utilities probably aren't separate and you would just have to factor that into the rent that you're paying their utilities. But I've seen that so many times where it's listed as an in-law suite, but it's actually a full-blown apartment.

7:53Also above garages, that's pretty standard if somebody does have an instead of ADUs where you're just having an additional dwelling unit on your property, they're usually more on top of garages that I would say in my area too. Okay, we're going to take a short break, but when we come back, we're going to talk about one of the most Googled questions in all of real estate investing. Do you actually need an LLC before you buy your first rental. We'll be right back. When you're just getting started in real estate, it feels like every dollar has a job, down payment, reserves, repairs. And then summer comes and you're like, can I afford to take that trip or should my money stay in the deal?

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11:48In some cases, investors get 50 to 75 % of their down payment back at closing, plus interest rates as low as 3.75%. They've partnered with BiggerPockets for over a decade, helping thousands invest smarter. If you want to do the same, visit biggerpockets.com slash retirement to learn more. Okay, welcome back. So we got question two today. This one is from the BiggerPockets forums. I am new to real estate investing and I would like to buy and hold rentals. I am wondering if it is best to set up an LLC, get a business account and business credit cards before actually buying a property. I want to keep my personal finances and rental property finances as separate as possible, so I'm thinking yes.

12:30I currently only own one rental property in Florida. It only became a rental because I moved to California to work, so I decided to keep it. I manage it myself and don't have an LLC set up. Really, all I have set up for the property is a separate checking account and a landlord-specific home insurance policy. My questions are, should I set up an LLC just for one property, and what are the pros and cons? If so, do I set up the LLC in California, where I live now, or in Florida, where the property is. And if I do set up an LLC, is transferring a property from your personal name to the LLC pretty straightforward, even with an active mortgage?

13:07Okay. These are great questions. And yes, very common questions. So the first one, the first question that she asked is, should you set up an LLC before you actually purchase your property and I'm going to say no. What about you, Tony? Yeah, I would agree with that for sure. What happens if you don't get a property under contract? You make offers, you make offers, you know, a year goes by or something changes in your life and now you have this LLC. I know in California, the fees are pretty expensive to have an LLC. You have to maintain it. You have to file a tax return for it. So what does that cost to pay someone to file it?

13:51So I would say no. I would wait until you have the property under contract, at least, if you want to do an LLC. When you go under contract, you can put on your contract is that, I can't remember exactly how it's phrased, but it's like, you could put it as your name, Ashley, and or assigns to, you know, and then later on during the process of being under contract, you can go ahead and fill in your LLC. I've done that a ton of times where I use like my development company LLC. And then I'll be like, okay, where do I actually want this? Am I doing this with one of my partners or not or whatever? And then I'll go and change it into whatever LLC it's going into before we actually close on the property.

14:32Yeah. I agree with that notion, Ash. I think, and I understand why, but I think a lot of people, they put the cart before the horse and they start asking a lot of questions about asset protection and corporate structure and all these things. And they candidly don't have a lot to protect in that moment. Now, unless just like in your personal life, you've already amassed a lot of personal wealth, well then yeah, definitely be more diligent upfront. I shouldn't even say more diligent, be more, I guess, cautious upfront about protecting that. But I think a lot of rookie investors maybe put the cart before the horse.

15:07Now, one thing I do want to clarify, though, is that having an LLC, you know, it doesn't mean that you can't, like, the risk of liability goes away, right? Like, there's still, even with an LLC, you know, there's ways to, like, you know, pierce the corporate veil is what they call it. So even if you set it up, you still have to make sure that you're running it the right way and you don't do all the right things and the right attorney can help you with that. But there are lots of real estate investors who, much like this story, right, where they have a personal residence, they move out, they turn into a rental and just kind of stays in their personal name.

15:39So there are other ways to protect yourself aside from just having the LLC as well. And I think that's a piece that maybe a lot of rookie investors don't recognize. There's other forms of liability protection aside from just having your LLC. Now, obviously the LLC is, I think, a good option. And I think I'll just describe those differences really quickly, right? Like you can have liability protection through your insurance. You can have like entity protection, like who's actually on the deed of the property, right? Or how's the property deeded? Who's on title? You have like additional, you can have like an umbrella policy, right?

16:22Like just additional liability protection for anything that happens to you, right? So those are all like different forms of protection. LLCs and the right like legal structure are probably the most, I won't say airtight, but probably the most concrete in trying to protect yourself. But even those, if they're not structured the right way, you can still kind of break through. Insurance is probably like the lowest level because, you know, a lot of insurance providers, their goal is to reduce the amount of money they spend on paying out claims. Right. So it's not always the easiest. but like if someone sues you um the insurance is what kind of kicks in to say hey here's what happens i think the the goal for the llc is in the right legal structure is that it prevents a lawsuit from happening like if someone goes through all of these things and they see like man even if we sue this this place like because of how it's set up we're not going to get a whole heck of a lot it hopefully just prevents any lawsuit from happening in the first place so they they serve slightly different purposes but all that to say um does a rookie need to go out and invest$30 ,000 in legal fees to set up this crazy corporate entity structure where you've got an offshore trust and the trust is allocating or delegating responsibilities to this entity?

17:33Probably not. You can probably start a little bit simpler and still have enough protection to give you peace of mind to sleep at night. Another kind of difference that you should think about too is financing on your property. So how are you going to purchase your investment property? Because if you have the LLC set up and you're buying the property in an LLC, it is much harder to get conventional residential financing on the property. And if you do, like I did it before through a small local bank on the residential side, and it was like 2 % higher than what the interest rate would have been if it would have been in my personal name.

18:11So you also have different financing options when the property is in your personal name compared to an LLC. So also it was addressed that she currently has one property in Florida that's in her personal name and what would be the process to actually transfer it into an LLC while having the mortgage. So first I would look at your mortgage documents and what does it actually say about a loan being assumed or transferring ownership, a change in ownership. And there can be a clause in there that says that the balance of the loan is due upon So the due on sale clause. And if that's in there, then technically the bank would call the loan due upon the change of ownership.

19:00So there's some language in mortgage documents that allows for the change of ownership as long as it is the same membership percentage. I don't know exactly how it's phrased. So if you're 100 % owner of an LLC and you change it from your personal name, 100 % you owns it, to an LLC where you're 100 % owner, will not trigger the due on sale clause. I have read of a ton of people doing it, even though they have a due on sale clause and don't have that written language and nothing ever happening, they continue to make their payments. I've also heard of it the other way. Not as common as I've heard of people getting away with it, I guess.

19:38But I've also heard of people doing it and the bank does call the due on sale clause. So read your mortgage documents, what it says. And then if it does trigger your due on sale clause, make sure you have some kind of strategy plan in place to actually pay that. But I would read your mortgage documents. And what you can do is like you could do like a quick claim deed and deed it just into your name quickly without having to do all the title work and everything because it's just being transferred from you to you, which an attorney would do. And it's not a long process at all to have that happen.

20:11Okay. We have one more question after the break. And this one is for anyone planning to use a 203k loan to buy a fixer upper. There are some rules you absolutely need to know before you close and we'll be right back.

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24:36That's rent, R-E-D-I dot com slash biggerpockets. All right, guys, welcome back. Our last question today is a great one for anyone thinking about using a 203k loan to buy a duplex and house hack it because this loan does have some specific rules that can maybe trip you up if you're not prepared. So this question also comes from the BiggerPockets forums and it says, I'm planning to purchase my very first property next year. It's a duplex and plan to house hack it using a 203k loan. I'm doing tons of research and getting my finances and DTI, debt to income ratio in line. I have a few questions I'm hoping to get answered.

25:08First, First, when should I start speaking to an agent? I currently have an apartment lease that is up at the end of August, 2026. This recording is as of April. I'd like to avoid going month to month on this lease. So I'm trying to understand when to start the process with an agent, a lender, and a contractor. Second, with a 203k loan, renovations must be completed within six months. I plan to use a limited 203k. This won't be an issue for the side I'll be living in, but how would I renovate the tenant occupied side within those same six months if their leases goes for another 10 months? Logistically, what would you do in this instance?

25:46Any guidance on how to plan this out would be greatly appreciated. Ashna, have you ever used a 203k loan before? No, I haven't. I don't think you have. No, I haven't either. But basically, guys, think of the 203k loan as like a renovation loan, right? So it's a government-backed loan, kind of like FHA, but it also gives you the money to make certain renovations to your property as well. Now, again, Ash and I haven't used it. So we can't speak from like a firsthand experience about how, you know, about how difficult it is to actually go through that renovation process. But like many government type products, there's usually a lot of hoops you have to jump through.