Do You Need an LLC When Buying Your First Rental Property? (Rookie Reply)

Many “experts” say you needCreating your own LLC is talked about constantly on YouTube. Everyone says you need it as an entrepreneur, but is it maybe overkill for a rookie investor?In this episode, we’ll also cover house hacking and expensive real estate markets and how it can be done. We’ll cover strategy and to give you some actionable advice if you’re new to the world of real estate investing.I am Ashley Kehr.And I’m Tony j RobinsonAnd welcome to the Real Estate Rookie Podcast.Alright, so our first question today and today’s rookie reply, this question says, hi y’all. I’m new to real estate investing and recently bought my first property a few months ago and got it rented out. I’m thinking about the future and how I will purchase properties in the future. I often hear you should get an LLC to protect yourself in case something goes wrong. Is that only useful if you have a large portfolio? Is that worth looking into right now as I’m only at the beginning of my journey open to any suggestions, insights, or past experiences? So I couldn’t agree more actually. I feel like we hear a lot about the LLCs and I feel like a lot of the real estate influencers have viral videos saying, here’s how I structure all my different properties. Everyone’s doing the same video with the right board, but I’ll give a quick anecdote and I want to get your take on it as well.
But we actually interviewed Brian Bradley and he’s an attorney that specializes in asset protection and I heard him tell this anecdote once about asset protection, kind of being getting dressed for a winter storm and depending on how bad the weather is, that dictates how many layers of protection you need as you go out on a nice warm, sunny day. You don’t need that much, right? You got shorts and a t-shirt. But if Ashley’s getting snowed out in Buffalo, maybe she’s got on long Johns and then she’s got her clothes and she’s got a light jacket, then her overcoat, then whatever else, I don’t know, it doesn’t snow in California, so I’m making things up right now. But you get what I’m saying, right? You need more layers as things get more intense. And he said building protection around your real estate portfolio is the same thing as your risk exposure gets bigger so too should your asset protection. But he’s seen people who kind of jump too deep at the beginning and they’re wearing parkas when it’s 80 degrees and sunny outside. So just keep that metaphor in the back of your mind that what you do today doesn’t necessarily have to be what you have five or 10 or 15 years down the road. So Ash, what’s just your initial take on this question?Yeah, so I actually just interviewed Brian Bradley again on the BiggerPockets podcast. So Dave Meyer is having a baby. So I took over one episode while he’s on his paternity leave and I brought Brian Bradley on and his recommendation was at least an LLC. So he went through the layers of protection. So if you have a high net worth and you have a lot of assets and you have a lot to lose, that’s where you really need to go into holding companies and trust and really layer those things. If you don’t a lot to lose. So maybe you rent your apartment, you drive or ride a bicycle, you don’t even own a car, or maybe you don’t have any equity in your car and your underwater on it. You have just enough in savings for your reserves, for your rental property and you really don’t have that much that if somebody came to sue you, they could take it.
So then it’s not as important to have all these layers of protection. But Brian’s recommendation was that you definitely should have an LLC that you should run your numbers, making sure that you can afford the cost of an LLC. I don’t know how much I agree with that. For your first rental property, I did several rentals upfront with just having them in my personal name and I went the umbrella policy route, but obviously Brian’s an attorney and he knows a lot better as to how to actually protect yourself. So I guess there’s that risk I was taking in the very beginning by putting the properties in my personal name, but you can get the umbrella policy to kind of cover if you were to get sued. And there are the two differences. So the LLC is giving you protection against getting sued that they can’t come up after your personal assets. The umbrella policy is giving you money to pay for attorneys or pay for a settlement. So there are two different types of protection. So kind of keep that in mind as you’re deciding which route you should go.You could make this so much more complicated than it needs to be. And much like you Ashley, I bought my first several properties without an LLC and again, we just didn’t have a whole heck of a lot that we were at risk of losing. The portfolio wasn’t that big at the time. So for us, I think we were okay with the kind of risk reward there. But I think where I see a lot of rookies getting caught up is that they put the cart before the horse and they try and set up, Hey, I need my holding company, I need my Delaware LLC, I need my trust, I need this, I need that. And then we ask, okay, well how many properties are you trying to protect? Like, oh, I don’t have any yet. And to me it’s such a backwards way of doing things.
Get the asset to protect first put your focus on protecting the asset and then on acquiring the asset, I should say, put your focus on acquiring the asset, then you can go back and make sure you dial in the protection piece. But I see a lot of people who do the incorrect way. I also think, and this is from the conversation I’ve actually had with Brian and you just talked to him recently, so I’m sure you’ve got the same insight, Ashley, but LLCs also aren’t like the end all be all for asset protection and there are still ways, or even if you have an LLC, someone could still come after you personally. It depended on the severity of what happened or how you structured things or how you run your LLC. So there are still ways to kind of brand called it like piercing the corporate veil where you might still be at risk. So I also don’t want people to have this maybe false sense of security that just the LLC by itself is the thing that’s going to save everything because it is called a limited liability company, not the foolproof liability company. It’s called a limited liability company.So we have to take our first ad break, but we’ll be right back after this. Okay, welcome back. We’re here with our second question on today’s rookie reply. So this question is we are looking at a property in the 600 thousands and up to do a house hack in a great and popular location with rising rents and upside on price with renovations, but also that will cost in the short term to improve the property. However, with interest rates in the high sixes, it would probably not cashflow after moving out with 5% down mortgage all in would be 4,700, 10% down would be 4,500 per month, 15% down 4,300 per month, 20% down 4,000 per month. The upstairs rental expectation is $2,500. The downstairs 1600, which would equal 4,100. Long story short, probably a negative cash flowing property seems house hacking or even a duplex in Denver is difficult to find positive cashflow.
Our first property we are living in now would have positive cashflow if we moved out, but that’s because we had a lower rate. Should we stay away from this property or is there a reason to consider buying this property? So Tony, I think the first thing is that they have a property now they could move out of and it’s going to be a cashflowing rental. Great start right there. Now their dilemma is they can’t find another house to move into that is going to cashflow if they move out. So my consideration here is how long would you want to stay in this house hack? So is this going to be two years, one year? Could it be five years? In five years you may have the option to refinance. Hopefully rents have gone up on the property where now you’re getting some wiggle room. I’ve definitely seen rent at my properties increase over five years.
So I guess that would kind of be an unknown as to what would be your time commitment to moving into this property. Because if you were going to house hack had half of your mortgage payment made for you, that’s cheaper than going and living in a single family house and paying your full mortgage. So you’re saving on your cost of living and then how long would you want to live there until could rent out the property? Or maybe it doesn’t make sense to actually live in the property for two years and to not rent it out after you leave, but to actually sell the property. So is there a value add that you can put into the property where it now becomes a live and flip and you can sell it for tax-free gains at the end of two years?Yeah, Ash, you read my mind exactly on the live and flip strategy. I think that’s what it comes down to, right? It’s like I think a lot of times as investors we kind of take a black and white approach to the deals that are presented to us not realizing there’s really a spectrum of opportunities that we can go after. And in this question, they very clearly said that the property they’re looking at is in a great and popular location with rising rents and upside on price with renovations. So it sounds like that you’re potentially getting this for a good deal and that yeah, if you made those renovations that you would have some equity being kind of forced, some forced appreciation with this deal. So I think your comment, Ashley, of doing this as a live-in flip could make a ton of sense and now they’ve built up a bunch of cash maybe two years or three years down the road and just transfer in a better place.
They can go out, deploy that capital, maybe get another house hack the cash flow is a little bit better. I think the second piece to this though is, and again this goes back to the kind of black and white, is they’re looking at this just from a strict traditional long-term rental basis. And I wonder are there maybe some other strategies that you could leverage to improve the cashflow on this deal? Now I know Denver short-term rental laws are a little strict. However, I do know, I believe, and someone can check me if I’m wrong, but I believe that there are certain pockets of Denver, like certain neighborhoods where you can short-term rent. And I also believe that I think if you’re living in it, I think there’s a little bit of flexibility there as well. I could be wrong on that piece, but even if traditional short term isn’t an option for you, could you midterm one of these units, does that give you more than the $4,100 per month in rental revenue?
Could you do something like renting by the room where you’re finding local, everyone’s always moving to Denver and when they get there, they typically need somewhere to stay. Could you be that resource for the person that’s moving to Denver to say, Hey, here’s a furnace room rental with a bunch of other people who are transplanted to Denver. They’ve got a little bit of a community there as well. So I think I would try and see if there are other options aside from a traditional long-term rental to see if maybe you can get the rents up above that or $5,000 per month where you get a little bit more cashflow.Yeah, I love the idea of renting out by the room. I know the midterm rental space is big in Denver, but renting out the room I think is a great idea. We’ve had a couple of guests come on and talk about the advantages of co-living and we’ve heard their cashflow numbers, which are amazing. So I think while you’re living in the property, you could kind of experiment with that unit as to let’s try this, let’s try this, let’s try this and see how that goes. And then when you move out of the property, you could also have one unit doing midterm rentals and the other unit doing rent by the room or long-term rentals for just one family. So I like the option that you’re going to move into a two unit so that you have that flexibility to maybe have a long-term rental in there to stabilize the property knowing that you’re at least locked in for a year of rental payments and then maybe try short-term rental with the other one.And I think just one last thing to call out here too is just the numbers that we have, where did you actually land on those numbers for your rental income? Did you talk to a property manager and they kind of provided those numbers to you? Was it you doing your own homework? And if so, where did you go to get the data? I think just validating those to ensure that you’ve actually got the right projections. Because what if you’re saying that the total rents are only 4,100, but if you actually go out and talk to a property manager like, man, I can rent this place out for like six grand a month, now you’re off by quite a big amount. So I think going back and validating those numbers will also maybe give you some confidence on what strategy, if any, makes the most sense for you to go forward with buying this property.Okay. We’re going to take a quick add break here, but we’ll be right back after this. Alright, let’s jump back in and before we get to our next question, make sure you guys head over to the Real Estate Ricky YouTube channel if you’re not already watching here and make sure that you are subscribed to our channel. We are trying to hit 100,000 subscribers, so it’d be really exciting for us. We would love it if you guys would be able to go ahead and do that if you’re not already subscribed and make sure you’re following us on your favorite podcast platform. Okay, so onto our last question today. This question says I am 18 years old with very little credit history and little capital. I am eager to start but can’t get around the glaring issue of not having initial capital. So I was wondering if there are any methods you guys would use to raise capital if you were in my shoes, or is it just time to put my head down and put in long hours? This is a great question.Yeah. First, can we just give this person asking this question a big round of applause for being 18, posting in the BiggerPockets forms and looking for support. It’s like I think if Ash and I have both started at 18, we would be, I can’t imagine where our portfolios would be today if we had that much of a head start. So kudos to this person for being eager to get started.Yeah, God, 18 man, going off to college definitely was not thinking about buying a hollows, real estate investing, any kind of investing at that time.The question says, what are some methods to raise capital? Or is it just time to put my head down and put in long hours? I think the answer is yes, it is time to put your head down and put in long hours, but it’s like how are you going to leverage those long hours? What kind of work is actually going into that to make the most value from it? Now, obviously at 18, yeah, no one’s going to expect you to have a ton of capital, a ton of credit to be able to go out there and do those things. I think that the best thing that you can do right now is leverage what you have in abundance, which is your time and your energy. And if you were to come to a place like BP Con, which has happened this year in Vegas, so make sure you guys are out there, but if this person were to come to Vegas and they were at BP Con and they just shared their story, I can only imagine how many seasoned investors or new investors with capital would say, man, I would love to work with this kid.
So take what you have in abundance, which is your time, which is your energy, and leverage that to start providing value to the people who do have the capital, who do have the credit, who can get approved for the mortgage. You can cover the down payments and there’s so many different things you can do. Can you underwrite all their deals for them? You say, Hey, Mr. And Mrs. Tony and Ashley, I’m going to sit down and I’m going to underwrite deals in your chosen market every single day in life. Find one that makes sense for you. But all I ask is that when we do this deal, kind of get a small sliver of equity, can you door knock? Hey Mr. Tony, Mrs. Ashley, I got this list of properties that you’re looking at in Buffalo that you’re looking at in SoCal. I’m going to go knock on the doors of every single one of these homeowners and see what I can do for you. Those are the things that take a lot of time that don’t require any capital. So I would really, really put a big premium on trying to identify how can I provide value to the people that have what it is that I need and how can I give them what it is that they need and make it a win-win.One thing that I would do is get a job in real estate, if you can. Tony mentioned some of the things is to going and working for another investor, be a material runners. I got, Daryl would love it if somebody came and said, I’ll go to Lowe’s. I’ll pick up your materials. I’ll deliver them to the job site. Wait, you need a screw, I’m on it. I’m going to go and do it. So there’s plenty of different ways to get involved on the real real estate side of things, manage a real estate investors, social media, things like that. Look at your job right now, what your W2 job is or what is your skillset? Is there any way that that can kind of translate into real estate? I’ll never forget me and Tony at a meetup and somebody said, I just have no skills that I can add value to partner with someone.
And Tony is already smiling. He knows exactly what I’m going to say. And we said, okay, well what do you do for your job? And he says, I’m a project manager. The next thing we said was, who here would love someone to manage their rehab projects? And all these hands shot up? So there’s so many skill sets that can translate into real estate. But if I was this person and I want to gain more capital, I would be looking for partners. I would be putting it out there saying, Hey, I want to get invested in real estate. I would figure out exactly what strategy I want to do. So is it actually in house hack your first property, which is a wonderful way to get started. You need low money down. You can get roommates, you rent by the room, you could rent out another unit.
But I would hustle. I would be working night and day. I think about when I was in high school, I didn’t work a lot in college unfortunately. So I’ve basically spent anything I’ve made in high school, but I just remember how much money I would’ve make being a hostess and a waitress. And I just wish that I would’ve continued that hustle throughout college and it would’ve set me up even better in life if I would’ve done that. So I think when you’re 18 or anytime as to what can you gain from a W2 job, what can you gain from side hustles? What can you gain from being a DoorDash delivery person? The one thing that I would not do, if your goal is to invest in real estate, I would not start a business. I would not dump money into building a brand marketing all these expenses.
A lot of businesses don’t make money for a while because they put so much energy and effort into getting their materials, getting their supplies. Unless this is something that is going to take you very low effort, low cost. So maybe it’s mowing lawns in your neighborhood where you already have clientele. You don’t have to spend a lot of money on marketing. You don’t have to hire other people to work for you and pay payroll taxes. And now you’re so busy doing the bookkeeping for this lawn care business that you created that you don’t even have time to think about real estate. So that’s where I would put in a word of caution. Like if you’re going to go on Etsy and sell some things on Etsy, make sure that this is actually going to be an income generating thing from day one. And it’s not going to be something you have to build up and put a ton of time and effort in to actually make income off of it. If your true goal is to actually invest in real estate and build capital for real estate, I would do something that is more quick and more effective to get that fast cash.I love, love, love that advice. Ash. I couldn’t agree with you more. Like if I were giving advice to my younger self, two things I would focus on. Number one, speed of acquiring knowledge, which it feels like this person’s already doing because they’re submitting questions in the forums that I would read as many books as I can, listen to, as many podcasts as I can, watch as many YouTube videos, talk to as many investors as I can, build your knowledge base and the sooner and faster and more quickly you can do that, the better. But the second thing I would focus on, which is what you touched on, is my ability to earn income. And I love your idea of getting into real estate related fields, but honestly, the one thing I think I would focus on at this age, I would get into a sales position.
And the reason I say that is because that gives you the highest earning potential, unless you’re going to be like a doctor or lawyer, whatever it may be. But a lot of times your ability to earn income is directly tied to your effort that you put into the position. And at 18 years old, you don’t have to worry about having a down sales month because you don’t have a mortgage, you don’t have kids, you don’t have someone else that’s depending on you. So you can take those kind of ups and downs to come along with building a sales career, but that is going to give you, I think, the biggest income opportunity. And then you start taking that money, you can start funneling it back into your real estate business. So building your income potential, focusing on that while also building your knowledge, those two things together, I think will put you in the best spot over the next 24, 36, 5 years to really get that first deal done.So Tony, if you were 18 right now and you took your own advice and you were going to go into sales, what would be the thing you were selling? What would you try and go get a job selling for?I would honestly probably go into some sort of B2B sales business to business sales. And the reason I say that is because a contract are typically bigger and bigger contracts means bigger commissions. That’s what I would try and try and focus on selling. So yeah, what company? I don’t know, but just in general, selling to businesses typically means higher cost per client or more revenue per client than going business to consumer.No, no, that’s great. I was just curious, was it like, oh, I would go into car sales because I feel like there’s huge potential there or whatever, but yeah, I was just curious on your thought for that. But yeah, that’s a great point. Going business to business is going to bring you more volume and higher dollar.I have a friend who runs an HVAC company here in SoCal, and he and his dad had been running it for, I dunno, close to 10 years now probably, but they started off like most small businesses taking whatever jobs that they could. And a lot of that was just residential stuff. Someone calls and says, Hey, my heater’s on the fritz, or my thing’s not working, whatever it may be. And now they’ve shipped it completely to commercial and they do all the grocery stores that are in their neighborhood now are their customers. And he’s like, dude, the businesses they want their HVAC system fixed yesterday and they’re going to pay a premium to get it done. Whereas when we were doing residential stuff, they’re going to nickel and dime us for a job that’s like 1% of what we get for the commercial businesses. So I think going after some kind of commercial sales would be super, super beneficial at that age.Okay. So Tony, one of the things you did say also is that you would fast track your knowledge and learning. So do you have any book recommendations for this person?I do actually two books. One that I just reread, another one that I read for the first time. But I would read Millionaire Next Door, great book about just living frugally and what true wealth looks like because it’s not what we typically associate it with. And the second book, and this is one that I just recently read for the first time, but it’s called The Psychology of Money, and that book is exactly what it sounds like. It is just about the mindset around money. And I think if you can take those two mindsets and let that kind of grow with you as your income starts to grow, as your knowledge base starts to grow, that’s going to give you the best foundation to really maximize on all the money that you’ve been able to make.Well, are you guys enjoying our podcast? Your support means the world to us. Taking just 30 seconds to leave a review on Apple Podcast can make a huge difference. Your feedback not only motivates our team, but helps us reach more awesome listeners like you. Thank you so much for being part of our podcast community,And we just want to give a special shout out to someone who recently left us in Honest Review on Apple Podcast and it says, this is from Geer Dew. I just hope I’m saying that name the right way. But it says, great podcast, five stars. I love how Tony and Ashley follow up with questions targeted for Ricky’s. Keep doing what you’re doing. Great job. So we appreciate all the Ricky’s that are listening and like Ashley said, took a few quick moments to leave that review. If you’re enjoying the show,I’m Ashley. And he’s Tony. Thank you so much for joining us on this episode of Real Estate Ricky Reply.