Christian Osgood explains why LLCs for rental properties require careful planning. Conventional loans won't finance LLCs, forcing costly refinances to personal names. He recommends separate LLCs per property, detailed partnership agreements, and insurance, but says beginners should buy assets first and worry about legal structure later.
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Hey YouTube, it's Christian and I am back this week to tackle one of the largest questions we get on this channel. We've never answered this before, but it is, do I need an LLC or what legal structure do I need when I'm starting to invest in multifamily real estate? Now, I will start by saying I am not a lawyer, nor is Cody. We are not giving legal advice. That is not what this channel is for. However, we will share what we have done in the event that that can help you make a decision or move you forward. So without further ado, like, subscribe if you want more on how to build your multifamily strategy, and we're going to get rolling right now. So first of all, the right answer is consult your real estate lawyer. I will get into everything Cody and I have done, but you should know what this looks like when you're finding the right lawyer. You want to find one, a real estate lawyer who owns real estate themselves. This is critical for every member of your team. If you're working with brokers, make sure they own real estate. Your property management company, if you want to make sure they have your best interest in mind, make sure they own real estate themselves. They're going to manage your property like they manage their own. This works for a lawyer. You're going to find someone who is an expert in their field who owns real estate. You're going to give them your specific pieces and ask for what they would do in your position. They will give you the best advice out there. Now, for what Cody and I have done. So when I first got started, I bought a duplex. And I was counseled by a non-lawyer, you should try to put it in an LLC. I did. And then I wanted to refinance it into new debt. I bought it with hard money and there was Fannie, Freddie are the two major, major institutions that are going to back most loans. You cannot do a Fannie Freddie loan as an LLC. There are different loan products available, but if you're going to put it in just conventional debt for a duplex, triplex, fourplex, that's residential debt. They're not going to do it to an LLC. So if you're looking for all the advantages within that segment of financing, you're going to have to move it right back out of the LLC. That's what happened to me. I put it in an LLC, all was good for about 3 months. I refinanced and they said, hey, you got to move this to yourself. I paid excise tax, the LLC came down. It was a total disaster. Do not recommend doing that. At the end of the day, you want to keep it simple. If your problem is you don't have real estate, don't worry as much about the legal structure today. It is not your biggest obstacle. If it's easiest right now to buy a duplex in your name, go do that. Keep it simple. Move forward. However, we do use LLCs every time any partners are brought in, whether it's 2 units, 4 units, 100-unit acquisition. No matter the project, when you have partners, you want to have a specific operating agreement. This typically will fall under a corporation or LLC, limited liability company. As we got rolling, I bought 2 duplexes just myself. My next project with Cody was a 38-unit building, and we raised capital and brought on partners. Now, while we've bought out those partners and own the building by ourselves today, we want clear instructions for who owns what, how much equity ownership does each member have. We document in that agreement what is everyone's contribution. For Cody and I is renovation cost, and it was the actual opportunity. For our capital investors, it was $100,000. Each of them took $300,000 to close that. We had 3 partners. We document each step. You want to make sure there's clear instructions for what happens if there's a conflict. What if someone needs to be bought out early? What if there is a disagreement? Who actually manages the LLC? All these go in what's called the operating agreement, or O A, we do these for every single transaction. Put together an awesome operating agreement. Work very hard on your first one. This is something that we learned. Don't just go to a lawyer, sign everything, good to go. You're going to review it when you do your first LLC with partners. You're going to sit down with your lawyer, you're going to review it, you're going to have your partners bring it to their lawyer and review it. You need to be a master at reading these. This does not mean you become a lawyer. This does not mean you have to be the lawyer., but you need to be a master in reading the legal. If you're not there yet, before you join a partnership or start an LLC, make sure you have this down. Next, do we put all the properties in one LLC? I've seen someone do this for 2,000 units spread over multiple states, all in one entity. In my opinion, which again is not legal advice, that is a bad idea. The reason being, if there is a lawsuit, all the properties and all the wealth is in one entity. The limited liability is not doing a good job of limiting your liability. What Cody and I do is every transaction is a new LLC. So if we bought 3 side-by-side duplexes, which we have, in one transaction. There's 3 properties in an LLC. We'll do multiple properties. However, it's one transaction with one set of partners with the same exact set of rules with one lender. Everything is in one house. If something went wrong, it is designed to only affect that one LLC. That doesn't mean legal can't get crazier than that, but that is the design. Our 38 is in one LLC. We have 12-plexes, each transaction, one LLC. What does this do? This gives you a huge book of LLCs. You should know what this entails. One, it separates our properties into their own separate silos with their own separate bank accounts. It would be very hard to sue one partnership and affect another partnership. That does not mean it can't happen. It means it is very unlikely. Courts do not like to punish other partners. Say I'm partnered with me, Cody, and someone named Mike in LLC 1. In LLC 2, I'm partnered with John, Cody, and Christian Osgood. Typically, they do not want to adversely affect John if LLC 1 made a mistake, so they will try not to disrupt partnerships when possible. This will give you some extra protection. The other thing this does is it spreads the wealth to different entities. If you have everything that you have built in one entity or everything you've built in your name, you're going to have a very, very hard time if something goes wrong in one property because your other properties can be directly affected. So what I have done is separate them. What you should do is talk to your lawyer and ask them what you should do for your portfolio. I'll say a third time, this is not legal advice. This is how we have structured what we have done. Now, if you are asking this question right now and you don't own any real estate, I want to emphasize, do not play defense until you've done enough on offense. One duplex should not make or break you, and one duplex is not going to reach your financial goals. There is no way that a single duplex can retire you, can give you ownership of your time, can give you the financial freedom that you desire. However, It's possible that you're 5 duplexes in or you're 1 12-plex in and you have built the real estate that you need to reach your financial goals. If this is the case, this is where you really want to start playing defense. Your first goal is to own a property that is worth losing. Your second goal is to figure out the legal, the property management, the specific billing of the utilities, all the little things that you may be getting caught up on before you buy the real estate. Don't worry about it, you're not there yet. And that is something that we say all the time when we're training or mentoring someone. The general answer to the LLC question that I give is, don't worry, you're not there yet. Now, as you start to amass a portfolio and you have something that would be hard to replicate, you've really got some traction. You need to get the legal lockdown. But this is what Cody and I've done. We don't keep too much money in any individual LLC. We don't keep too many assets in any individual LLC. Every different partnership has a different LLC. The things I own personally, I have a few duplexes that are still in my name and I'm happy to have them there. Very simple. You can use different types of insurance to protect yourself from legal. I have an umbrella policy that covers everything. And again, I don't keep too much capital in one place for the purposes of if a lawsuit happens, which eventually will if you buy enough real estate. I have some level of protection. Now I know in the comments we're likely going to hear a lot of other opinions. That is fine because for the fourth time, it's not legal advice. This is something we've done. We will continue to change our strategy and restructure as we get larger to defend what we've created. But your first goal is to acquire enough real estate to be worth defending. Don't let this be a distraction if you're trying to get started today. If you want a deeper dive on multifamily real estate and to streamline your acquisition to get something worth defending, put a link over here, themultifamilystrategy.com. Check it out. It's coding my course. Other than that, like, subscribe, put your questions below. We'll answer them on next week's Whiteboard Wednesday.
