What is the best way to start financing real estate?

When would be the best time to form an LLC, after first property? Should I purchase with personal credit then quitclaim to the LLC to start out? Does it help business credit to do this? Any recommendations would be great.

Answer

Even in good markets, for most LLCs, banks are going to require your personal guarantee regardless.

However, having the property in an LLC is good liability protection for you personally for liabilities other than the mortgage debt.

Here's what I mean. If you own the property in your own name, if someone slips and falls on your property, or if there's an environmental problem that insurance doesn't cover (and they don't cover much--read the "pollution exclusions" in your policy), then you are personally on the hook. Environmental laws are particularly nasty, and the EPA and state agencies don't care who caused the problem, if you own it, you are liable.

On the other hand, having your property in an LLC will protect you personally from the slip and falls and environmental problems (assuming that you weren't personally dumping stuff on the property yourself).

In terms of the right order to do things in? Either way will probably work. If you're interested in building business credit, I would suggest having the LLC take out the loan. Understand that you will have to personally guarantee it, but at least the LLC will be building a credit record, and you will have insulated yourself from all liabilities associated with the property EXCEPT the mortgage note you personally guaranteed.