Investing in real estate can be one of the most sound and lucrative ways to make your money work for you…
That being said, just as with any new business venture, investing in real estate can carry some serious risks…
in many cases, risks that might far exceed other avenues for investing or start-up businesses.
So how do you, as a sole investor or small team of investors, mitigate the risk to reap the potentially tremendous benefits of becoming involved in the real estate game?
The answer could be as simple as starting an LLC for your real estate company.
If you’re interested in starting your real estate LLC, email me at firstname.lastname@example.org
Why Start Real Estate LLC?
One of the biggest advantages a real estate LLC formation offers is the protection it creates for your personal possessions and finances.
Opting to form an LLC, or limited liability company, started to pick up in popularity within the last ten to fifteen years as investors realized the potential benefits.
Forming an LLC not only offered real estate investors a much greater level of protection compared to more traditional means of investing, but it also offered some excellent benefits during tax season.
What are the Benefits of a Real Estate LLC?
Operating your real estate business under an LLC separates your business assets from your personal assets and can deliver some nice advantages at tax time.
Before the takeoff of LLCs for real estate, investors would purchase properties for renting or future sale with almost no protection for their finances.
In the event of a lawsuit you, as the property owner, would be held personally liable for any damages awarded in court. Your savings, your own home and any other properties owned could all be at risk if a property dispute resulted in legal action.
One of the biggest benefits that a real estate LLC offers is the protection of your finances.
If you invest under an LLC for real estate, only the holdings of the LLC are at risk in the event of a lawsuit.
All of your personal property and, possessions and finances are completely separate and will remain untouched in the event of an issue that turns legal.
What Are Some Real Estate LLC Formation Pros and Cons?
Operating your business as an LLC requires set up and maintenance, which bring associated costs, but of all the legal entities, an LLC is the easiest to form and operate and it does carry multiple advantages overrunning your real estate business without any incorporation.
While forming an LLC for real estate seems to be the preferred course of action for most people who are interested in real estate investing, the process isn’t necessarily for everyone.
Forming an LLC can seem a bit daunting, even overwhelming, to those who have never been involved in starting a business.
There are forms to be filled out, fees to be paid and regulations that need to be followed to operate as an LLC.
Some investors prefer to not be bothered with the process and to move forward with investing in real estate without the added protection or tax benefits, in the hopes that a simple liability insurance policy will protect them in the event of legal issues.
How to Set Up Real Estate LLC?
The paperwork for forming your real estate LLC is relatively straightforward and readily available via your state’s official website, filling out and filing the forms and submitting the associated fees will get your real estate LLC in motion.
While the process of forming an LLC does take a few steps and can seem to be a difficult undertaking, the investment of time and effort is more than worth the protections the entity provides.
You need to start by registering a business name and then complete and submit a series of documents to begin the process of establishing the LLC.
Once you’ve got the paperwork that shows the formation of the LLC, you’ll need to obtain a tax number (EIN) and you’ll need to open a business bank account under the name of the LLC.
Some can tackle the process of forming an LLC for real estate on their own, but it can be advisable to get assistance from an experienced professional to make sure the process is smooth and free of issues.
If you are interested in protecting yourself and your assets while investing in real estate, I can help. Contact me via e-mail Sam@MollaeiLaw.com for professional assistance in forming your real estate LLC.
Reasons for Starting a Real Estate Investment LLC
Real estate LLC offers the greatest possible financial benefit, with the lowest personal risk – operating as a real estate investment LLC ensures better protection and the opportunity for an improved bottom line.
The primary difference in operating as an LLC for real estate investments and serving personally as the owner of an investment property lies in the separation of business and personal finances.
From the outset of your real estate LLC business, you’ve got to make sure that you adhere to the specific rules of operating your business as a legal entity.
If you don’t separate your finances from that of the LLC, if you don’t maintain a registered agent in the required location or if the owners take funds that are owed to creditors you can lose many of the valuable protections offered by operating as an LLC.
These steps can seem a bit confusing to a new investor, but if you adopt a strict separation of finances and adherence to the few structured regulations from day one of your LLC the process becomes much easier and you can feel confident that you and your family are fully protected in the event of an issue in the business.
Real Estate LLC or Corporation?
Any legal business entity will offer some legal protection and the potential for tax benefits, but if you are looking for the fastest and easiest route to maintain, while still having clear separation and financial protection, an LLC is often the best option.
A real estate LLC is the most popular legal entity used for single or group real estate investors but it certainly isn’t the only option.
A group of real estate investors may choose to form a C corporation or S corporation for similar protections to those offered by forming an LLC for real estate.
Corporations are structured based upon the laws of the state they are formed in. As such, they may be subject to different rules and hold different protections from an LLC.
Depending upon the style of a corporation formed to invest in real estate, there may be no “pass-through” protection at tax time as there is with an LLC. Owners and shareholders may face double taxation, having to pay taxes on the income of the business and personal income accrued through the investment.
With corporations, the number of shareholders has a limited impact on operations.
With an LLC, multiple owners can result in different rules when it comes time to file taxes on the income of the entity.
LLC vs S Corp for Real Estate?
Both an LLC and an S Corp have distinct advantages, but If you are just breaking into real estate investing and aren’t planning on rapidly building a fortune 500 company, an LLC is a least expensive and often most convenient way to get your business off the ground.
Both an LLC and an S Corporation offer tremendous personal liability protections and potential tax advantages to owners and shareholders.
When it comes to flexibility and overall tax benefits though, the LLC has some distinct advantages over operating as an S corp.
In an S corp, shareholders are taxed strictly based upon their percentage of ownership. If a shareholder owns 60% of the company, they will face income taxes on 60% of the profit.
In an LLC, the percentage of ownership and amount of taxation don’t necessarily have to be identical.
S corporations also have regulations when it comes to owners and shareholders. In an S corp, there are restrictions on both the type and quantity of shareholders.
All shareholders in an S corp must be either permanent U.S. residents or hold U.S. citizenship and at no time can an S corp have more than 100 individual investors.
While these restrictions may have little impact on a small, brand new company, it could inhibit potential investments down the road. LLCs don’t face the same restrictions regarding shareholders
How to Start a Real Estate Holding Company?
Starting any business is a tremendous challenge, but the actual process of formation isn’t as challenging as you might think, a real estate holding company can be started by filling out just a few forms and paying licensing and registration fees.
Starting a real estate holding company begins with incorporating or opening up a legal entity that will “own” your property or properties.
It is possible to begin investing in real estate today, without forming a holding company, but you won’t be afforded the same protections as investors who operate under an LLC.
The simplest way to move forward in the process of starting an LLC for real estate investing is to enlist the help of an attorney who is experienced in LLCs for real estate.
Relying on a qualified attorney ensures that all of the necessary forms are filled and filed accurately the first time so that you can begin benefitting from your investments with minimal risk.
Buying Real Estate under an LLC
Buying real estate under an LLC is a simple and straightforward process – when you buy real estate through an LLC, the company name goes onto the deed as the owner of the property and it is this distinct separation that keeps you and your partners protected in the event of a lawsuit.
If contractors, tenants or other third parties pursue legal action against the owner of the property, only the LLC will be mentioned in the lawsuit.
This keeps your savings, retirement funds and other personal properties protected and limits the damage that can be done to your net worth.
Buying real estate under an LLC has some benefits beyond asset protection. One of those benefits is privacy.
It is very easy to find out how much a property sold with a simple search of public records.
Not everyone wants their employers, employees, friends or extended family knowing exactly how much they paid to acquire their assets.
When you purchase a home under an LLC it becomes more difficult to identify an individual owner. This anonymity comes in handy for owners and investors who don’t want the value of their assets so easily open for public view.
How do I Transfer a Property into an LLC?
Transferring property into an LLC isn’t always as fast and easy as some new entrepreneurs might hope – you may need refinancing or brand new loans and the process almost always requires the assistance of an experienced attorney.
If you already own a property and are planning on turning it into an investment property, it is possible to transfer ownership to your LLC.
An experienced attorney can help you draft a deed of transfer for your property.
You’ll need to sign the new deed of transfer in the presence of a notary and the document will have to be filed with your township or county. The filing will ensure that taxes are billed to the appropriate entity.
You may also need to transfer insurance policies to reflect the new ownership of your property.
If your property is still mortgaged, the process of transfer can be a bit more complex as most mortgages have a clause that requires payment in full at the time of sale.
You’ll need to reach out to the lender to verify what options are open to you under their rules of a transfer before putting the wheels in motion.
You may have to obtain a brand new loan in the name of the LLC or refinance your current mortgage in the name of the LLC to proceed.
As there will almost certainly be fees and closing costs associated with new and/or refinanced loans, this process can be fairly expensive to complete.
Can You Buy a House with an LLC and Rent it Yourself?
It is certainly possible to buy a home with an LLC and serve as the only renter or as one of the multiple renters, but the situation of renting from a business you own can create some complications at tax time and is often closely evaluated by the IRS.
Because there is a multitude of advantages of LLC property ownership, some entrepreneurs opt to purchase their own home through an LLC and pay rent to the company.
This practice seems like it would result in massive benefits for both the business and the individual investor, but it can create a slippery slope with the Internal Revenue Service at tax time.
You’ll experience many of the same protections against liability if your LLC owns your property.
If someone slips and falls or has another accident on your property that results in damage or injury, a lawsuit brought against the owner would name the LLC – which should protect your finances and limit the potential damage to your net worth.
You cannot attempt to manipulate your income from the rental property to attempt to experience a windfall at tax time.
For example, you can’t pay a fraction of the monthly mortgage payment in rent and then claim the remainder as a loss for the LLC for the tax benefit.
If you are planning on purchasing a property under your LLC to rent to yourself, you need to discuss the potential pros and cons based on both local and federal rules and regulations.
Before pursuing this path, it would be advisable to speak with an attorney who is experienced in both real estate investing and LLCs.
Real Estate LLC Tax Advantages
Asset protection is usually the primary reason that investors choose to operate under an LLC, but tax advantages that benefit the bottom line are always a big consideration as well.
An LLC is considered a pass-through entity when it comes to taxation.
This means that the business itself will not be taxed and that the profits reaped from the property will “pass-through” to the individual LLC owners in the form of personal income.
The personal income tax rate is also often lower than the rate that a corporation would face.
Under a C corporation, the company faces taxes on the property dividends and the individual owners face personal income taxes at the time of filing.
This is often referred to as double taxation and can dramatically affect the net profit that individual owners will see at the end of the year from their investment properties.
Additional Real Estate LLC Tax Benefits
Operating as an LLC allows the owner to declare a greater percentage of losses than other business entities to help offset expenses and improve the annual bottom line.
As a real estate investor will run into unexpected costs from repairs and renovations and may face decreases in value from depreciation.
LLCs also offer investors a greater opportunity to claim losses (including some or all of the cost of the mortgage of an investment property).
It can be more of a challenge to find losses that can be passed through to individual shareholders making it possible that you will face a much greater tax burden in an S corp or C corp than you would in an LLC.
Even if the protections of assets and limitations of liability were identical in corporations and LLCs, the tax advantages of the LLC can make it a much more attractive option to a small business owner who wants to maximize profit while mitigating risk.
Do You Need a Real Estate LLC Attorney?
Hiring an attorney isn’t a requirement for operating a real estate investing LLC, but it does eliminate any confusion as to the most appropriate and effective course of action for growing your business.
When you purchase a property strictly for personal use, the process can be long, but it is generally fairly straightforward.
When you are attempting to branch out and make a real estate investing career, the transactions tend to be larger, much more involved and can carry much greater risk.
It’s often in your best interest to handle these transactions under the protection of a real estate LLC, secured with the help of a real estate LLC attorney.
An experienced attorney can not only identify the best legal entity to operate your business under and expedite the process of the initial formation, but he or she can also greatly simplify the endeavor as well.
By entrusting a real estate LLC attorney with the process of forming your business you can feel confident that no steps were overlooked.
With an attorney on your side, you’ll know that all your bases are covered and that when the time for the first property closing comes around that you’ll be fully protected and fully prepared to do business.
The ideal structure for your real estate investment company depends on your current situation and the desired direction of the business.
Real estate investing can be a very rewarding and lucrative endeavor – if you approach it as a serious business and protect yourself from potential pitfalls.
The fastest and safest way to start your real estate investing business is by utilizing a real estate LLC.
If you’re looking to form an LLC for your real estate, email me at Sam@MollaeiLaw.com to get started
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