Transferring The Property Title To Your Llc
In property law, a property title can refer to two different things. The first is a collection of rights that define the ownership of a given property while the second is a formal document that proves ownership, also known as a property deed. A propertys ownership rights can belong to a single individual or it can be split between different parties.
When purchasing property as an individual, the property deed will come with your name on it, which means that you are personally liable if any claims are made against the property. This is one of the biggest benefits of an LLC property purchased on its behalf comes with a property deed under the LLCs name, protecting your personal assets in a worst-case scenario.
If you want to transfer a property title to your LLC, you will first need to obtain and file a Quit Claim Deed at your local County Clerks office. A Quit Claim Deed is a document that lets you edit the information on previous deeds. A real estate lawyer can help you with drafting your Quit Claim Deed.
One last thing: beware of title transfer taxes! These are charges made to transfer the title.
Why Start A Real Estate Holding Company
Setting up a real estate holding company has become increasingly popular in the last decade, and for good reason. By incorporating their businesses, real estate investors can gain access to unique benefits and enhance the long-term health of their businesses. Real estate holding company benefits include, but are not limited to, the protection of investors from personal liability, pass-through taxation, and the building of credit for your business.
Holding companies can protect business owners from liabilities and debts incurred by their properties.
A holding company prevents double taxation on investment properties.
The business structure allows investors to more easily manage their properties.
As a whole, LLCs pay less fees when compared to corporations.
Holding companies provide investors with more flexibility to distribute their profits.
Real estate investment company enables investors to purchase properties in the U.S. and abroad.
A holding company is more easily transferrable than other entity types.
Furthermore, those wondering how to set up a real estate holding company will be pleased to find out that they are relatively easy to register. The sections below will expand upon each of the main benefits, along with some of the lesser-known perks.
How To Start A Real Estate Holding Company
Starting a real estate holding company is not as complicated as it may seem. Investors can familiarize themselves with the process and get started today. Here is a step by step guide to starting a real estate investment company:
Choose a business name: First and foremost, you will want to research your states rules on setting up an LLC, such as through this guide provided by the U.S. Small Business Administration. The first step is selecting a business name, which will always be followed by a comma and the letters LLC. Make sure to run a search to make sure that your desired business name is not already taken.
File the Articles of Organization: Once the business name and business address are determined, a document entitled the Articles of Organization must be filed with your states LLC office typically the Secretary of State. The document is often available as a simple, fillable form found on the Secretary of State website, along with submission instructions. Once prepared, the document can be submitted by mail or in-person with a filing fee.
Publish your intent to file: Although required only by a few states, find out whether or not you are required to publish an intent to file through your local newspaper. Otherwise, your LLC is considered officially formed once your Article of Organization are accepted and approved by your Secretary of State.
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Why You Should Skip The Llc When Youre House Hacking
Dont use an LLC when house hacking, because it may prevent you from getting the financing you want. For instance, low-money-down, Fannie Mae, or FHA-backed mortgages cant be held under an LLC. As a first-time home buyer, youre able to put down as little 3.5 percent with an FHA loan. But this type of loan is available only to people purchasing primary residences under your personal name.
The same bank that would allow you to purchase a property for just five percent down may require 20 percent down for you to buy using your LLC. Plus, you might be able to get lower interest rates when purchasing a property as yourself, not an LLC.
Thats why you want to think about the type of investing you want to do before starting an LLC.
Underestimating The Cost And Commitment
Whether they realize it or not, aspiring entrepreneurs will be required to make a lengthy commitment to simply keeping the LLC up and running its not a one-time deal. Following the initial creation of an LLC, business owners will need to spend time and money each year to keep it operational. That said, far too many new entrepreneurs underestimate just how much the commitment is.
According to James Gilmer with Harbor Compliance, entrepreneurs need to know what they are getting into before they register for an LLC.
We encourage entrepreneurs to look into the ongoing requirements for keeping their LLC in good standing. For example, franchise tax obligations can be costly, such as in California where its $800 per year per LLC. Most states also require an annual report filing, which while fairly straightforward, can cause fees and penalties if not filed on time. While these are necessary costs of doing business, entrepreneurs should factor this into their budgets and plan ahead, says Gilmer.
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A Guide To Forming A Real Estate Llc
A real estate LLC can offer certain protections and tax benefits when investing in real estate.
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Creating a real estate LLC is often one of the first steps an investor takes when deciding to invest in real estate. After all, a real estate LLC offers the real estate investor certain protections and tax benefits for a real estate business and is relatively cheap to establish. If you’re considering forming a real estate LLC, learn what it is, the pros and cons of investing with a business entity, the cost to start one, and how to create your own real estate investment LLC.
Using Llcs For Asset Protection For Nc Rental Property Owners
Rental property ownership is a popular investment strategy for many, but it brings a higher risk of lawsuits and creditors compared with other potential investment options. Lawsuits may arise for a variety due to a tenant, guest, delivery person, neighbor, or repairman getting injured on the property. This could arise from a slip and fall, a balcony collapse, mold issues, a fire, you name it. As the owner of the property, you can be sued not only for things that you knew about, but for things that you should have known about. While some of these risks may be covered by insurance, its always possible that a claim could exceed your insurance policy coverage.
In some instances, there may be risks that are not covered by your insurance. For example, lets say that you decide to sell the rental property. The purchaser could later try to sue you for undisclosed defects on the property claiming that the supposed defects should have been disclosed prior to the sale.
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Not Hiring A Professional
Theres a time and place to do everything yourself as an investor, but not when it comes to your businesss legal or tax segment. The importance of consulting an attorney and a tax advisor is undeniable, as these experienced professionals will provide the best advice moving forward.
As a real estate entrepreneur, its important to remember that your skillset lies somewhere else. Although learning information on corporate structures and tax loopholes has its place, your time and effort are better spent in other departments of the business. Leaving it to a professional will allow you more time to concentrate on taking your business to the next level. With the right team and people in place, your real estate LLC will not only cement your position as a business, including full protection but put it in a position to achieve every tax benefit available.
The Main Benefit: Protection Of Personal Assets
An LLC is often set up to offer asset and liability protection. In the event of a lawsuit resulting from damages in or on a property, the property owner is likely going to be named in the suit. If the property is owned by an LLC, the LLC is the entity that’s most likely to be named in the lawsuit.
In the event of a suit brought against the property owner, the plaintiff won’t typically have direct access to sue the individual investor. He or she would have to sue the LLC, thus any assets within the LLC would be at risk but, this limits the liability of the individual owner and protect non-LLC owned assets from an award to the plaintiff in the event that the lawsuit is decided in their favor.
This means that your personal retirement accounts, primary residence, and other investments owned outside of the LLC are generally protected. This can be an important way of ensuring that you, your family, and your long-term financial health are protected in the event of legal action against one of your properties.
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What Is The Best Llc Structure For Your Rental Properties
Summary: Many real estate investors use limited liability companies to house their investment properties. This post covers the reasons you should consider putting your property in an LLC and contains an overview of our personal LLC structure. We also provide a checklist with step-by-step instructions for setting up your LLC.
A limited liability company is a business structure that allows for limited liability for its owners. LLCs are popular among real estate investors because they offer additional legal protection with the added benefit of flow-through taxation.
When we first started real estate investing, Kenji and I set up several LLCs to hold our real estate purchases. Over the years, we have continued to spend the time, money and effort to create additional LLCs because we believe the benefits of housing our properties within LLCs far outweigh the costs to create and maintain the structures.
The goal of this post is to cover the benefits of LLCs and to offer a real-life example of how to set up your LLCs, using our personal LLC structure as an example.
As a reference to use in this post, heres a diagram of how our LLCs are set up.
And with that, lets address why we put our properties in LLCs using this structure.
Why Choose An Llc Over Other Business Structures
In short, an LLC formalizes your business. This builds your credibility and gives you the opportunity to grow in the future.
There are two types of business structures that you can choose for your rental property:
- Informal: This includes sole proprietorships and partnerships . Since a buy and rent business involves plenty of assets, cash, and legal obligations, a formal structure is more efficient than an informal one.
- Formal: LLCs and other corporate structures fall under this category. When you first get started, the straightforward process of creating an LLC is more advantageous than a more complex corporate entity. This is the case for individual and group real estate investing.
Check out our article on the main types of business structures for more in-depth information.
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Starting A Real Estate Investment Llc Next Steps
Now that you have set up your company, you may be wondering what to do next. The steps outlined below are mechanisms that will help protect your business in more ways than you could possibly imagine.
Obtain an Employee Identification Number .
Get your business licensed and permitted.
Open a separate bank account.
Apply for a business credit card.
Get started by establishing an employer identification number , otherwise referred to as a federal tax ID, a unique number assigned to businesses by the Internal Revenue Service . When applying for your EIN, you will need to provide the type of entity you are starting and the date it was founded. Obtaining an EIN is required by the IRS and will allow your LLC to open a business bank account, protect against identity theft, and build credibility as a sustainable business.
In the same vein as opening a separate bank account, newly acquainted LLC owners will want to apply for a company credit card. This is to maintain the corporate veil that protects your assets and differentiates business expenses from personal ones. Having a company credit card essentially eliminates the possibility of record-keeping confusion and placing all of your eggs in one basket.
What Is The Due On Sale Clause
The due on sale clause of a mortgage typically requires that the property owner listed on the mortgage documents pay the remaining mortgage balance in full when transferring ownership. Therefore, transferring ownership from an individual to an LLC may violate the due on sale clause, but it is possible to obtain a waiver from your lender before doing so.
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Using An Llc For Real Estate Investments
One of the most common reasons to use an LLC for investing is to invest in real estate. An LLC will protect you from potential liabilities that arise, as well as provide a framework for dividing up the investment ownership of the property.
This can work really well if you plan on owning multiple properties, or if you have multiple investors in one property.
One of my favorite ways to get started with rental properties is through crowd funding. Similar to LendingClub, you can start investing in real estate for as little as $5,000 at platforms like RealtyMogul. Want to do it as a group? Well, then each person can invest – once again saving yourself the DIY headache.
Another similar platform is FundRise. They only have a $500 minimum to get started and offer a variety of options we love as well! FundRise has really been a great performing passive income investment over the last year!
Both of these platforms allow you to use an LLC to invest, but you’ll have to talk to their customer service teams to get started.
Create Your Operating Agreement
Not all states will require an operating agreement, though it is not a bad idea to create one as part of your business plan anyway. The states that do require one include California, Delaware, Maine, Missouri, and New York. While the other states have different rules, an operating agreement can actually come in handy no matter where you live. Essentially, it states how the business is divided among members and how decisions will be made. Further, it can also describe what would happen if one member decided to leave the company. One of the biggest perks of starting an LLC is that it can offer protection from several negative situations. The same logic applies to an operating agreement: it protects business members by anticipating possible scenarios that could harm the business structure.
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Waiting To Form Your Llc
The purpose of a real estate LLC is to separate yourself from the business legally. When first getting started, even if you havent completed a deal yet, you must begin the necessary steps of forming a real estate LLC. This investment umbrella will supply investors with the real estate LLC benefits of asset protection and allow them to reduce their taxable income with business-related expenses immediately. The addition of a real estate LLC can also help to legitimize an investors business credibility, as this corporate structure will provide an element of professionalism and trust that other competitors wont have.
Along with pulling the trigger early on an LLC, its also important for beginner investors to understand that individual state laws govern LLCs. This means that the filing requirements and protection they offer will differ from state to state depending on the state you registered your LLC in. For example, Nevada is a popular destination to establish a business LLC, as the state offers optimal asset protection laws.
Should I Create An Llc To Hold My Investment Property
There are many ways to hold a parcel of real property, each with unique benefits and drawbacks. At some point, most individuals looking to generate additional revenue through investment properties will debate whether or not they should purchase and hold a piece of real estate through a business entity such as a limited liability company .
Holding property through a business entity adds a layer of separation between an individual owner and their real property. Doing so can help to protect the investment property from an individuals debts and liabilities, and helps protect the individual from the investment propertys debts and liabilities.
The decision on whether to purchase property through an LLC depends on many factors and the specific preferences and goals of the buyer. This article is intended to provide a basic outline of the general concept of incorporation, and some of the primary benefits that are provided with an incorporated entity. For more detailed information, you may wish to consider speaking with a business attorney that can help assess your particular real estate venture.
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