Easily Separate Business And Personal Expenses
When you create an LLC, you should create a for your LLC. That way, your personal expenses are separated from business expenses.
This makes it easier to claim business expenses when it comes time to do your taxes. Separate bank statements make it clear which expenses are business and which are personal.
How Hard Is It To Set Up An Llc
In Colorado, it is not very difficult to create an LLC. I have my assistant create the paperwork and submit the documents to the Secretary of State. Each state has different requirements and rules to create an LLC. Some states have a very easy process like Colorado and others are much more difficult. Check out your states requirements before you take this on yourself. I learned how to submit the paperwork and how to create the paperwork by looking at the documents for other LLCs that were created by a lawyer.
Protection From Personal Liability
If you purchase income property as a private individual, you will be held personally liable if you are unable to make payments, or an accident occurs on your property. That means that any assets you hold individually or jointly will be fair game in the event you are sued or enter a foreclosure.
In the past, there were only two ways to avoid being held personally liable: form a corporation or a partnership. Partnerships are actually worse than individual investors each partner is not solely responsible for both his debts and obligations, but also for his partners.
Corporations, on the other hand, ensure you are not held personally liable for any debts or obligations of the company. Also, the liability is limited to the amount that was invested by the shareholders.
However, while this would seem ideal for most investors needs, corporations arent able to take advantage of the tax benefits offered by partnerships. Partnerships are not taxable entities, and they are an excellent way to take advantage of various tax benefits.
Corporations, on the other hand, are considered taxable and are taxed at a much higher percentage. Fortunately today there is an additional alternative: the LLC, or limited liability corporation.
The LLC offers the best of both worlds: you are shielded from personal liability but can take advantage of various federal tax benefits. Its easy to set up, especially since the IRS has simplified the process.
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Learn Why A Llc Is A Popular Business Structure For Real Estate Companies
Create your LLC with Nolo
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A limited liability company is a popular business structure for real estate companies involved in the business of buying, selling, or renting commercial or residential real estate. Most real estate company owners want to make sure they take appropriate steps to limit their liability because of the numerous risks involved with running a real estate business. These risks include depreciation in the value of property, lawsuits arising out of construction accidents, and issues with tenants. One way to reduce the risk of personal liability is to create a separate entity for your business like an LLC.
Boosts Your Companys Reputation
As a real estate LLC owner, you have the opportunity to develop credit for your company. When a business owner decides to form an LLC, they can apply for an Employer Identification Number . Essentially, this allows your business to develop credit without affecting or using your personal credit.
Investors can use it to develop a strong credit rating for their firm, which includes the ability to obtain credit lines in the name of the business. For investors with both personal and company credit profiles, this may effectively double their borrowing capacity.
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Limit Your Personal Liability
If you own your property as an individual and someone files a lawsuit against you, then your personal assets are at stake. However, if you create an LLC, then the only assets at stake are those owned by the LLC. In other words, your rental property is the only asset at stake and not your personal finances.
Do You Need An Llc For Rental Property In Another State
No matter where youre buying a rental property, protecting that investment is important. Many real estate investors who own rentals choose to set up each of their properties as a Limited Liability Company . Doing so helps protect their personal assets from mishaps or accidents at their rental locations.
But do you really need an LLC for rental property in another state? And, where is it most advantageous to register an LLC when buying real estate property out of state? Is it in the investors home state or where the rental property resides?
In this article, Ill provide some food for thought when deciding where to form an LLC for a rental property in another state. Ultimately, though, its critical to get a lawyers guidance on the matter. Different states have different laws, and every real estate investors situation is in some way distinct. Therefore, no single approach is right for every property owner.
Below, Ive listed some things to think about registering an LLC for a rental home or business property in another state.
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Using Llcs For Real Estate Investment
Why Real Estate Investors Need Customized Business Planning
Real estate investment is a time-honored and often exciting way to grow wealth and find financial independence. But compared to many other business activities, real estate investment often carries more legal risk and involves more tax complexity. A one-size-fits-all business structure may leave real estate investors exposed to liability and paying higher taxes.
Real estate investments have a lifecycle that requires a holistic approach to planning. The right business entity for a real estate investor must anticipate the events that occur throughout the three main real estate investment phases:
Each stage of the real estate investment lifecycle involves agreements with different stakeholders, including lenders, contractors, tenants, buyers, and sellers. A default on any of these agreements can result in breach-of-contract lawsuits or other legal threats. Real estate investors may also face ongoing lawsuits for slip-and-falls and other personal injury claims, many of which are frivolous.
Any real estate investor that plays the game long enough is likely to be involved in legal disputes. Any dispute can result in a judgment against the real estate investor. Without proper planning, the real estate investors assetsincluding personal assetsare potentially subject to legal claims. The investor may wake up to find his home or bank accounts under seizure by a plaintiffs attorney seeking to enforce a judgment.
Are There Ongoing Costs Once You Create An Llc
Below are two possible ongoing costs once you create an LLC:
- Annual franchise tax can be $250-800.
- Most states charge an annual fee for having an LLC. It can be as low as $9 and as high as $500.
In addition to the above costs, there is the possibility that your interest rate will change as a result of transferring title of your property .
Keep in mind that transferring ownership to your LLC may trigger tax consequences depending on the value of your property when you transfer title. This is because the value of your property may have increased from the time you bought the property. These additional tax consequences can be avoided by creating an LLC before you buy the property.
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Llcs Versus Other Business Entities
An LLC is a business entity, which means it is separate from its membersthe term used for people who own the LLC. The LLC, not the members, owns and manages the business and real estate. One advantage of an LLC is that you have a great deal of flexibility in deciding how to manage the company and how to split profits among co-owners.
Another option is a corporation, whichlike an LLCprovides liability protection for its owners. However, a corporation is generally more complicated to form, operate, and maintain than an LLC. Additionally, depending on your situation, corporations may not provide as many tax benefits for your business as an LLC.
If you decide you don’t want to create a separate legal structure, you can operate your business as a sole proprietor, or as a partnership if you are in business with others. While both a sole proprietorship and partnership are the easiest businesses to own and operate, they don’t provide owners with personal protection from the debts and liabilities of the business. Business insurance provides some protection, but many real estate company owners want more because of the level of risk involved with owning and operating a real estate company.
How Do You Transfer Title To The Llc
First, lets define some legal terms. In property law, property title is a bundle of rights that outline ownership of a property. These rights can be held by several parties or by a single individual. Titles can also refer to a formal document known as a property deed that serves as evidence of ownership. Your property deed is a legal document that states who owns the property.
If you bought the property as an individual, then the property deed will state your name. This means you are personally liable if any claims are brought against the property. The benefit of creating an LLC is that you dont need to have your name on the property deed your LLCs name should be on the deed.
In order to transfer title to the LLC, which means to transfer ownership rights to the LLC, you need to create a Quit Claim Deed and file it at your local County Clerks office. Quit Claim Deeds allow you to edit information on previously recorded deeds.
You can create a Quit Claim Deed by contacting a real estate lawyer, or you can use a service like Rocket Lawyer to create one for free.
Be aware that there is sometimes a title transfer tax, which charges you for the privilege of transferring title.
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Real Estate Mutual Funds
Real estate mutual funds invest primarily in REITs and real estate operating companies. They provide the ability to gain diversified exposure to real estate with a relatively small amount of capital. Depending on their strategy and diversification goals, they provide investors with much broader asset selection than can be achieved through buying individual REITs.
Like REITs, these funds are pretty liquid. Another significant advantage to retail investors is the analytical and research information provided by the fund. This can include details on acquired assets and managements perspective on the viability and performance of specific real estate investments and as an asset class. More speculative investors can invest in a family of real estate mutual funds, tactically overweighting certain property types or regions to maximize return.
What Is An Investment Llc
An Investment LLC is a limited liability company that is established for the purpose of making investments. An LLC is a popular legal business entity because they are easy to create and provide the owner of the company with several benefits like liability protection and tax benefits.
Advantages of an LLC include:
- Easy to create
- Limited compliance laws
- Pass-through taxation
- Flexibility for the owner to choose management structure
LLCs can be created for any business purpose, whether running a brick and mortar store, purchasing and selling real estate, or investing.
Investment LLCs have been growing in popularity due to their various benefits to investors. It is common to have two or more people interested in ajoint venture for the purpose of investing.
An investment LLC will protect all partners involved in the company from liability. This allows multiple parties the opportunity to pool their money and profit not only from investments but from the various benefits offered by the limited liability company.
Read more about LLCs and their benefits by .
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Triggers The Due On Sale Clause
If you already own some properties and want to transfer them into your LLC, youll have to be careful. In some cases, changing the name of the property owner can trigger a due on sale clause. They may demand the remaining balance of the loan at that time. If you cant pay it, they potentially could foreclose on the property.
You may be able to ask your lender if theyll waive this clause, especially since youll still be the owner through the LLC.
File Your Articles Of Organization
The Articles of Organization for an LLC is essentially the blueprint of a business. It should state the company name, primary address, start date, business owners , and a brief description of the business. As I mentioned above, the specificities can vary between states. With that in mind, make sure you include each of the required parts before submitting your Articles of Organization to the Secretary of States office. This is also the part of the process where business owners must pay any fees associated with starting an LLC. It may take a few weeks to hear back from their office, but there should be no issues with approval if everything is submitted properly.
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How Much Will I Need To Pay
All entities are not created equal. Certain states have high entity fees, and others have high maintenance costs. Before forming a legal entity, make sure that you have a clear understanding of what the formation and annual maintenance costs will be.
As with anything in investing and business, it is always a good idea to do a cost-benefit analysis prior to forming a legal entity such as an LLC. Only form a legal entity for your real estate business after you have a clear understanding of what benefit you will be receiving and after you ensure that it makes sense for your specific situation.
Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisor regarding your specific situation.
Questions about any of the above information? Advice to add?
How To Purchase Property In An Llc
Using an LLC for rental property requires you to use commercial, not personal, financing since the loan is made to a business rather than an individual. Up until recently, commercial financing received a bad rapmost commercial lending programs did not offer 30-year fixed financing or competitive interest rates, required 25% or more down, and were riddled with high closing costs and prepayment penalties if you sold the asset within three to five years.
Today, there are many commercial lending programs that offer 30-year fixed rates, 20% down payment programs, competitive rates, and reasonable closing costs. In addition, they are oftentimes more competitive than a conventional loan should you do a cash-out refinance, such as when you are doing a BRRRR.
Purchasing a property in an LLC is a straightforward process. Lets break it down into its integral parts.
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Clearer Finances For Each Property
After you create your real estate LLC, make sure you open up a business bank account for that property. Any funds you use to perform repairs and maintenance, store tenant deposits, etc., should be transmitted through that account.
Having separate finances and bank accounts for each property can help you understand what money is coming into and going out of each LLC . You’ll be able to quickly see how much you’ve spent on each property and you can even keep your annual LLC fees organized by property. This prevents you from having to spend the time later trying to figure out what properties are profitable and what properties may have caused losses.
Choose A Business Name
The right business name is more fundamental than you might think. Not only does it need to attract potential clients, but it must also be unique to register as an LLC. Write out a few potential options before going online to check their availability. One of the best tips to follow as you name your business is to avoid pigeonholing yourself. Starting an LLC is only the beginning of your real estate business, so choose a business name with potential. Once you have some candidates in mind, make sure they are not already taken. The most common reason LLC applications are rejected is because of problems with business names.
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Can I Buy A Property In My Own Name And Transfer It To The Llc Later
Once you have an LLC, you may wonder, “Can my LLC buy my house?”
If you own your home free and clear, you can transfer your property to an LLC. However, if your home is mortgaged, this type of transfer would trigger the due-on-sale clause and the mortgage acceleration clause.
The due-on-sale clause in a mortgage contract requires a full repayment of the mortgage. In other words, lenders can demand that you pay the remaining balance of a mortgage if you sell or transfer a property. A mortgage acceleration clause means you must pay back the entire loan at once including the interest that accrued.
Instead of achieving what you wanted, you would have to repay your debt to the lender, so you would have to take out another home loan to pay for your mortgage.
What Is The Best State To Form A Real Estate Llc
While the best state to form a real estate LLC is subjective and dependent on an investors personal aspirations, Nevada is a great place to set up a real estate LLC. In addition to awarding business owners the many benefits associated with todays LLCs, those formed in Nevada are awarded an extra layer of protection. Specifically, Nevada allows LLCs to form whats known as a Series LLC. According to LegalZoom, The Series LLC allows for the erection of limited liability shields within the LLC. For example, a real estate LLC might hold several properties and set up a series LLC in a manner that prevents one property from being foreclosed upon to satisfy the debts of another property.
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