In real estate investing, asset protection is one of the effective ways of guarding one’s wealth. It is the manner in which the owner secures financial management to protect valuable properties and resources of the owner from the creditor’s claim or lawsuits that may arise out of the transaction.
As you engage in real estate investing, you will certainly enter into contracts and agreements with other people or entities, such as the buyer, co-investor, real estate agent, the bank, and other interested parties. In these contracts, you may either be the debtor or the creditor and in both instances, your assets may be exposed to different liabilities. For example, if you are the debtor, you may attach your lien or a mortgage to secure the fulfillment of your obligation. On the other hand, if you are the creditor, you are extending a part of your credit or asset to another person. In both of these cases, your assets are susceptible to claims and obligations, hence, there is a need to protect it.
What is Real Estate LLC
A Real Estate Limited Liability Company (Real Estate LLC) is a corporate structure where the business entity and the owner will be viewed as separate entities in the eyes of the corporate world. When the owner forms a real estate limited liability company, the real estate business will be clothed with a legal entity separate and distinct from the owner. In effect, the real estate LLC can be a party to a business transaction, own a bank account, and acquire, convey or dispose properties in its own name.
What the Guru tells you
Your real estate mentors may have discussed to you the positive sides of having an LLC. The most common significance of LLC is the protection it extends to the owner by limiting his personal liability in dealing with real estate transactions. However, in deciding for a corporate structure, you must assess not only the positive sides but also the negative aspects. Knowing both features of the LLC will help you to decide in pursuing your business with this organization.
The two sides
The discussion below will help you expound more about the Pros and Cons of having a Real Estate LLC:
Protection from Liability
In forming a Real Estate LLC, the business entity can enter into transactions using its own legal personality. To illustrate, if there will be claims against the real estate entity, the claimant will assert it first against the real estate LLC and not immediately to the owners. As such, the arrangement extends protection to the owner from personal liability.
Tax and financial management
From the financing viewpoint, it is better to separate your business assets from your personal account. This will help you to make your audit and financial analysis more organized and less confusing. If you will form a real estate LLC, your business entity will have its own tax returns. As such, you can write-off your business-related expenses for tax return purposes without confusing it with your personal assets. In addition, real estate LLC is also entitled to tax deductions varying from each state.
Payment of fees and expenses
Establishing a real estate LLC entails registration costs and other expenses to maintain its good standing. The costs depend on the state of registration and the strategies selected by the owner in forming the LLC. The costs may include registration fee, professional fees for hiring a lawyer, registered agents and other legal and financing services, and annual real estate LLC fees.
Challenge in rentals and refinancing
In rentals, you may want to encourage more capital investors when your rental company becomes large enough. However, investors usually prefer investing in corporations to have more collaborative privileges. Further, if you want to issue stocks and have it listed for initial public offering, you need to reorganize your real estate LLC to a corporation.
In refinancing, there may also be challenges if you arrange your business in LLC. Imagine this scenario:
You buy a property using hard money with the intent of keeping it. All repairs are completed. You are now ready to take it to a conventional Fannie Mae or Freddie Mac lender for the refinance. You are told from your government lender that they will not accept the loan because you closed in the name of an entity. For the refinance to take place you have to switch the title to your name. You also have to be on title for 6 months and show that you have made 6 months of loan payment so that you can refinance the property.
In this event, you need to make fast arrangements to accommodate the demands of the situation on time. If you want to learn more about asset protection, you may watch our webinar here.
Choosing the right business structure is an important factor in establishing your real estate investing endeavours. You need to know the two sides- both the pros and the cons, so you can arrive in a more calculated decision.
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Maurice Federbusch is a graduate of the university of St. Thomas Houston, Texas with a degree of Bachelors in Business administration. He received his loan officers license in 2005. His experiences include working in Wells Fargo and Bank of America. He established Value Funding Inc in 2010. To date, he enjoys working with investors and providing financing using a NO DOC Loan strategy in residential and commercial real estate
The blog articles are intended for educational and informational purposes only. Nothing in the content is intended as legal or financial advice.