How To Start a Real Estate Investing Business

Real estate investing is a great way to supplement your income or start an entirely new career as a business owner. Whether you plan to flip houses or manage rental properties, the real estate market has a lot of potential.

Creating an LLC for your real estate investing company provides various protections and benefits. Follow this guide to learn how to set up and run your real estate investing LLC successfully.

Why Form a Real Estate Investing LLC?

Any debts incurred by the business or lawsuits filed against it are the limited liability company's (LLC) legal responsibility. Creating an LLC provides personal liability protection if you're interested in the real estate market. An LLC protects your personal assets from any liability. Setting up your business as a separate legal entity is the best way to protect yourself.

Some people mistakenly think taking out liability insurance for their business will protect them from personal liability. Unless you legally separate your personal finances from your company's, you could be liable for the company's debts. A limited liability company provides asset protection.

A real estate LLC also provides tax benefits and gives you flexibility in choosing how the IRS will tax the business income. You can pass the income to your personal income tax return to avoid double taxation. You could elect to have the LLC taxed as a corporation. Your tax preparer can help you choose which method will benefit you the most.

14 Steps To Start a Real Estate Investing LLC

1

Understand the Market

Before you take any steps to set up your real estate investing company or buy an investment property, research and understand the market in your area. If you will be flipping houses, figure out labor and supply costs. If you plan to rent properties, understand the rental market clearly.

Be sure to evaluate the housing inventory in your area:

  • Are there few homes for sale or too many?
  • Are rental properties going for a premium?
  • Is there an overstock of rentals?

Pay close attention to mortgage interest rates, as well, as they can significantly impact your profits. Calibrate your plans to the market in your geographic area.

2

Create a Business Plan

business plan allows you to carefully consider your limited liability company and provide an outline for success. Your LLC plan includes:

  • Company structure details
  • Employee or contractor positions
  • Financing
  • Long-term and short-term plans and goals
  • Marketing strategy
  • Professional assistance needs
  • Target market research
  • Total initial investment costs

A business plan can help put your commercial real estate property investment company on the right track for success.

3

Consider Opening More Than One LLC

Opening an LLC may feel like a big decision if you're just starting real estate investing. But, suppose you are planning to own and manage many properties. In that case, there are benefits to creating a separate LLC for each property.

Each LLC is then separately contained. If a significant loss happens with one property, it won't wipe out your profits or equity with the others. This separation makes tracking each property's expenses, financials, and LLC taxes easier.

4

Choose Your Formation State

You can form your LLC in any state you want. Some states are more friendly than others on LLC formation and small businesses. Delaware and Nevada are popular states for LLC business formation, even if you don't plan on buying homes there.

But, if you do not live in the state where you form your business, you will incur extra fees. You must pay a registered agent in that state to accept paperwork on your personal property investment company's behalf. You must also file an annual report every year.

Setting up an LLC may result in more paperwork, but the financial benefits can outweigh the time concerns.

5

Choose a Name for Your LLC

Before you take any steps to form your LLC, you will want to choose a name. While choosing a business name that suggests what the company does might be tempting, choosing something a bit broader can be more beneficial. This allows you to expand what you do and still have a name that makes sense.

Be aware that most states require you to include "LLC" or "Limited Liability Company" in the name.

Once you've found a few possible names, visit your state secretary of state's website. Do a business entity name search using those possibilities. You want to be sure another company is not using the same name so you can trademark it.

6

Research Your State and Local Laws and Regulations

Each state has its own business laws and regulations governing LLCs and formation. The general process is the same in most states. Your secretary of state or division of corporations may have a business formation guide for your state that you can read.

Even within a state, cities can vary their own laws about property.

For example, St. Paul, Minnesota, has "rent control" regulations that limit an entrepreneur's ability to raise profit margins. Minneapolis, Minnesota, does not have rent control, so an entrepreneur could profit more there.

Other cities prohibit short-term rentals within certain city limits and neighborhoods. This means you could not turn a property into an Airbnb or VRBO there.

7

File Articles of Organization

In most states, you must complete a form called Articles of Organization to create an LLC. Your secretary of state or Division of Corporations website has the form to mail in or complete online.

Be sure to fill in:

A filing fee is usually required (under $200). You may have to pay extra fees to receive certified copies of the document or for a quicker processing time (expedited filing).

It may take a few weeks to get the approved forms back. Wait to take action with your business until it is officially formed.

Or you can let our trusted partner LegalZoom handle your business formation filing for $99 plus filing fees.

8

Choose a Registered Agent

Most states require LLCs to name a registered agent for their company. This person or company is physically located in the state you file in who can accept mail and personally served documents for your company. They must have a physical address in the state and available during business hours.

You or one of the other LLC members can be your registered agent. Still, most companies find working with a registered agent service convenient if you form your LLC in another state.

9

Create an Operating Agreement

Your state may not require an LLC operating agreement, but creating one is always good. In particular, an operating agreement is a meaningful way to avoid future conflict and misunderstandings if your LLC has more than one member.

The agreement details how ownership in the business is held and how business decisions get made. It explains how the business will be divided if a member decides to leave or dies. Think of it as insurance for your business structure.

Even if you have a single-member LLC, an operating agreement helps you stay organized and provides clear guidelines for how you will do business.

10

Apply for Business Licenses

A few states require every business operating within the state to get a general business license. Most other states require licenses and permits for specific industries and professions.

Sometimes, you must get licenses at the county or municipal level. Take the time to determine which licenses you need and apply for them.

Research whether you need a sales tax license since some states require you to collect sales tax on real property rentals. The Small Business Administration (SBA) can help if you're unsure where to start.

11

Establish a Business Bank Account

The most significant benefit of an LLC is that it shields you from personal liability from your company's debts. But, for this to be effective, you must completely separate your personal and business funds.

You should open a business bank account and business credit card. Funnel all business expenses through these accounts only. Suppose you start to pay business expenses out of your personal accounts or directly deposit business income into your personal accounts. In that case, you commingle the funds and blur the lines between your company and your personal financials.

Once you cross this line, it makes it easy for litigants to pierce the corporate veil and access your personal funds to pay for company liabilities. Keeping your business financials completely separate provides you with the full protection of your LLC.

12

Maintain Ownership Through Your LLC

If you are buying real estate, buy it only in the name of the LLC. This prevents the commingling of assets and provides other important protections.

If you own real estate in your name and transfer it to an LLC, this triggers the lender's due-on-sale provision in the mortgage (if you have one). These provisions state that if you sell or transfer the property, the full mortgage amount immediately becomes due at the time of the sale. Because of this, buying property as an LLC and getting financing in the LLC's name is essential.

13

Work With Professionals

Buying, improving, selling, and renting real estate involves a wide range of knowledge. It is a good idea to work with professionals who understand the industry and can give advice or act on your behalf, such as:

  • Real estate agents
  • Real estate attorneys
  • Mortgage brokers
  • Insurance agents or brokers
  • Contractors and renovation experts
  • Property managers
  • Accountants

These professionals can guide you and help you make your business successful.

For example, an insurance agent can advise you on what necessary business insurance you should have on your real estate properties.

14

Get Contracts

Before renting your property, prepare the right contracts, including a rental application and lease agreement.

Rental applications cannot discriminate against federally protected classes. Some of these classes include age, race, and disability. Ensure you seek legal advice in your state as some states limit the amount you can charge for a rental application and if it can be nonrefundable.

A standard lease agreement or rental agreement should include the obligations of the tenant and the landlord. Here are some common lease provisions:

  • Amount owed monthly
  • Eviction procedure
  • Hold harmless or indemnity clause
  • Rental insurance (how much does your tenant need to buy and provide you proof)
  • Pet policy (note: service dogs and emotional support animals are exempt from pet policies by federal law)
  • Security deposit amount and when you will return it
  • Term of the lease (month to month, six months, 12 months, net five?)
  • When rent is due
  • Who handles HVAC, plumbing, and pest control

As a property owner, you should have reasonable agreements in place with tenants in case you have to go to court one day over them. The agreements must be in writing, signed, and dated by both parties. Some property owners hire property management companies to serve as liaisons with tenants.

Other Ways to Increase Your Income

If you want to expand your real estate business, consider doing the following:

  • Consider short-term rentals with Airbnb and VRBO that have a niche theme or in a vacation area
  • Get your real estate license so you can handle sales yourself
  • Learn how to do a renovation or home repairs yourself
  • Manage rental properties for other landlords
  • Opportunity zones in economically distressed areas can offer capital gain tax incentives to investors to help revitalize the economy of a community or area
  • Seek out real estate investors so you can buy more properties
  • Stand out by operating eco-friendly and green properties

A real estate investing LLC is an excellent business opportunity. Following the correct process to set it up ensures it runs smoothly and maximizes your income. When in doubt, talk with a landlord and tenant lawyer.

Use Our Simple Process to Start Your Business

If you are ready to start your business, you can let our trusted partner LegalZoom handle your business formation filing for $99 plus filing fees.

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