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, there is a lot of potential in the real estate market.
Creating an LLC for your real estate investing company provides you with a variety of protections and benefits. Follow this guide to learn how to successfully set up and run your real estate investing LLC.
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Why Form a Real Estate Investing LLC?
If you're interested in the real estate market, creating an LLC provides you with personal liability protection. Any debts incurred by the business or lawsuits filed against it are the legal responsibility of the limited liability company. Your personal assets are shielded from any liability. Setting up your business as a separate legal entity is the best way to protect yourself.
Some people mistakenly think that if they simply take out liability insurance for their business that it will protect them from personal liability. Unless you legally separate your personal finances from that of your company, you could be held personally liable for debts of the company. A limited liability company provides asset protection.
A real estate LLC also provides tax benefits and gives you flexibility in choosing how the business income will be taxed by the IRS. You can either pass the income through to your own personal income tax return (avoiding double taxation) or you can elect to have the LLC taxed as a corporation. Your tax preparer can help you choose which method will benefit you the most.
Creating a formal LLC for your business also gives it credibility and makes it easier to obtain funding or investors should you ever want to expand the business.
Steps To Open a Real Estate Investing LLC
1. Understand the Market
Before you take any steps to set up your real estate investing company or purchase 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, get a clear understanding of the rental market.
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 or is there an overstock?
Pay close attention to mortgage interest rates as well, which can have a significant impact on your profits. Calibrate your plans to the market in your geographic area.
2. Create a Business Plan
A business plan allows you to carefully think through your limited liability company investment, estimate costs, understand the market, detail your company structure, identify needs for professional assistance, and plan how you will grow your business.
If you intend to form your LLC with several members, a business plan can help map out each person's responsibilities.
3. Consider Opening More Than One LLC
If you're just getting started in real estate investing, opening an LLC may feel like a big step. However, if you are planning to own and manage many properties, there are benefits to creating a separate LLC for each property.
Each LLC is then separately contained. If a big loss happens with one property, it won't wipe out your profits or equity with the others. Additionally, this kind of separation makes it easier to track expenses and financials for each property.
4. Choose Your State
You can form your LLC in any state you want. Some states are more friendly than others when it comes to LLC formation and small businesses. Delaware is a popular state for LLC business formation.
Setting up an LLC may result in additional 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 for it. While it might be tempting to choose a business name that suggests what the company will do, it can be more beneficial to choose something a bit broader so that you can 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 come up with a few possible names, visit your state Secretary of State's website and do a business entity name search using those possibilities. You want to be sure another company is not using the same name.
6. Research Your State Laws and Regulations
Each state has its own business laws and regulations governing LLCs and their formation, although the general process is the same in most states. Your state Secretary of State or Division of Corporations may have a business formation guide for your state you can read.
7. File Articles of Organization
To create an LLC, in most states, you will complete a form called Articles of Organization. You can obtain the form from the state Secretary of State or Division of Corporations website.
Be sure to fill in:
- Your company's name
- Business address
- Start date
- LLC members (owners)
- Description of your business
There is usually a filing fee required (under $200 in most cases). You may have to pay additional fees to receive certified copies of the document or for expedited filing.
It may take a few weeks to get the approved forms back, so don't take any action with your business until you know it is officially formed.
8. Choose a Registered Agent
Most states require LLCs to name a registered agent for their company. This is a person or company 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 be available during business hours.
You or one of the other LLC members can be your own registered agent, but most companies find it convenient to work with a registered agent service, particularly if you form your LLC in another state.
9. Create an Operating Agreement
An LLC operating agreement may not be required by your state, but it's always a good idea to create one. In particular, if your LLC has more than one member, an operating agreement is an important way to avoid future conflict and misunderstandings.
The agreement details how ownership in the business is held and how business decisions are 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 obtain a general business license. Most other states require licenses and permits for specific industries and professions.
Sometimes licenses must also be obtained at the county or municipal level. Take the time to determine which licenses you need and apply for them.
Also be sure to research whether you need to obtain a sales tax license, since some states require you to collect sales tax on real property rentals. If you're not sure where to start, the Small Business Administration (SBA) can offer assistance.
11. Establish a Business Bank Account
The biggest benefit of an LLC is that it shields you from personal liability from debts of your company. However, for this to be effective, you have to completely separate your personal funds from your business funds.
You should open a business bank account and business credit card. Funnel all business expenses through these accounts only. If you start to pay business expenses out of your personal accounts or directly deposit business income into your personal accounts, 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 will be buying real estate, purchase it only in the name of the LLC. This not only prevents the commingling of assets, but it also provides other important protections.
If you own real estate in your own 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 amount of the mortgage immediately becomes due at the time of the sale. Because of this, it is very important to buy property as an LLC and obtain financing in the LLC's name.
13. Work With Professionals
Buying, improving, selling, and renting real estate involves a wide range of knowledge, and it is unlikely that you will know everything when you are getting started. Because of this, 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
These professionals can guide you and help you make your business successful.
14. Obtain Contracts
If you plan to rent or lease real estate, obtain a standard lease agreement or rental agreement as well as a rental application form so that you have the legal documents you need to rent your property.
Other Ways to Increase Your Income
If you want to expand your real estate business, consider doing the following:
- Get your real estate license so you can handle sales yourself
- Learn how to do renovation or home repairs yourself
- Seek out real estate investors so you can buy more properties
- Manage rental properties for other landlords
Use Our Simple Process to Start Your Business
Instead of hoping you get it all right, use our easy-to-use business formation service to make sure your business is correctly and legally formed. Your real estate investing LLC will be off to a great start and ready to generate income once you get everything in place.
A real estate investing LLC is an excellent business opportunity. Following the correct steps to set it up ensures it will run smoothly and maximize your income.