While the popularity of fix-and-flip investing has grown over the years, many real estate owners still prefer the tried-and-true success of long-term investing. Those looking to buy and keep their investment holdings can enjoy a steady stream of income over years, if not decades, as opposed to the quick, one-time-only cash infusion of a flipped property. However, the risks of holding investment properties can prove problematic, especially for investors with multiple properties. To counteract these risks, many choose to create a Limited Liability Company (LLC) for protection.
When a Tenant Falling in Their Home = The Loss of Your Home
Investment properties carry inherent risk to the buyer. After all, purchasing homes or businesses as an investment means that other people will be residing or operating in your property and generating rental income for your bottom line. What happens if someone is injured due to an accident or faulty craftsmanship at your property?
If you purchased the property in your name, your personal assets are now at risk if an accident were to occur onsite, regardless of whether your property is in adequate condition, or the incident was out of your control. If an injury is involved, you can be personally held liable for medical bill compensation and lost work time. And if the plaintiff wins their case against you, the court can go after your personal assets – your money, your car, and even your home – in order to satisfy the judgment.
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How Does an LLC Work?
To protect themselves, most investors form an LLC to act as the purchaser of said property. The LLC is an entity separate from yourself and has the personal liability protection of a corporation, while also maintaining ‘pass through’ taxation status. This means that the LLC itself does not pay taxes, as a sole proprietor or corporation would. All profit and taxes pass through to the owner. This avoids the double dip of taxation that corporations experience, where owners are taxed both individually and at the corporate level.
An LLC is also easier to manage than a corporation, which requires corporate officers, annual board meetings, stock disbursements, and so on. This somewhat informal structure is especially convenient for property owners who do not have a large team of co-investors that can help supervise an unwieldly business.
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Moving Your Assets and Protecting Your Privacy
Another powerful advantage that an LLC has is the ease in which owners can transfer their properties to someone else. Most states require a new deed to be recorded when property is transferred, which can be a time-consuming and even expensive process. However, under an LLC, an owner can gift a property to another without a new deed and can even transfer an entire LLC to another with minimal muss and fuss.
An LLC can even allow an owner to anonymously purchase properties. When using an LLC to purchase property, the LLC name is public record as the owner, not the individual owner. This affords an individual a measure of privacy in doing business and allows the LLC to act as the point of contact for tenants, debt collectors, lawsuits, or other unfavorable actions that can reflect poorly on an individual owner. It also conveniently allows an owner to circumvent the Fannie/Freddie rule which caps the number of properties an individual can own.
Park Place Finance has extensive experience working with clients who have LLC’s. Our dedicated and professional loan team can discuss the pros and cons with you and refer you to a specialist who can help you form one. If you are ready to broaden your investment horizons and protect yourself with an LLC, contact us today at 866-407-1599.