If you have more than one rental property you may have heard the phrase “treat it like a business”. I hope you have heard this phrase from your CPA! And without question, if you have heard me speak you have heard my opinion about setting your investment property up like a business and running it like a business! So, in the spirit of “rental real estate as a business” here is some information to guide you if you have not done this or maybe fine-tune what you’re doing if you have!
THE INFORMATION IN THIS ARTICLE IS THE OPINION OF THE WRITER. THIS SHOULD NOT BE TAKEN AS LEGAL ADVICE. ALWAYS SEEK THE ADVICE OF AN ATTORNEY REGARDING LEGAL MATTERS AND ASSET PROTECTION.
Before we get into the particulars of setting up and using a limited liability company or LLC, let me paint a picture for you. What happens when the contractor you hire to do the work on your property has a couple of knuckleheads with him, and one falls off the roof? And what if he is not properly licensed and insured as a subcontractor? Or worse, it’s someone you hire off Craig’s list that is out of work? That’s right, you get sued! How does one avoid this?
Well, if you own the property in a Limited Liability Company (LLC), and it is structured and maintained properly, the injured party would have to go through your LLC to get to you and your assets personally! Moreover, if you have a good property insurance policy you can choose to just pay a deductible and have the insurance deal with it. Don’t want the insurance claim as a knock against you? Then get the insurance in the name of the LLC! If you have a claim against the LLC you can always choose to use a different LLC in the future with a clean insurance record. This is one reason to not group all your properties in the same LLC.
Taxes! You didn’t think I would write something that didn’t have to do with reducing your taxes, did you? When you set up your rental business like a business and operate it like a business then you will get the best of both tax worlds! You will get the favorable tax environment of the investor as well as the incentives available to business owners! This includes the extra expenses involved in running a business that you might have anyway! For more details about these tax strategies and the new tax reform that benefits investors and business owners see the previous issue of the Rental Review.
How about the situation where you use private money for a project or partner and the investor would like to see how all the funds were allocated? I work with a lot of private investors and sellers who hold notes. By having a separate LLC, with a separate bank account, it is easy to see where the money is spent. This equals peace of mind for the people doing business with you.
All the above are real-life scenarios and reasons to build an active real estate investment business. There are crucial steps that should be taken to make sure you limit your risk exposure and are doing things the right way. Moreover, the better you are set up, the more successful your business efforts will be. Common sense, right? Not always. Sometimes it’s a case of you don’t know what you don’t know and it could hurt you.
I am going to give you a basic rundown of things you need to make sure you are aware of when building your real estate investment business.
I’m sure you have heard “the first step is to set up your LLC”. Pretty basic right…..? Well, that depends. Do you have any partners? What type or how many projects are you going to do with that LLC? Are you going for asset protection, and anonymity? (insider tip # 13: Washington State LLCs do not provide anonymity, owners of these LLCs can be reviewed right on the Washington Secretary of state site. Whereas in say Wyoming, an LLC can be set up where the members’ names do not appear on any public records). Talk to your attorney about what your intentions are.
Once your LLC is set up you will have a UBI number in WA state and can file for an EIN on the IRS website. You will need your articles of incorporation and or LLC operating agreement to open bank accounts and buy and sell real estate.
You will want to open a bank account in the name of the LLC. I have a different bank account and Quick Books set up for all of my LLCs.
Once the above is accomplished you can borrow money, buy real estate, and be a landlord all in your company name and not in your personal. So if your LLC is holding the title and the same knucklehead falls off the ladder, the LLC is the owner of the property, not you as a person.
Now it is time to complete your power team and “business vendors”. Get a great lender on board. This can be institutional like the commercial or hard money lending companies who can explain the cost of money as well as private lending individuals that you will work with. Get a great Real Estate Investment Broker on your team. This person will help you find, negotiate and analyze the real estate and returns as well as put together investor packages. (We are Real Estate Investment Brokers here at Extant Realty and this is what we do ☺). Get your unique business cards printed up and start networking with industry vendors, investors, and associates.
With your real estate investment company bookkeeping is essential. Understand commingling personal funds with your real estate investment company funds is a bad idea. And if you are collecting rental deposits, that may require a trust account and it is illegal to combine funds. You are going to need to use Quick Books, Quicken, or some other financial program to track all of your income and expense for your company. Now that you have a real estate investment business expense write-offs could include vehicle, travel, meals and entertainment, tools, office supplies, etc. (Always seek the counsel of a licensed CPA regarding tax matters or advice) This could mean heaven or hell come tax filing time.
Now you have a company and can market it appropriately for your business model. In addition to an operating agreement, I think a legitament business plan is also something you should have in place and lenders may want.
So a quick nutshell recap ….
Set up your LLC, and get on board with your CPA, Attorney, Real Estate Investment Broker, Lenders, and industry associates. Set up a bank account and financial management software. Write out a thorough business and marketing plan. Do business under the LLC name (as you grow you to will likely start many LLCs) and write all of your contracts and lease agreements and promissory notes in the name of the LLC whenever possible. Now you are for real and limited in exposure.
If you would like more detail, examples, and real-life how-to on putting this all together, Next Level Real Estate Education with Extant Investment is going to offer a FREE course on “how to properly structure a real estate investment company and get it off the ground”. We will get into detail about asset protection strategies and investment acquisition strategies based on the type of business you want to do.
If you are planning on building wealth through real estate you do not want to miss this course.