Have you been watching all of those home-flipping television shows and want to give it a shot? Are you dreaming about starting a real estate investing business and building out your investment portfolio? Do you want to flip houses or manage property investments over the long-term as they build value and equity?
Whether you are new to real estate investing or looking to add another address to your portfolio, the process of creating real estate LLCs for your properties doesn’t have to be overly complicated or expensive. This should be the first lesson in any guide to real estate investing for dummies.
Real Estate Investing Statistics You Should Digest
Deciding on how you want to invest your money is a very personal decision, and real estate is a strong choice. Here are some of the statistics to take into consideration.
Moving from Paper Assets to Real Estate
Bankrate, in a recent survey, looked into how Americans are investing long term. The two main investment strategies have long been real estate and paper assets (stocks/bonds/mutual funds). In 2019, 31 percent said real estate was their top investment choice, while 20 percent said stocks. But things seemed to shift slightly due to the pandemic of 2020, and now only 26 percent are leveraging real estate in their portfolio, with 28 percent choosing stocks.
Many experts believe the change from real estate to stocks was due to the stock market dropping in 2020, and investors saw the opportunity to dump a bunch of capital into the stock market to take advantage of the lower stock prices — knowing it would rebound and make them a small fortune. We should see a shift back to real estate leading the long-term investment strategy as things normalize following COVID.
That all being said, do not jump into real estate investing blindly, or you risk losing a lot of money. Learn the market and understand what to look for in properties, vacancy rates, locations and surrounding areas before jumping into any real estate deal.
It can be easy to fall into a hurried mindset when you want to move quickly on a property. Filling out documents and going through the process of reading and understanding your obligations (especially if you’re unfamiliar with that particular state’s laws) can be the most laborious parts of the process. And once you create your LLC for real estate investing, you will need to make sure you remain in good standing by re-filing certain documents and paying annual fees.
The thought of having to perform these steps with each property can tempt you into maintaining a single LLC to manage all your real estate properties. But this might not be the best solution! There are several reasons why you should form an LLC for each separate real estate property, which we’ll outline below.
Why Use Separate LLCs for Real Estate
Protection of Personal Liability and Other Properties
Forming an LLC is crucial for business owners to separate their personal and business assets and liability. You never know when a tenant may sue you, and insurance sometimes isn’t enough to foot the bill – leaving you with a considerable difference that needs to be paid. Creating an LLC for each property will protect your personal property, along with all of your other properties, should you be subject to a lawsuit.
It’s not a stretch to imagine a tenant trying to hold a landlord responsible for hundreds of thousands of dollars, especially if personal injury is involved, such as falling down a flight of stairs. Should you forgo separating each of your real estate property investments and keep them lumped under one LLC, they could all become at risk, and there is no actual separation should a lawsuit happen, depreciation or liability be held over your head.
With separate LLCs, you have the ability to better manage each individual real estate investment when buying, selling or renting the property.
Clearer Finances for Each Property
After you create your real estate LLC, make sure you open up a business bank account for that property. Any funds you use to perform repairs and maintenance, store tenant deposits, etc., should be transmitted through that account.
Having separate finances and bank accounts for each property can help you understand what money is coming into and going out of each LLC (property). You'll be able to quickly see how much you've spent on each property and you can even keep your annual LLC fees organized by property. This prevents you from having to spend the time later trying to figure out what properties are profitable and what properties may have caused losses.
Ability to Establish and Grow Your Business Credit
Creating multiple LLCs and establishing credit as a business owner will keep your personal finances protected. You can look at business credit in the same manner as you do personal credit. When you need money and ask for a loan, many banks will decline your loan application because you don't have any credit. Your ability to get the funding necessary to purchase properties, make renovations and pay for expenses all falls on whether or not you have the credit banks are looking for.
The better your business credit is, the easier the process goes and the greater your chances are of getting approved for the amount you're asking for. Any credit inquiries and loans taken out under your LLC will not affect your personal credit history, keeping your personal and business finances separate.
SBA.gov mentions that if you want to build your business credit, there are five things you need to focus on and complete.
- Choose the right business structure (such as starting an LLC).
- Obtain a Federal Tax ID Number (EIN).
- Open a dedicated business bank account (maintain separation between personal and business finances).
- Establish credit with your vendors and suppliers who report.
- Monitor your business credit reports.
Tax Benefits for Real Estate LLCs
We can’t discuss the benefits of creating separate real estate LLCs without mentioning the potential tax implications. Pass-through taxation is another main reason why it makes sense to choose an LLC as the entity to represent your real estate investments.
As the owner of an LLC, you’ll avoid the double taxation incurred by owners of C Corporations. In addition, LLCs have less complex legal filings and regulatory requirements compared to a C Corp or S Corp when it comes to real estate investing.
In fact, real estate investors who use LLCs to own their real estate holdings can typically benefit from mortgage interest deductions on all their properties the same way other types of sole proprietors can benefit from different kinds of deductions. This is because LLCs are a “pass-through entity,” where the business income gets reported on your personal income tax return.
Award-winning broker and founder of The Holly Parker Team at Douglas Elliman, Holly Parker was quoted saying, “Real estate has incredible tax benefits. In certain situations, you don’t have to pay taxes on your gains from investment properties. You can also get a $250,000 tax break as an individual and $500,000 as a married couple.”
And don’t worry if you have a multi-member LLC with other investors. In this case, you would file taxes as a partnership and still retain your protection from double taxation (just like a single-member LLC).
What About a Series LLC?
In some states, you can form a “Series LLC.” What exactly is a Series LLC, and why would this be advantageous to those looking to start investing in real estate?
A Series LLC is a unique form of an LLC where you are provided with the ability to separate assets and operations into independent series — essentially providing you with the ability to form mini-LLCs but have them all under one umbrella company. Each "mini" LLC is protected from each other in case of lawsuit or litigation. Perhaps the biggest benefit of establishing a Series LLC vs. separate LLCs for each property is potentially reduced paperwork. However, not all states offer this type of LLC.
Some of the states that offer a Series LLC include:
Form Your Real Estate LLCs Quickly and Easily
Are you ready to start a business, form a real estate LLC or reorganize your real estate business structure with a series LLC to get the most out of your real estate investments? Talk to Incfile today. Our incorporation experts can help you evaluate your options with state-specific advice to help put your real estate business on a stronger foundation.