Are you dreaming about starting a real estate investing business? 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.
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, 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 in the following section.
If you’re ready to add another LLC to your real estate investment portfolio, then contact Incfile about our low-cost packages that can relieve you of the time and energy it takes to manage these tasks. We include a long list of benefits, such as lifetime customer service and reminders of when important filings are due.
Read on for more of our basic advice on real estate investing for dummies — and how to use real estate LLCs to protect your assets while maximizing your business potential.
Use Separate LLCs for Each Real Estate Property Investment
As you already know, 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. Creating an LLC for your properties can help ensure you at least keep your personal roof over your head 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. If you don’t separate your bank accounts, create separate LLCs, and maintain your business regulatory compliance in good standing, your personal assets and other properties could be fair game.
Tax Benefits of Separate 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 other kinds of deductions. This is because LLCs are a “pass-through entity,” where the business income gets reported on your personal income tax return.
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).
How to Ensure Your Real Estate LLCs Remain Protected From Liability
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. One way to get penalized in court if you’re ever sued is to commingle your personal funds with business funds, or use funds from one property in an account related to another property. This would strengthen the argument that whoever filed a lawsuit against your property’s LLC could be entitled to the money in your personal account (or the other property’s account).
We also recommend engaging the services of a good CPA. This may seem like a no-brainer, but many startup investors try to juggle too many things themselves. Believe it or not, there are affordable tax services for business owners who have multiple LLCs, which could save you thousands in unnecessary payments or overlooked deductions. With all of Incfile’s business formation packages, we offer customers an hour of free tax advice that can steer you in the right direction.
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.