The Pros and Cons of Buying Real Estate as an LLC
Investing in real estate is a great way to build wealth, and it’s a strategy that is increasingly being used by businesses rather than individuals. Because of this trend, many first-time real estate investors wonder whether to buy an investment property in their own name or through a limited liability company or LLC.
Unfortunately there is no easy answer. There are a variety of factors that your customer should consider, such as: B. whether he already has experience with real estate investments, what he would like to do with the property, whether he is pursuing an exit strategy and the risks associated with owning real estate. Reviewing the pros and cons of investing in real estate should prepare you to help your client make that decision.
The advantages of an LLC
An LLC is a liability-limiting business structure, which means that the LLC’s assets and liabilities are segregated from the business owner’s personal assets. If something happens to the company, such as a legal dispute or bankruptcy, only the business assets are liable, which protects the entrepreneur from losing his home or car, for example.
Should your client decide to buy real estate and become a landlord, the main benefit of owning real estate under an LLC is that tenants can only sue the LLC and not your client if something should happen. Exceptions exist in extreme cases of fraud or neglect, but the bottom line is that in the event of a legal dispute, only the rental properties would be at stake. It is even possible to form separate LLCs for each property to further reduce liability.
There are other benefits of holding a property under an LLC. For one, it’s easier to invest in an LLC with partners or add an additional member by selling a percentage of the LLC. There are also tax advantages from working with an auditor or lawyer. Finally, forming an LLC allows the owner to separate their real estate income from all other income, making it easier to keep track of real estate activity.
The challenges of an LLC
Despite the benefits, there are reasons to avoid an LLC, especially if your client is a first-time investor in real estate. Although LLCs exclude personal liability for real estate, if your client gets into financial trouble, their bank may decide that their personal mortgage and property take precedence over their commercial real estate.
For this reason, LLC mortgages are more difficult to come by, the interest rates tend to be higher, and higher down payments are expected. Also, your customer will not be able to get a home loan and avail of various government home ownership programs. In many cases, the bank will not approve a mortgage unless your client provides personal assets as collateral, which defeats much of the purpose of forming an LLC.
One also needs to consider the cost and hassle of starting an LLC. Registration fees range from $ 40 to $ 800 depending on where the property is located. There is also the cost of hiring an attorney to make sure the LLC is formed properly, and you really want to advise your client to see an attorney instead of trying to set it up on their own. Your client will also have to pay an annual fee to maintain the LLC. While these costs are generally small compared to the cost of buying a property, they should be considered.
How to Buy Real Estate in an LLC
Fortunately, buying real estate as part of an LLC is not much different from buying real estate as an individual. However, it is important that your client set up their LLC well before buying any particular property. A delay while your customer tries to set up their LLC can cause the seller to look elsewhere.
Once your customer makes an offer and it’s accepted, they need to go to a lender and discuss the details of taking out a mortgage. In addition to the challenges above, your client will need to submit personal documents proving their own income as the LLC does not yet have any income or tax records to prove their solvency. If the mortgage is approved, the property will be titled on behalf of the LLC.
Final questions
If you’re still not sure how to advise your client, ask yourself the following questions:
· How much property does my customer intend to own? If you intend to own and rent a single property, buying it as an individual might be easiest. If you are planning to own multiple properties, the increased protection of an LLC becomes more important. It is important to note that while it is possible to transfer a property from an individual to an LLC, it can be risky while it is still mortgaged, depending on the initial loan terms.
· How much money does my customer have? When buying a property as an LLC, the lending requirements are stricter and a larger down payment is required so your customer should have enough money saved for this purpose if they want to buy as an LLC.
· What is my client’s long-term plan with this property? Do you intend to cash out your property one day or leave it to your children? An LLC can make it easier to give real estate to heirs if certain steps are taken in advance.
While owning real estate under an LLC has certain advantages, there are also challenges to consider. Establishing an LLC takes time and money, a loan can be more costly, and it can be difficult to maintain. If your client is just starting out with real estate investing, it may be easier for them to buy real estate on their behalf without an LLC. A person with sizable cash and ambitions to own a real estate empire may do better with an LLC, while a person who owns a property or two and may want to rent it out is better off on their own.