How to Structure and Execute Your Real Estate Investing Business

It’s most people’s dream to have enough passive income from real estate investing to settle down, enjoy life and be free of the day to day grind. Real estate investing has been very rewarding for me. It can be lucrative for anyone who applies the training principles Strategic Real Estate Coach teaches.

All you need is to know where to begin. Setting up your company appropriately is important. Tax considerations, limiting liability and entity structuring are important items to discuss with a financial advisor, tax consultant and/or attorney.

Going into business and setting up a Limited Liability Company has its benefits. Setting up your real estate investing in your personal name is not the best first step. You need to create a business entity to have that credibility, liability protection, and even tax advantages if structured right.

4 Types of Business Entities

Basically, you can register four types of business entities:

  1. Sole proprietorship:
    1. With this structure you’re personally liable for anything that goes on in the business because it’s directly in your name. Profits are taxed as personal income. Basically, it’s not an entity.
    2. In this structure the entrepreneur is simply operating business matters in their personal name. this opens up all kinds of liability and risks personal savings, house, and assets in the case of a lawsuit.
  2. Partnership
    1. Partnerships could be general in nature where there are no written or formal agreements and liability is personal or limited where you register.
    2. Partnerships could be as a limited liability company in which the company exists on its own and bears its own liability and limits the liability of the partners.
  3. Corporation
    1. Corporations provide liability protection but comes with double taxation and is tough to manage (boards, elections etc) and generally archaic.
    2. Corporation profits are taxed as well as any money received from it is also taxed. Double taxation.
  4. Limited liability company (LLC)
    1. LLC’s are a hybrid between a corporation and sole proprietorship or corporation and partnership.
    2. It’s essentially the best bet you have in real estate investing whether as an individual or group.
    3. As the name suggests, the business is separate from the owner and limits the owners personal liability to whatever the owner signed for on a personal basis such as a line of credit or company credit cards.

Creating an entity has its advantages

For example:

  1. Tax considerations:
    1. Tax advantages due to the capacity to write off expenses like employees and contractors and other expenses.
  1. Non-tax considerations
    1. Liability protection
    2. Allows you to have a management structure
    3. You can designate and have ownership percentages between partners
    4. Operating agreements allow for a written business plan and pre-determined management decision making hierarchy.
    5. You can have several LLCs under a parent company which allows you to diversify

The entity chosen will depend on the goals of the real estate investor and their advice from their financial advisors but for beginners and for easier management, nine out of ten times, an LLC will do the real estate investment job the best.

But how do you go about it?

Here’s how:

Basics

There are two kinds of LLC’s.

Single-member LLC and Multi-member LLC.

How you will be taxed will be your choice depending on how you registered. Good CPA advice will come in handy at this point. To establish an LLC, you will need a number of things.

  1. Articles of organization
    1. The filing form you sent to the secretary of state for name reservation and organization recognition. Most people, however, wrongly stop here.
  2. Corporate record book
    1. States that your entity is a separate going business concern separate from personal matters. It will contain:
      1. Operating agreement: Operating Agreements are critical. They state who has the authority to make decisions, its scope, profit & loss distribution, among other agreements
      2. Member declarations/ resolutions: These are evidence of agreements and decisions on everything that goes on in the business. Good for audits, litigation, etc
      3. Member certificates: These certificates are proof of ownership. Similar to stock options. They prove who’s who and who owns what.
  1. Statutory agent:
    1. The Agent is a person or entity representing the LLC and where 3rd parties can make inquiries about the LLC
  2. Employer identification number (EIN)
    1. The EIN is a separate legal identification for your LLC. Simialr to a Social Security Number for a Business.

Special considerations

  1. Title
    1. How investments are titled depends on who is bankrolling it.
    2. Is it you or maybe a private lender? It’s advisable to however title it under your LLC. Real estate investing financiers can be:
      1. Cash
      2. Traditional bank financing
      3. Hard money lending
      4. Freeland lending (preferred)
  1. Ownership interests/sale of units. Make sure to engage a securities laws expert when selling units or bringing on board new money/partners
  2. Buying an LLC vs a property – Think about selling or buying a whole LLC rather than property and avoid the IRS as well as unnecessary attention.

Before you form a real estate investing LLC, do your homework and consult with legal and tax advisors as much as you can. Though there’s no limit on how many you can register, its good to have separate ones like one for flipping, one for renovations, one for each commercial building, one for rentals and we generally recommend holding approx. 8 units or doors in each LLC.

If you want to learn more about how you can accelerate your real estate investing business, you need to attend our One Flip Masterclass.  One Flip is our comprehensive training for everything you need to know about flipping houses, creating a real estate investing empire, or investing in properties in your spare time to create more passive income so you can achieve financial freedom.

Be Daring,

Josh Cantwell & David Streeter Esq,

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