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I got into residential real estate last year and have 1 property.

I would like to purchase...
I got into residential real estate last year and have 1 property. I would like to purchase 1 property for per year for core holdings. I am not structured as a business yet, just operating under my own self. I will pick a structure this year, but here is my question.

I also have achieved a line of credit at the bank, to buy distressed assets in foreclosure and fix them up then put them back onto the market for sell. If I cannot sell the re-worked property in 6 months or around that time frame, I will buy the property myself and put it in my rental portfolio.

Is it wise to operate this under one company? How can I structure this to give me the best chance to grow at the fastest pace? I do not intend to take money from this project any time soon, all earnings will be reinvested back into the business. Right now my earnings on rental income is being netted out by my depreciation.
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Answered in 30 minutes by:
5/2/2013
PDtax
PDtax, CPA, MBA
Category: Finance
Satisfied Customers: 4,773
Experience: Tax professional and business consultant for 35 years.
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PDtax :

Hi from Just Answer. I can help you.

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Customer reply replied 4 years ago

if you can help then help

I see you rated my service bad while I was typing my response. Please correct that rating after reviewing my response.

Real estate is one of the best businesses to be in right now, but I likely don't have to tell you that. It's also one of the best long term, for rentals and long term income and wealth building. The risks in the business that you are trying to minimize include:

Personal risks to your portfolio. Divorce is the big one. Partners (you don't mention any).

Decline in rents (not likely), slip and fall at one of your rentals (insurable, also not likely), increase in the cost of borrowing (not a problem in flips, and your rentals are likely at low rates), injuries on the rehab jobs (depends on the contractors you hire).

The idea of a business entity to control things makes sense. An LLC as a management company would do a lot, by limiting your personal liability for the business risks. The problem is the financing is in your personal name.

If you can transfer the entity doing the flip deals to an LLC, the bank would eventually lend to your company. That covers most of your business risks. You can buy workmen's comp, liability protection if you want it, but no claims would stick to you.

Personal claims, like divorce, a car accident you are involved in, etc. could be covered with some very inexpensive umbrella liability protection. It covers 'over the top' so that your personal holdings would not be at risk even if claims against the flips or rentals could be made against you.

The LLC has other advantages as well, if you ever decide to get bigger and take on investors or partners, or to preserve assets for your heirs, to name two examples.

Please ask any follow up questions you may have. Thanks for asking at Just Answer/PDtax.
PDtax
PDtax, CPA, MBA
Category: Finance
Satisfied Customers: 4,773
Experience: Tax professional and business consultant for 35 years.
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Customer reply replied 4 years ago

So you would recommend doing flip deals with a C-Corp and a line of credit, then selling the home to my individual self and then placing that home in an LLC holding company?


 


Is it not smart to keep rental properties in a C-Corp?

An LLC would help with the flip deals, but will be hard to do until the bank lets your LLC own and finance the properties. Until then, your name and your credit are needed. An LLC limits much of the risk. Start by asking your banker to include your LLC on the deals as a co-borrower. After a few more deals, the bank will allow you to use just the LLC with your personal guarantee on the debt.

If you buy a flip and can't sell it, you can put it in your rental portfolio with good mortgage debt without reselling it from your LLC. I would not use an LLC holding company to own rentals.

I would consider a separate company to provide services for the rentals, like repairs, even collecting rents. I like this because it limits your personal risk in the rentals and you can shift cash flow and income from your personal income (from the rentals) to the separate service company (it works for tax purposes).

I did not mention a C corp. Real estate and C corps do not work well together. The LLC limits the liability like a C corp would, and doesn't create a second layer of taxes like a c corp does.

Thanks for the excellent rating.
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PDtax
PDtax
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Category: Finance
Satisfied Customers: 4,773
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