Are you considering setting up a real estate LLC? Owning property rentals is not without its set of specific problems. Your property rental business can, in one way or another, have tenant issues or repair issues. Even transferring ownership of your properties to your heirs may not be a walk in the park. Another concern is the separation of your business and personal affairs. You also do not want to mix your business and personal finances. You do not want your personal assets and interests affected in case of litigation.
There are at least two ways to mitigate the effects of litigations on you. One is thru insurance policies that you can get to address these problems. Another one is thru an LLC, or what is also known as a Limited Liability Company.
What is an LLC?
LLC is the acronym for Limited Liability Company. An LLC is a business entity that can have as few members as one but can also accommodate up to 100 members. Each member has equal membership interests in the LLC. An LLC is simpler to establish compared to regular companies. A Real Estate LLC protects your personal assets and finances if there is a suit against the business.
The formation of an LLC provides both advantages and disadvantages. Here are a few which you can refer to:
Pros and Cons of LLCs For Real Estate Investments
Here are some Real Estate LLC advantages and disadvantages you may have to consider.
Pros of an LLC In Real Estate
1. Protection of Your Personal Assets
Lawsuits, business debts, and tenant-related problems can impact your personal finances and well-being. Insurance policies may cover these problems, but you will still feel the effects as a person. Another option is to establish an LLC. An LLC protects your personal assets and finances from these unwanted developments. The protection LLCs provide is invaluable for many real estate rental investors.
2. Real Estate LLC Tax Benefits
With an LLC, you can avail of pass-through taxation. Generally, you pay personal taxes based on your income from the business. Since the LLC will not need to pay taxes anymore, avoiding what can be double taxation. This setup holds even if the LLC has many members. Yet, LLC members can also elect to pay taxes as an S-Corp or a C-Corp. In an S-Corp structure, the members pay taxes thru pass-through taxation. As a C-Corp, the LLC and its employees pay taxes as a corporation.
3. Advantages to Estate Planning
Because the LLC owns the real estate properties, transferring assets to your heirs or anyone is easier. In an LLC, you can include a provision in its Operational Agreement that will name your successor in any case. This setup will give your successor administrative functions immediately. Such transitions will not affect the LLC operations. You can also transfer your membership interests anytime you want. The absence of these provisions can derail the operations of the business.
4. Membership Interest and Profit Sharing
A Limited Liability Company is flexible in its membership. From a single one to as much as one hundred, all will have equal rights to the company. The number of members may determine the operations of the LLC based on the interests of all the members.
5. Simple to Operate, No Complexities
Complexity is one of the characteristics that is lacking in an LLC. An LLC does not need a board of directors or hold shareholders’ meetings. There is no need for an organizational structure for it to run. A Real Estate LLC is like a blank canvas for management styles. It does not follow any management convention.
Cons of an LLC in Real Estate Investments
1. Operating Costs Higher than with Single Proprietorships
Real Estate LLCs or any other LLCs pay annual fees that affect their budget. Each State has its own rules and regulations for LLCs within its territories. You may find yourself paying Administrative Fees and other Annual Fees up to $800.00. Sometimes even depending on the annual income of your LLC. Check with your State’s regulatory agencies for updated fees.
2. Closed Membership
Inviting more investors into an already established LLC is an improbable undertaking. A rigid LLC structure sometimes prompts members to form a new LLC with the new member instead. Preparing administrative and legal papers is a challenge no one would want to do. It is easier to establish another LLC with the new investor members.
Other Points to Consider
Transferring your Properties to your LLC
Do you already have rental properties, and you now want to include them in a Real Estate LLC? If your properties are mortgage free, you can transfer their ownership to your LLC. Complexities arise if your properties are subject to mortgages. Lenders are strict in protecting their interests and will not allow such requests. A demand clause also protects them from such scenarios. The said clause authorizes them to collect full payment given the situation. But, there are other ways to do this. You can ask for an amendment to the contract if you own the LLC 100%. You have to know how to properly present your case and persuade the lender to make an exception for you.
The Sureties and Guarantees Effect
When applying for a loan under your Real Estate LLC, a lender may ask you to sign as a personal guarantor to the loan. You may not find this a disadvantage at first and may even think it is for your business. Yet, the guarantee exposes your personal assets if your LLC suffers from litigation.
Be Ready for Your Own Real Estate LLC
Hard Money Lenders exist to fill the financial gap sought by real estate investors. The investment gap that traditional lenders ignore or fail to recognize. Hard Money Lenders accept even properties that need repairs. And sometimes even dilapidated properties that have potential once rehabbed. These investors want fast processing of loans and fast release of funds. Many real estate investors prefer to buy properties that no traditional banks finance.
Hard Money Lenders focus on business loans, not on consumer loans. They have preferences for business-related loan transactions. It is uncommon that you may find a Hard Money Lender willing to give you a loan for personal consumption.
Dealing with a Hard Money Lender using a Real Estate LLC is favorable for both of you. Having a business name somehow legitimizes your services. It can also describe your business in as few words as possible. Happy Rentals LLC., for instance (similarity to existing businesses unintentional). The business name evokes a comfortable and welcoming rental property. It also projects a friendly company.
Real Estate LLCs can open new doors for you in the rental business. Not only among your target market but also in building your real estate rental portfolio.
GL&L Holdings is Here to Help
At GL&L Holdings, we cater to many who aspire to financial independence and balanced life. If you want to build your portfolio as an individual investor or through a Real Estate LLC, let us talk about it. Consultation is free. Call us now at (832) 770-9415 or fill out are no-obligation application form here. We will be more than happy to accommodate you.
