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Benefits of Using a LLC to Invest in Single-Family Homes

Real estate investment, like any other

form of investment, is a business. Regardless of whether you are a professional investor or not, you should approach it as such. This is why understanding the structures that exist in this industry is important.

Once you choose to get into the real estate business, choosing your business structure will depend on your needs and the benefits that come with it. While some individuals choose to purchase their investment properties directly, there are other options at your disposal.

In the United States, there are four major business structures; sole proprietorship, partnership, S-corporation, and Limited liability company (LLC).

One of the most popular business structures non-professionals investors go for is the real estate limited liability company. Just as its name suggests, this business structure offers limited liability to its owners. What does this mean, and why should you consider using this business type for your real estate holdings?

Well, read on to discover the benefits of using an LLC to invest in single-family homes.

Limited Liability/ Asset protection

This is the most attractive feature that comes with this structure. Real estate investment comes with several risks, which can be scary, especially if you are new to the industry.

By investing through an LLC, members’/owners’ personal assets are almost untouchable in case of debt, bankruptcy, or a lawsuit. This layer of security limits risks that you, as an investor, will be exposed to.

Compared to real estate partnerships, LLCs offer the most protection to owners. Some people might opt for Limited liability Insurance. However, there is always the risk of facing a lawsuit over something your insurance doesn’t cover.

Flexible Taxing

Another major advantage of investing in single family homes via an LLC is the tax benefits that come with this structure.

LLCs are not directly taxed but benefit from what is called pass-through taxation. This means that once the company publishes its profits and losses, its members are taxed for any business income at a personal tax rate. This is not the case with corporations, who are taxed at the business level via the corporate tax and the personal level as income tax.

This is profitable only if the income tax rates in your state are lower than corporate taxes.

From inception, LLCs are classified by the IRS as partnerships unless in the case of a single owner. Here the company taxes are mandatorily filed as a sole proprietorship. Nevertheless, LLCs have the flexibility to choose to file taxes either as a partnership or corporation.

Liberal Ownership and Management Structure

If you are thinking of getting into property investments with partners, be it family, friends, or business partners, having clear-cut roles and responsibilities is essential. These roles are defined within the company’s operating agreement.

This document basically outlines company rules and regulations, member responsibilities, share of ownership, and how profits and losses are distributed. All members of the LLC take decisions regarding the company, and ownership interests can be distributed based on member preferences.

By using an LLC, owners or members can either choose to be invested in the day-to-day running of the business as managers or appoint a manager. This makes the chain of command less rigid as opposed to corporations that run with boards that need to meet on a regular basis, with reports and minutes.

Easier property ownership transfer

When carrying out a direct real estate transaction, the property title records must be modified to indicate new ownership once a property is sold. LLCs simplify this process. As a member, you can simply gift or transfer a part or all your shares or membership units in the LLC to another without re-titling the property. This is particularly advantageous when doing estate planning.

Non Traditional Financing Options

Using an LLC to invest in real estate also opens the door to untraditional financing. For example most hard money and portfolio lenders will only lend to an LLC.

There you have it! Like every business structure, LLCs have considerable advantages, but you need to understand the demerits of this business structure before deciding how to manage and protect your assets. Before you make your decision, properly assess your personal holding and needs. If you still can’t make up your mind, contact a attorney to help you out.

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