Why The Self-Directed IRA LLC Means You Don't Have To Pay IRA Custodian Fees
A Self-Directed IRA LLC is an IRS-approved tax structure that allows you to personally manage your retirement account without having to pay a custodian. It also offers several other benefits, such as ease of access and tax-free profits.
Self-Directed IRA LLCs vs. Traditional IRAs
A Self-Directed IRA LLC allows you to take control of your retirement by giving you the ability to invest in anything you want. Except for collectibles, such as art. The best part is, you won't have to ask a custodian for consent or pay any custodian fees.
With a traditional IRA, you must go through a custodian when you wish to make investments using your retirement funds, which often triggers high custodian fees and transaction delays.
With a Self-Directed IRA LLC, a special purpose limited liability company (“LLC”) is established that is owned by the IRA and managed by you or any third party. As manager of the IRA LLC, you will have total control over the IRA assets to make the investments you want and understand – not just investments forced upon you by Wall Street.
Not THAT kind of custodian ...
A Self-Directed IRA LLC Gives You Control of Your Retirement
With a Self-Directed IRA LLC, you will have total control to make any approved investment, including a real estate purchase. You can even pay for improvements and then sell the property without ever talking to the IRA LLC custodian.
Since all your IRA funds will be held at a local bank in the name of the Self-Directed IRA LLC, all you would need to do to engage in a real estate transaction or other investment is write a check straight from the IRA LLC account or simply wire the funds from the IRA LLC bank account.
No longer will you need to ask an IRA custodian for permission or have the IRA custodian sign the real estate transaction documents. You will be able to make investments by simply writing a check.
With a Self-Directed IRA LLC, you will never have to seek the consent of a custodian to make an investment or be subject to excessive custodian account fees based on account value and per transaction.
Self-Directed IRA LLC Benefits
#1 Invest in real estate & much more tax-free
With a Self-Directed IRA LLC, you will be able to invest in almost any type of investment opportunity, including real estate, tax-free.
#2 Virtually no IRA custodian fees
With a Self-Directed IRA LLC, you no longer have to pay excessive custodian fees based on account value and transaction fees. Instead, with a Self-Directed IRA LLC, you keep your money with a passive Self-Directed IRA custodian, often a bank.
Think of the passive custodian as a piggy bank for your Self-Directed IRA LLC. Whenever you need money for an investment, you just go to the piggy bank. You can write a check. You don't actually have to go or speak to your passive custodian.
#3 Tax deferral
With the Self-Directed IRA LLC structure, all income and gains from IRA investments will flow back to your Self-Directed IRA LLC tax-free.
An LLC is treated as a pass-through entity for federal income tax purposes and your IRA, as the member of the LLC, is a tax-exempt party. Which means all income and gains of the LLC will be tax-free.
A Self-Directed IRA LLC allows you to enjoy many more advantages, including the following:
Better protect your retirement assets from a falling stock market or against inflation.
Make a real estate or other investment by simply writing a check( Truly it is that easy.)
Generate profits tax-free when you use the same Self-Directed IRA LLC to purchase domestic and foreign real estate, private mortgages, gold and stocks, bonds, and mutual funds inside the same plan.
Buy your future retirement home or vacation property now at today’s prices, rent it out, and then move in at the age of 59 and 1/2!
Diversify your retirement portfolio and invest in almost any type of investment tax-free.
Take control of your retirement funds and hold them at a local bank or credit union.
Purchase real estate foreclosures and tax liens on the spot, or make personal loans by simply writing a check and generating profits tax-free.
To learn more Royal Legal Solutions' IRA LLC custodian services, take our investor quiz and you'll get the opportunity to book a free consultation.
Business Trusts: Your Key to Greater Control Over Your Investment Accounts
Business trusts can allow you to safely and inexpensively manage your Self-Directed IRA (SDIRA).
With typical IRAs, you’re at the mercy of the "custodian" (the financial institution that manages your investment). With a Self-Directed IRA business trust or LLC, you get access to different types of alternative investments (including real estate), that you otherwise wouldn’t be able to purchase with those funds.
So the SDIRA grants you the "checkbook control" you need, which means more direct authority and oversight over the investment and management decisions regarding the funds held in your retirement account.
With a business trust, there are even more benefits, as we'll see ...
LLC filing fees vary by state, but most states charge anywhere between $50-800 for annual filing fees and reports, creating an additional and unnecessary expense.
The states with the highest annual LLC filing fees are:
California ($800)
Massachusetts ($500)
Nevada ($350)
Delaware ($300)
Maryland ($300)
Tennessee ($300)
Washington DC ($300)
That’s not to mention the initial filing fee cost, which averages anywhere from $100-200. If you ignore or forget to pay your fees, your LLC gets shut down. If you’re managing a lot of money in that LLC, this could cause even bigger issues.
For Self-Directed IRA investors, business trusts offer the same checkbook control with fewer annual fees. That means a lower cost and generally less upkeep. A California business trust, for example, would save you $800 a year right off the bat (and an additional $70 if you count the initial filing fee). Instead, you could pay nothing annually.
But that isn’t the only benefit trusts afford you...
LLCs Can’t Offer the Same Level of Anonymity
Additionally, business trusts go beyond the protections afforded to you by an LLC. They don’t require that you file publicly. When you form an LLC, the Articles of Organization, along with your name and address as the trustee of that LLC, must be filed with your Secretary of State.
Business trusts don’t have that same requirement, giving you an additional layer of anonymity and asset protection in the event of a lawsuit. If the litigators can’t find who owns the trust, they can’t sue that person.
Tax Efficiency
Finally, business trusts can be more tax-efficient than LLCs. A business trust is considered a “disregarded entity” separate from its owner. That’s also true for LLCs—but there’s a key distinction: even if you file taxes as a partnership, most states require LLCs to file income taxes. If you choose to use an LLC, that’s an additional headache.
This also ties in with the anonymity. Business trusts don’t have to be filed publicly, they don’t have to be updated annually with any reports, and they don’t have to report income taxes. If you use them to shield your Self-Directed IRA, you’re protecting against legal trouble to the greatest possible extent while minimizing costs.
What Can You Hold in a Self Directed IRA Business Trust?
To give you an idea of the types of assets that you could invest in with your retirement funds using a business trust, here’s a short list:
Real Estate
Vacant land
Silver and Gold
Tax lien certificates
Cryptocurrency
However, just because you have access to more investments doesn’t mean there aren’t rules to what you’re allowed to do and what you aren’t allowed to do. We actually have a specific list of prohibited transactions.
For one, you aren’t allowed to self-deal in any way. If you want to buy a vacation home using your Self-Directed IRA, that’s prohibited. The investment can’t serve you, and you aren’t allowed to work on it yourself. If you choose to purchase a fixer-upper, you also need to hire contractors for that fixer-upper. DIY is expressly prohibited.
Your Key to Greater Control Over Your Investment Accounts
Here are some of the biggest takeaways from this article:
Both LLCs and business trusts give you an additional layer of asset protection.
Business trusts can save you money by cutting back on annual fees. Unlike a Traditional LLC, there is no registered agent, no franchise taxes, and no yearly fees.
They offer the same checkbook control as self-directed IRA LLCs with even more protection. They’re relatively simple to set up and there’s no legal requirement for you to publicly file your business trust, offering you additional anonymity.
You can use either a business trust or LLC to separate your personal assets from the holdings in either entity, protecting them in the event that you get sued.
Selling Real Estate 'As Is': Guide For Investors
What are the benefits of selling real estate “as-is”?
If you’re a real estate investor, you need to know what “as-is,” means. Having an “as-is” clause in a real estate contract could potentially save you from many litigation issues down the line. What are the benefits of this type of real estate deal? What are the drawbacks?
In this article, we’ll go over all of that and more, including:
What it means when a property is being sold as-is.
How as-is properties differ from houses on the traditional market.
The pros and cons of selling real estate as-is.
What Does It Mean When a Property is Sold As-Is?
If you’ve ever shopped for homes online, chances are you’ve run into a property description that included the phrase “as-is.” Chances are that the house was significantly cheaper than the other houses in the area. Why is that? What does it mean when the owner is selling the property “as-is?”
Selling real estate "as-is" means that it’s being sold in its present condition, without any stipulations that the seller fix this or that. It doesn’t matter if the roof is caving in and the water isn’t running. As long as the seller follows the disclosure laws in his or her respective state, he or she doesn’t have to make any repairs to the home to get it in livable condition. It comes exactly as you see it, or “as-is.”
Here are some quick things you should know about buying and selling real estate as-is:
As-is properties typically are in worse condition than other homes on the market. That’s why they’re usually less expensive than those other homes.
If you’re selling a rental property (or any property, for that matter), including an as-is clause can save you from a litany of possible legal issues.
Often as-is deals are 100% in cash.
When you’re negotiating for an as-is property, it usually isn’t appropriate to try to get the seller to pay for certain repairs. If it’s included in the property description, the seller probably isn’t interested.
These properties usually offer opportunities for value-add “fix and flips.” Investors buy a run-down property for less than its after-repair market value, fix it up, and attempt to sell it for a profit.
How does that differ from the traditional real estate sales process?
Selling Real Estate The Usual Way Goes Like This ...
Many traditional real estate contracts include inspection and appraisal contingencies. Since the deal isn’t 100% in cash, the bank wants to make sure it’s granting a loan on a reasonable investment. These contingencies can also give the buyer the right to back out of the contract if something unexpected pops up, or if the appraiser comes in at a value that’s higher than the sale price.
The biggest differences between selling real estate as-is and selling real estate on the retail market are:
Sales price. Selling a property “as-is” typically has a lower sales price than listing a house in a more traditional manner.
Time to close. It takes a traditional real estate transaction longer to close, since a third party (the lender) is usually involved.
Realtor commission and other fees. Since lenders require inspections and appraisals, there are more fees associated with buying and selling traditionally.
Now that you have a general overview of what that means, let’s dive into who buys and sells these types of properties.
Why Would You Sell a House or Rental Property As-Is?
There are plenty of reasons why someone would sell a house or rental property as-is, but they all have one common denominator: they aren’t willing (and/or able) to make repairs to the property before closing.
With that said, here are some common reasons people sell properties as-is:
They received the property as an inheritance following the death of a loved one, and they don’t have the money or time to fix the property up to the market’s standard.
They received a notice of default from the bank and are attempting to sell the home as a short sale to avoid bankruptcy.
They don’t want to haggle with buyers over certain repairs.
So, whether it’s through neglect, inheritance from a loved one, or some other reason, the seller doesn’t have the time, interest, or money to fix it up and list it to people who are looking to move in immediately.
Pros and Cons of Selling Real Estate As-Is
Let’s look at the pros and cons of selling real estate as-is.
Pros
Quick sale. The average real estate transaction takes 30-45 days to close after being sold. Repairs are one of the biggest reasons it takes so long to close. When you’re selling as-is, you can probably avoid many of those repairs.
Less hassle. If you sell as-is, you won’t have to haggle with buyers over minor -- or even major -- repairs.
Including an as-is clause might save you from potential legal issues down the line.
Cons
Your sale price will almost definitely take a hit. Since buyers are being dissuaded from negotiating repairs, they’ll have to make those repairs themselves. That will cost you some money.
Selling real estate as-is doesn’t mean you can avoid an inspection. The buyer can still cancel the contract for any reason at any time, and they can still come back and ask for repairs.
It doesn’t protect you from all potential legal issues, nor does it mean you can sidestep your state’s disclosure laws.
What You Need to Know if You’re Buying or Selling Real Estate As-Is
If you’re an investor, what are the big takeaways from this article? If you’re selling real estate as-is, then you can avoid a slew of potential litigation issues, particularly in the case of rental property, and you can close deals at a much quicker pace. However, in exchange, you’re sacrificing a higher sales price. Houses that are sold in a more traditional manner might have more fees, but they also typically sell at higher prices.
Bitcoin is constantly making headlines. We're getting a little sick of hearing about it, to be totally honest.
As Bitcoin becomes mainstream, we hear stories of the crypto-savvy investor buying Bitcoin in its early years and becoming a millionaire. Which leaves more investors asking, “Why not me?”
In 2021, IRA investors are increasingly diversifying with Bitcoin and other cryptocurrencies. Self-Directed Bitcoin IRA investing can deliver high yields along with the tax benefits of non-digital investment.
Here’s a brief primer on Bitcoin and three steps investors can take to start making their own Bitcoin investments using a Self-Directed IRA-owned Business Trust.
Bitcoin Basics
With cryptocurrencies, encryption is used to make new currency units and perform transactions. All this is done in a decentralized system and records are kept in a blockchain, which is a type of digital ledger.
Bitcoin, released in 2009 by Satoshi Nakamoto, is one of thousands of cryptocurrencies but is easily the most popular. Bitcoin must be stored using an online digital wallet or in a personal computer. Due to hacking concerns, some owners use a hardware wallet (a USB-like device protected with a PIN code).
Bitcoin Gets Attention From Investors
Bitcoin turned heads in the investment world by going from a price of under $1 in 2011 to $40,111 on January 14, 2021. The highs and lows have attracted headlines, as in December of 2017, when prices doubled in a matter of weeks. As I write this, its current U.S. value is $33,626.60.
Bitcoin’s wider adoption and impressive gains led to the “Bitcoin IRA," bringing the flashy new investment into the stodgy world of traditional retirement accounts.
Bitcoin Meets the IRA
A traditional IRA (individual retirement account) doesn't permit alternative investments such as Bitcoin and other cryptocurrencies. They're not really known for trying new things.
But what about the Self-Directed IRA (SDIRA), with its more flexible structure? The IRS doesn’t list Bitcoin as a forbidden investment (only list life insurance and collectibles are specified as non-permissible IRA investments). Check out our article, Our 3 Most Popular Self-Directed IRA Investments, to see what else is (and is not) permitted.
How to Invest in Bitcoin Using a Self-Directed IRA
#1 Do Your Research
The information I’ve provided about Bitcoin is a good primer, but is by no means a substitute for doing your own due diligence. Be prepared for the uncertainty that surrounds Bitcoin as a new investment.
Also, since Bitcoin isn’t under a regulated system don’t expect the same type of publicly available financials you’d find with traditional stocks or mutual funds.
Traditional IRA custodians won't even think about it, but if you're in the market for the self-directed version, you'll need to make sure your IRA custodian is IRS-approved and allows Bitcoin investments. Still, you probably won’t enjoy true checkbook control over your account.
Your SDIRA is self-directed (as the name says), but it isn’t “self-managed.” This means you can’t write a check out yourself for a Bitcoin transaction without a custodian approving the transaction. The processing time can hurt you when you're trying to buy or sell quickly. Also, the fees can add up when choosing this route.
This doesn’t mean you should give up on Bitcoin investing with a Self-Directed IRA. Royal Legal Solutions may be able to help you eliminate the custodial overhead. Many of our clients are Bitcoin investors who enjoy direct control over their IRA investments. Start with our investor quiz to see if you can take advantage of our custodial services.
#3 Choose a Good Cryptocurrency Exchange
Once your Self-Directed IRA is setup and you have direct access to your funds, you’re ready to purchase Bitcoin. Choose a reputable exchange and understand its fee structures. More importantly, be aware of any security flaws and hacking issues. Currently, Coinbase and Kraken are some of the most reputable exchanges.
#4 Choose a Good Cryptocurrency Wallet
For those new to cryptocurrency, this step may seem like the hardest to understand. A cryptocurrency wallet isn’t a physical wallet, although it can take physical form as a hardware digital wallet. Wallets are accessed via a private key, which is a hexadecimal code that you should guard just as you would a security box key. Like a bank account, the wallet holds your balance and a reference to all transactions. It’s also where you can send and receive currency. Think about security when choosing a wallet. Online wallets are convenient and usually offer a mobile version. However, they are susceptible to hackers. Hardware wallets are more secure because they hold the private key in an offline, unhackable device.
#5 Keep Your BTC Investments in Compliance
The “self-dealing” rules that apply to other alternative assets also apply to Bitcoin. For instance, an investor can’t sell Bitcoin to his own IRA nor can any of his family members. This can disburse the IRA or lead to a taxable event. Also, be mindful of annual reporting requirements which require market valuations similar to real estate properties.
#6 Enjoy Tax-Deferred Earnings
With a Self-Directed IRA you can apply the tax-deferral benefits enjoyed by other alternative investments towards Bitcoin. Bitcoin investments can grow unhindered as taxes aren’t applied till funds are disbursed, which can mean decades of growth.
#7 Explore Other Cryptocurrency Investments
Bitcoin is the most widely-known cryptocurrency. However, once you’ve gotten your feet wet in Bitcoin investing, you can expand towards others currencies such as Ethereum and Litecoin. Like Bitcoin, Litecoin has enjoyed tremendous growth. It’s second to Bitcoin in market capitalization, followed by Ethereum and Ripple.
When expanding your Self-Directed IRA, consider what advantages rival currencies have as an alternative to Bitcoin. For instance, Litecoin enjoys faster transaction times and a larger coin supply limit of 84 million compared to Bitcoin’s 21 million.
Start Investing Today
Like any other investment, investors should complete their due diligence, choose the right custodian and be aware of custodial fees. Check out our Using Your IRA to Invest In Crypto (4 Steps) article while you're at it.
Lastly, keep Bitcoin investments in compliance with IRS regulations. The unique steps Bitcoin investors need to make may be overwhelming at first. They include choosing a cryptocurrency exchange and digital wallet. However, once investors get their feet wet, they’ll be a step ahead in expanding their Self-Directed IRA towards other cryptocurrencies. For now, investors could start off with Bitcoin and other private investments using a Self-Directed IRA.
What Is A Bump Clause In Real Estate?
When you are selling real estate, you want to get the best possible price.
Duh.
In a red-hot seller’s market, that’s usually not a problem. But what about when the market starts to cool down?
A bump clause is a way a seller can continue to market a property until the buyer satisfies a specific contingency, such as selling their current house first. With this type of transaction, a seller can “bump” the original buyer if a better offer comes in.
In this article, we’ll examine how a bump clause works and its advantages for both buyers and sellers.
How a Bump Clause Works
Unless it is their first home, most buyers need to sell their current home before purchasing a new one. In these cases, the buyer makes an offer with a contingency that they sell the other home first.
If the seller accepts the bid and enters into a contract without a bump clause, the seller has to take the home off the market. No other bids will be accepted during the contingency period. A typical contingency period typically lasts between 30 and 60 days.
With a bump clause, however, the home remains on the market. If another buyer makes a better offer, the seller must notify the original buyer. Then that buyer has only a few days to waive their contingency or increase their offer.
Otherwise, the original contract becomes void. The seller returns the earnest money to the original buyer and proceeds with the new offer.
What’s the best timing for a bump clause?
In a hot real estate market, homes often sell without contingencies. For example, in the pandemic-fueled housing market of 2020 and 2021, many homes across the country sold above their asking prices with no contingencies other than the home inspection.
However, hot markets eventually start to cool down. Bump clauses allow sellers to accept an offer that may be below their expectations along with a way out if a better deal comes along.
On the other hand, a buyer can present an offer with bump clauses as a way to encourage a seller to accept a bid with a contingency.
Typically there are two different time frames for real estate bump clauses: the 72-hour bump clause and the 48-hour bump clause. Sellers and their agents use the set time periods as a negotiating tool to encourage buyers to act quickly.
The 72-hour bump clause. With this clause, the seller will keep the property on the market, providing the original buyer with a 72-hour first-right-of-refusal notice if a better offer comes in.
The 48-hour bump clause. This clause allows the original buyer a period of 48 hours to waive the contingency or increase their bid on the property.
If the buyer does not meet the time frame stated on the contract, the seller is free to move on to a second offer.
Here are some other terms you need to know when dealing with bump clauses in real estate transactions.
The no-bump bump offer -- A no-bump contract is just like it sounds. If the seller accepts an agreement with this wording, they cannot back out if a better offer comes along. The seller must take the home off the market and proceed with the sale.
The active offer with bump – This wording on a property listing means that the seller has accepted an offer and has the right to accept another offer.
CTG – You also might see the abbreviation “CTG” for “Contingent” in a property listing. This status means that the property is on the market until the seller learns that buyer has either waived or satisfied a contingency.
Advantages of bump clauses for sellers
Many real estate experts describe a bump clause as a kind of security blanket for home sellers. The main advantage of a bump clause is that it allows a seller to continue listing the home throughout the contingency period. The seller may get a cash offer or one without any contingencies.
However, in a cooling housing market, a better bid may not materialize. So, a bump clause protects the seller from losing out on a perfectly good offer.
Advantages of bump clauses for buyers
Most home buyers cannot secure financing for a second home prior to selling their current one. But waiting to shop for a new home until your current one sells can be awkward at best. The bump clause is a good solution in a cool seller’s market.
Also, a bump clause may help convince a seller with an unrealistic home listing price to accept a reasonable offer.
Are there any downsides to bump clauses?
Sellers with bump clauses should be careful about jumping into a second “better” offer. After all, bigger isn’t always better. Ensure that the second buyer has good credit and mortgage pre-approval, or else you could be bumping a solid buyer for a less-qualified one.
Another potential problem is that some qualified buyers will stay away from contracts with bump clauses. They may prefer not to take the risk of getting bumped when their current home is about to sell.
It’s always a good idea to evaluate your local real estate market, weighing the pros and cons carefully before including a bump clause.
3 Things Landlords Should Do As The Eviction Moratorium Comes To An End
The national eviction moratorium is set to end this month.
Are you ready? Because when it does, courts will be flooded with evictions.
And if you know anything about bureaucracy, you know that clogged courts mean evictions will take much longer to process. Pending evictions will be backlogged. New evictions will be delayed as well.
We could be talking years, guys.
There will be billions of dollars' worth in back rent owed to landlords. It's a no-brainer to say this will impact investors. You have to decide whether to charge the full back rent immediately, offer payment plans, or forgive all or a portion.
Last September, the Center for Disease Control (CDC) issued the Eviction Moratorium, halting residential evictions in response to the coronavirus pandemic. Texas and other states have already stopped enforcing it, but the moratorium takes effect nationwide June 30.
Things Landlords Should Do As the Moratorium Comes To An End
Ensure your tenants are aware that all back rent will become due at the end of the moratorium.
Set a plan in place for what will happen at the end of the moratorium. Get legal help and prep any evictions filings that may be needed upon the end of the moratorium. See the section below for more information.
Prepare to have the paperwork ready for any evictions and be working with local counsel to start the process immediately.
Making A Plan
It's so important to make sure the right legal structure is in place now. The Royal Legal Solutions team can help you with this process. Take our quiz to get started!
How Are Canadians Taxed If They Invest Or Do Business in The United States?
A growing number of Canadians are getting into the U.S. real estate investment game.
According to the National Association of Realtors, Canadian buyers spent $9.5 billion on U.S. residential property purchases during the 12-month period between April 2019 and March 2020. This means that Canada only trails China in the worldwide rankings of foreign investments in U.S. real estate by country.
As more and more Canadians look to acquire U.S. properties, investors must keep in mind the tax implications of purchasing real estate in one country while living in another.
In this article, we’ll explain the ins and outs of how Canadians are taxed if they invest or do business in the States and how you can avoid double taxation.
If You’re Canadian, Don’t Use A U.S. LLC
We usually recommend that our clients in the States use a Limited Liability Company (LLC) to manage their real estate investments. Not only do LLCs protect investors from personal liability, but they also offer tax advantages compared to a corporation, allowing owners to avoid double taxation on their business’ profits.
Under U.S. law, corporations are taxed on their profits, and then employees and shareholders are taxed personally on the income they receive from the business. This means that every dollar the business makes is taxed twice. With LLCs, the business is not taxed separately. Instead, all of the business’s profits are reported as individual income of the LLC’s owners. This is known as pass-through or flow-through taxation.
Unfortunately, both single and multi-member U.S. LLCs are recognized as foreign corporations under Canadian tax law. So, if a Canadian invests through a U.S. LLC, the LLC distributions would be considered foreign income that is not subject to a Canadian dividend tax credit or a foreign tax credit. Rather, LLC income will be subjected to double taxation, eliminating the benefits of pass-through taxation that make LLCs ideal for investors in the states.
U.S. LLLPs And LLPs Are No Longer The Go-To
For this reason, Canadian investors had traditionally relied on U.S. limited liability limited partnerships (LLLPs) and U.S. limited liability partnerships (LLPs) when investing in the States. Historically, these structures had been viewed as partnerships for Canadian tax purposes and therefore allowed investors to avoid double taxation.
However, in 2016, the Canada Revenue Agency (CRA) announced that going forward, U.S. LLLPs and LLPs would be classified as corporations rather than partnerships. This may mean double taxation for Canadian investors who manage their U.S. investments through LLLPs or LLPs.
Limited Partnerships Are The Way To Go
Now that LLLPs and LLPs are treated as corporations, the ideal structure for Canadian investors is a U.S. Limited Partnership (LP) structure. Similar to how LLCs work for American investors, LP income is not taxed at the corporate level; it’s passed through and reported on its owners’ personal income tax returns.
Plus, LPs offer Canadian limited partners comparable personal liability protections to LLCs without the double taxation that comes with investing in a U.S. LLC. It’s a win-win!
Avoiding Double Taxation
As you can see, intercountry taxation issues can be messy and complicated. In order to enjoy the tax advantages available through U.S. LPs, Canadians must ensure that the required documentation is drafted and filed correctly. Mistakes could result in substantial tax penalties, forfeiting your liability protections, or even losing your right to do business in the U.S.
For this reason, Canadians who are thinking about purchasing properties in the States should consult with a U.S.-based business attorney with experience in real estate investments before making any purchases. A U.S. lawyer can help you minimize your taxes and maximize your profits.
Have you heard about the real estate Gold Rush that's about to happen?
If not, let me fill you in. Even though the COVID-19 pandemic created a global economic recession, real estate values have skyrocketed. In fact, between September 2019 and September 2020, it’s estimated that property owners gained $1 trillion of equity in their homes due to the increased demand and low supply of available housing.
People Have Been Saving—Now They're Ready to Act
Not everyone spent their stimulus money. Look at all of the economic data and you'll see the savings rates are up. Part of the Gold Rush will come from money hitting the market from all of these pent-up savings.
As Americans start to emerge from their COVID-19 hibernations, they are ready to spend the money they’ve saved during the pandemic. Stimulus checks and higher wages are also contributing to the desire to spend and start getting life back to normal. This means that people who were thinking about buying a house before the pandemic have decided to take the plunge, which means more demand and higher prices.
Price Spikes Are Coming
The pandemic led to a sharp increase in remote work, with many high-paid employees working from home for the first time. As people started spending more time at home, many started to desire more space. Many of the benefits of living in an urban environment (such as proximity to restaurants and cultural venues) became moot during COVID closures. Families swarmed the suburbs for the extra square footage, driving the housing demand in these areas even higher.
As COVID vaccines roll out, people are going back to work. Daily life is looking a little more like it used to. Once people start to see this they will start to feel more secure.
Security means they're going to start spending money. When that happens it's going to cause asset prices to spike. Count on it.
Fill out my quick quiz so I can help you on your path to financial freedom. Someone on my advisory team will contact you to find out what you want to achieve and how we can help you get to that next step in building your own Freedom Temple.
Home Values Will See Massive Increases
I'm calling this a "Real Estate Gold Rush" because you can take on a ton of debt right now to finance a single-family home or other property. The value of your investment will increase dramatically once the money starts to flood into the market. You'll get the appreciation and all of the debt will be easy to pay off because (thanks to inflation) you can pay off your debt with cheaper dollars.
In fact, housing prices are already shooting up. Between November 2019 and November 2020, housing prices rose 9.5%. The average home value at the end of 2019 was $245K; by 2021, that number had risen to $266K. That’s a lot of extra Ks in a very short time, and prices will continue to rise as demand increases.
Rents Are Going Up
As the housing market becomes more competitive, prospective homebuyers may choose to rent instead. Given the overall housing shortage across the country, as the demand for rental properties increases, market rents will also rise.
Since people are getting back to work and the economy is revving up, rents are going to get higher. You can leverage a bank loan to finance a property, you get all the appreciation AND you're practically guaranteed more rental income in the near future.
GOLD RUSH! This is the time to buy as many rental properties as you can.
This Is a Gold Rush, Not a Real Estate Bubble
Let me guess. You have heard this unprecedented rise in prices called a "real estate bubble," right? In reality, it's absolutely not a bubble. It's a new reality—a new baseline—the new normal.
Don't believe me? The professional investor communities at the highest level are leveraging all of their assets to the tilt to buy as many assets as they possibly can because they know the Gold Rush is going to keep going at this rate or an accelerated rate for at least the next year or two years.
Right now most real estate investors are wondering "What should I do to get there as soon as possible?" Now is the time to buy, but if you’re unsure of what steps you should take, consulting with a real estate investment attorney should be your first step.
Partnering with an experienced professional can help you ensure that you don’t miss out on the 2021 Real Estate Gold Rush.
Diversifying Your Real Estate Investments: How Important Is It?
Any experienced investor knows that diversifying real estate investments is key to long-term success.
Many real estate investors get started with single-family homes (SFH) because the market is more accessible than commercial real estate or multi-family properties. This is a natural first step, but it shouldn’t be the last.
Expanding your portfolio to include different asset types lowers your overall risk.
Not only should you buy different assets, but also spread those investments out across different markets. Any number of factors could wipe out home or real estate values in an area -- and you want to guard against that volatility as much as you possibly can.
However, diversifying beyond single-family homes will not guarantee profits -- nor will it fully ensure you won’t have losses. But for high-net-worth investors, it’s definitely the best route to take.
In this article, we explain why.
The Benefits of Investing in Single-Family Homes (SFHs)
First, there are a variety of benefits to investing in single-family homes versus multi-family homes and other properties:
Lower cost
Easy financing
Easy to sell (even during the current COVID-19 pandemic, demand for single family homes is rising)
Higher appreciation
Better tenants (Many SFH renters are families who want to stay in one place and take better care of the property)
All in all, these points fall under the same general category: Easier accessibility. It’s simply easier to get started with a SFH than any other real estate asset type. That’s why so many real estate investors begin with SFHs.
As with any investing approach, it’s smart to start small and work your way to bigger properties. Buying one SFH is less daunting for new real estate investors than buying a multi-family property. After all, taking care of one tenant (or one family) is much easier than taking care of two or more.
Most Royal Legal Solutions clients initially invest in SFHs and eventually branch out into industrial real estate, multi-family housing, retail, medical, and self-storage. Why? Because they begin to realize that all of their eggs shouldn’t be in one basket.
Different assets have different risk factors -- and sometimes, in real estate, different properties are complementary. If the demand for SFHs collapses and property values plummet across the nation, then the slack has to be picked up by apartment and multi-family properties (because people have to live somewhere, after all).
In addition to diversifying across asset types, it’s just as important to diversify across markets.
Locations, Locations, Locations: Don’t Get Tied Down in One Area
There are advantages to having your investment property near where you live. If anything goes wrong—say, your tenant gets locked out of the building or the power goes out—you can be there to offer hands-on assistance.
But spreading out your investments across different real estate markets is also important.
Concentrating your holdings in a particular city or area makes your entire portfolio subject to the fluctuations of local supply and demand. Even in the best areas, there are a number of factors that could seriously hurt real estate market values:
A natural disaster (hurricane, flood, earthquake, etc) destroys homes and buildings. (Even if you have insurance, entire communities don’t easily bounce back).
A major business/employer shuts down or relocates.
Crime waves hit the area.
The school system takes a nose-dive.
Mismanagement of local government funds leads to major infrastructure issues (poorly maintained roads, bridges, etc).
Even if you own a variety of real estate asset types in a single location, you still aren’t as diversified as you could be. If you lived and invested in New Orleans in 2005, it didn’t matter if you owned a single-family home, a condo, a four-plex, a self-storage facility, and a corner convenience store—Hurricane Katrina would’ve dealt a massive blow to your portfolio (unless you were amply insured and looking to cash out).
Experienced real estate investors avoid over-concentrating in one particular asset class or location. If, instead, your assets were spread out across the entire continental United States, your portfolio wouldn’t have been affected quite as much.
High-net-worth investors know that a real estate portfolio with a range of asset types, spread out across different locations, puts them in a better position to withstand economic downturns and events like the COVID-19 pandemic and natural disasters.
Why Different Asset Types are Key to Diversifying Your Investment Portfolio
A multifamily apartment community with 300 units in the Southeast
A self-storage facility in the Midwest
A debt-free multifamily property in Texas
Kay says this hypothetical investor “has diversified her portfolio by both asset type and geography.”
The hypothetical investor has also avoided highly cyclical and volatile markets, like senior housing and buildings involved in oil and gas production.
Conclusion: Diversifying Your Real Estate Investments
When it comes to real estate investing, it’s easiest to get started with a single-family home. The cost is lower, the financing options are plentiful, and the tenants typically care more about general upkeep than a multi-family or apartment building. Naturally, that’s where many investors start.
However, as time goes on, it’s smart to diversify across different asset types. That includes:
Multi-family buildings
Self-storage facilities
Distribution centers
Convenience stores
Medical centers
Not only is it a good idea to invest in different asset types, it’s also a good idea to spread those investments out across different markets. A number of factors could wipe out real estate values in any given market, and they aren’t always within your control (nor are all of them easily insured against).
Avoid cyclical, highly volatile asset classes, including senior housing and long-term senior care facilities, hotels, and real estate used in the production of oil and gas.
Focus on diversifying your portfolio by buying different assets in different markets. Don’t get too caught up in solely buyings single-family homes in one market. Remember: the demand could disappear in just a few short years.
Renting To Tenants With Dogs: What Landlords Need To Know About Liability
We’ve all heard of horror stories about the dog owner who had to go to court because his/her dog bit a child at the park or snapped at the pizza delivery guy.
These cases can often elicit strong emotions. Dog lovers can empathize with the dog owner, whose otherwise gentle furry friend is maligned as a dangerous threat.
However, anyone who's seen an obviously untrained dog run wild as the irresponsible owner stands idly by can emphasize with the victim.
As a landlord, you may consider yourself the uninvolved bystander when a biting incident occurs. However, this is not always the case.
In this article, we’ll review your responsibilities as a landlord when it comes to renting to tenants with dogs. Our four legged friends can come with some unexpected liability issues, so read on.
One of the most important things to keep in mind is that landlord liability is rare when it comes to incidents involving a tenant’s dog. You can read more about dog bite liability here. There are only two scenarios in which a landlord can be held accountable.
The first scenario is when a landlord has previous knowledge of a dangerous dog and also has the power to remove that dog. Both conditions should be met in order for the landlord to be held accountable. For instance, David is the new landlord of a building where the old owner, according to a one year lease agreement, allowed one tenant to own a dog. David knows of this dog’s history of biting both guest and other tenants. In this case, David wouldn’t be liable if a biting incident occurred because the dog’s owner had a prior agreement with the previous landlord.
Although David met the condition of knowing about the dangerous dog, he didn’t have the power to remove the dog. In this case, it’s still wise and responsible for David to manage the situation. He can attempt to remove the dog through eviction, request the dog be kept indoors or erect a fence to prevent further incidents.
Previous Knowledge of a Dangerous Dog
Knowledge of a dangerous dog isn’t as cut and dry as it seems. For instance, Ron who is the landlord of a property with a dog who barks and growls at everyone who passes by may have an intuition that the dog could be dangerous. The entire building and neighborhood may be irritated with this dog’s constant barking and mean demeanor. However, this doesn’t mean Ron has actual previous knowledge of the dog being a danger to others. The key word here is “actual knowledge.”
Actual knowledge means Ron knows of a past attack, such as a biting incident or threat made by the dog. Since determining what constitutes a threat can vary greatly depending on how individuals interpret a dog’s actions, it’s important to study past cases. Both Colorado and New York had cases where landlords were found liable for attacks because they ignored overwhelming evidence of potential danger by a dog. In the Colorado case, overwhelming evidence included a previous threat towards the landlord’s own grandchild.
Harboring a Dangerous Dog Can Lead to Liability
The second scenario in which a landlord can be held liable for an incident involving a tenant’s dog is if the landlord also harbored or carried out control over the dog beyond simply just renting out property to the dog’s owner. A good rule of thumb to remember here is that if a landlord in any way manages or cares for a dog, he/she will hold the same accountability as the dog’s owner.
Caring for the dog can include bathing, walking or feeding the dog. In a 2004 Wisconsin case, the courts ruled a landlord not liable for an attack involving his tenant’s dog. The dog was kept in an area adjacent to both the tenant’s and landlord’s dwellings. However, the landlord was not found to “harbor” the dog since he didn’t manage or otherwise care for the dog. He simply allowed the dog in the wooded area adjacent his residence.
Liability for Dog Attacks Off the Rental Property
Landlord liability for incidents that occur outside the landlord’s property can be as equally confusing and require a good asset protection lawyer. Based on past cases, landlords can be held liable for attacks that happen off property. Thus, if you know that a tenant’s dog poses a threat, don’t let it roam around freely and excuse it as the owner’s liability. A court might not agree and instead deem you as the landlord liable. Speak to the tenant about safeguarding his/her pet.
Rental Property Liability Protection
As you can see, determining liability when it comes to incidents involving a tenant’s dog can be complicated. In general, it’s rare for courts to deem landlords liable. However, this doesn’t mean that landlords should take their chances. Rental property liability protection may not be the most exciting aspect of real estate investing, but it is a requirement.
While we can’t do a background check on every dog on your property, we can help you come up with a liability protection plan that can safeguard you against animal attack lawsuits and other often overlooked liabilities. Contact our experienced legal professionals today.
What Assets Are Protected in Bankruptcy?
If you’ve been hit by financial hardship, filing for bankruptcy can offer you a way out of crippling debt. Bankruptcy is a court proceeding that can allow businesses or individuals freedom from their debts while also providing creditors an opportunity for repayment.
However, before you make this move, it’s essential for you to understand how a bankruptcy will affect your assets. This article will offer information on what assets are protected in a bankruptcy and how bankruptcy exemptions work.
Chapter 7 vs. Chapter 13
The first important decision in filing for personal bankruptcy is whether to file under Chapter 7 or Chapter 13. This choice will play a significant role in what assets you are able to keep.
Chapter 7. Sometimes called a “straight bankruptcy,” Chapter 7 is the most common type of bankruptcy proceeding. Under Chapter 7, qualifying individuals, partnerships, LLCs, or corporations can eliminate most of their unsecured debts (and some secured debts) through liquidation. When you liquidate assets, you make cash available to pay your creditors.
When you file for Chapter 7 bankruptcy, creditors are no longer able to garnish your wages, harass you with phone calls, or initiate lawsuits against you. However, Chapter 7 exemptions typically apply only to your legal residence, not to any property you own as an investment.
Chapter 13. Under Chapter 13, you can keep all your property, including your investment property, but you must pay your creditors a portion of what you owe according to a reorganized three- to five-year repayment plan.
The amount you must pay certain creditors under Chapter 13 depends on how much property you can exempt. Here’s are some examples of how it works:
You must repay your creditors at least the value of your investment property. (This rule is intended to ensure creditors receive at least as much out of a Chapter 13 case as they would under Chapter 7.)
You can avoid foreclosure by rolling a few missed payments on your investment property into your Chapter 13 repayment plan and pay it back over three to five years.
You can request that the judge lower the amount you owe on certain types of investment real estate to its current value. However, the downside of this strategy, called a “cramdown,” is that you will have to pay back the entire new loan amount during the new three- to five-year repayment plan.
What Assets Qualify For Bankruptcy Exemptions?
The purpose of bankruptcy is not to strip you of everything you own. The courts understand that if you lose everything, the legal proceeding is at best counter-productive. There are both state and federal laws to protect some of your property from creditors even if you don’t file for bankruptcy.
However, you must claim your exemptions when filing your bankruptcy petition in order for them to be protected. And, as we have explained, the court handles exemptions differently depending on whether you file a Chapter 7 or a Chapter 13 petition.
Some states require you to use their list of state exemptions. Others allow you the option of choosing either its exemptions or the federal system’s set of exemptions. You cannot combine the two sets. The state laws you qualify to use depend on where you have lived over the past two years.
Bankruptcy law views property under the lens of necessity. Property that you can keep (exempt property) generally includes items that are deemed necessary for living and working purposes. Property that you have to give up (non-exempt) includes items that fall outside what the court deems the petitioner requires for living and working.
Under Chapter 7, exemptions typically apply only to your residence, not to any property you own as an investment. Investment real estate, including rental property, is generally not exempt.
Here are some typical examples of exempt property:
Vehicles (up to a specific value)
Clothing (that is reasonably necessary)
Household goods and furnishings (that are reasonably necessary)
Household appliances
Jewelry (up to a specific value)
Pensions
A portion of home equity
Tools necessary for work (up to a specific value)
A portion of unpaid earned wages
Public benefits, including Social Security, public assistance, and unemployment funds accumulated in a bank account)
Any personal injury damages
Here is a list of property that typically is not exempt:
Cash, bank accounts, stocks, bonds, and other investments
Cars, trucks, or boats not needed for everyday transportation
A second home or vacation home
Expensive musical instruments (unless the debtor is a professional musician)
Collections of art, jewelry, stamps, coins, and other valuable items
Family heirlooms
Expensive show dogs or racehorses (now you know why we used a photo of a horse with this article!)
Filing for bankruptcy is never an easy decision since it comes with long-term credit and financial consequences. If you own real estate investments, the decision is even more challenging.
However, many investors are facing unique challenges these days. If you think filing for bankruptcy might be the right decision for you, it’s wise to take the time to consider all the ramifications and consult a trusted legal and financial professional.
What Are Workout Agreements In Real Estate Investing?
Declining property values and the travel and business shut-downs during the pandemic have played havoc with the balance sheets of many real estate investors.
When faced with red ink, some individuals opt to liquidate their assets, while others prefer to negotiate with their creditors. One way to negotiate a debt obligation is with a workout agreement.
A workout agreement (also called a settlement agreement) is a contract made between you and a creditor that allows you to “work out” or renegotiate the terms of a loan. A real estate workout is not a repayment of a real estate secured loan nor a resolution achieved by way of a foreclosure. Instead, it is a negotiated settlement that establishes a new agreement between the two parties.
This article will explain the benefits of a workout agreement and what you need to know before entering into one.
Who needs a real estate workout agreement?
The idea behind a workout agreement is that it should be mutually beneficial to both parties. A borrower who is in default avoids foreclosure, and a lender gains a greater chance of recouping the loan principal and interest without having to foreclose. The lender also avoids the expenses of any debt recovery efforts.
Not every lender will agree to a workout agreement, and those who do can vary widely in the terms they accept. Typical workout agreements involve extending the terms of the loan or rescheduling the payments.
The right solution depends on the following factors:
type of property (built or under construction; income-producing or not)
type of loan (short-term, long-term, or construction)
liquidation value of the property as compared to the unpaid loan balance
amount of income (if any) generated by the property
long-term prospects for the property
financial status of the borrower
Types of real estate workout agreements
Workout agreements can be used for any type of loan, with the exception of government-backed student loans. Here are some of the different types of real estate workout agreements.
Modification – Changing the terms of an existing mortgage (usually temporarily).
Deed change – Granting the deed to the creditor instead of a foreclosure
“Friendly” foreclosure – Selling the property back to the debtor (or another party) with a clean title after foreclosure.
Short sale –Selling the property to a third party in exchange for debt forgiveness.
Short refinance – Refinancing the property for a loan amount less than the original amount.
Repayment plan – Making a down-payment on the balance and promising to pay the balance over time.
Repurchase after foreclosure – Buying back the property after foreclosure.
Forbearance –Discontinuing legal action in exchange for the borrower’s promise to take action (such as listing the property with a real estate agent).
Conversion – Changing an amortizing loan to an interest-only loan
Preparing for a workout agreement
Both the borrower and the lender should carefully consider the terms of the agreement before signing a new loan document. Here are some factors to consider:
Notification – The borrower should give the lender as much advance notice as possible of an inability to meet debt obligations. Most of the time, lenders are more likely to agree to a workout agreement if they have been notified of a possible default on the loan. Giving advance notice shows that the borrower is someone the lender can trust.
Honesty – A lender is not obligated to amend the terms of a loan, so the borrower helps their case by being as flexible as possible in accepting terms set by the lender. However, it is in the lender’s best interest to help the borrower as much as possible.
Tax implications – Although a workout agreement won’t damage a borrower’s credit score as much as a foreclosure, it will have a negative impact. Also, the IRS views any loan reduction or loan cancellation as taxable income. That means the borrower could end up owing more taxes for the year the workout agreement is signed.
Due diligence – Both parties must perform due diligence on issues surrounding the troubled loan. A pre-workout agreement is an important step for discussing specific problems with the loan, the goals of a workout agreement, and the terms of the contract.
When a loan is in arrears, it’s a bad situation for both the borrower and the lender. Just as both parties have something to lose in a foreclosure, both have something to gain with a workout agreement. Working together on a mutually beneficial solution beats the alternative every time.
4 Tax Benefits of Real Estate Investing
If you're a real estate investor, it's no secret that taxes are an essential part of your business. But did you know there are actually some tax benefits to owning property? That's right - not only is real estate investing an exciting and profitable way to cultivate wealth, but it can also help you pay less to the IRS.
Do we have your attention yet? Read on to discover four substantial tax benefits you can enjoy if you get into the real estate investing game!
Benefit #1 — You Can Deduct Your Expenses When You Invest In Real Estate
There are many benefits to investing in real estate, but one of the most well-known is the ability to deduct expenses you incur related to your investment properties. The IRS allows individuals to reduce their taxable income by certain expenses when they file their taxes for that year. This means if you own a rental property and have $10,000 worth of deductible expenses during the course of that year, you can use those deductions on your tax return and reduce your taxable income by $10,000!
Examples of some deductible expenses for investment properties include:
In some circumstances, you’ll be able to deduct additional expenses as long as they are related to your investment properties or your investment company, if you own one. Because everyone’s situation is different, it always helps to consult with a lawyer or tax professional before claiming any deductions.
Benefit #2 — You Can Deduct Depreciation When You Invest In Income-Producing Buildings
In addition to deducting expenses related to your real estate ventures, you can also deduct the depreciation in value that the building structures will inevitably suffer over time, as long as it is considered an income-producing property.
The first step in deducting depreciation is to calculate the value of the building itself without including the value of the land. You’ll then divide the value of the structure by its “useful life,” which, according to the IRS, is 27.5 years for residential buildings and 39 years for warehouses and other commercial properties. So, for example, if a commercial office building you own and rent out is worth $1 million, you can deduct 1/39th of the value (about $25k) in depreciation each year.
Generally, you can only use losses caused by depreciation to offset passive income and not your total income. So if you earned $200K in salary and have one investment property that lost $5K due to depreciation, you could not use that loss to reduce your taxable income from your salary. However, if you made $10K from another property, the $5K you lost can be deducted for a total of $5K in passive income.
There are three exceptions to this rule:
If your modified adjusted gross income is less than $100K, you can offset $25K of your non-passive income with depreciation losses.
You can offset active income with depreciation losses the year you sell the property.
If you or your spouse is a real estate professional, you can offset non-passive income with depreciation losses.
Benefit #3 — You Pay Capital Gains Taxes Rather Than Income Taxes When You Sell Real Estate
When you earn money by selling a property for more than you initially paid for it, the profits will be subject to capital gains tax rather than income tax. If you own the property for a year or less, the income will be considered a short-term capital gain, which means it will be taxed based on your income-based tax bracket.
Long-term capital gains are where the tax savings can start pouring in. If you owned the property for over a year before selling it, the profit you make would be considered a long-term capital gain. Long-term capital gains are subject to 0% to 20% taxes, with your rate of taxation being based on your income. This rate is lower than their income tax bracket for most people, which can save you thousands in tax dollars.
The long-term capital gains tax rates are as follows:
0% for taxable incomes less than $80,000.
15% for taxable incomes ranging from $80,000 to $441,450 if you’re single, $496,600 if you’re married filing jointly or a qualifying widow(er), $469,050 if you’re a head of household, or $248,300 if you’re married filing separately.
20% to the extent that your taxable income exceeds the limits set for the 15% capital gain rate based on your filing status.
Benefit #4 — You Can Avoid Social Security and FICA Taxes When You Earn Rental Income
Because the IRS considers earnings from rental properties to be passive income rather than active income, you don’t have to pay social security or FICA taxes on your rental income. If you’re employed, you’ll have to hand over 7.65% of each paycheck to FICA, while your employer also pays 7.65%. If you’re self-employed, it’s even worse — FICA will take a whopping 15.3% of your self-employed active income since you’ll have to pay both the employee’s share and the employer’s part. This is called self-employment tax, and it sucks.
Fortunately, Uncle Sam actually cuts us a break for once and considers rental income to be passive. This means it isn’t subject to payroll or self-employment taxes. Paying less in taxes is always great, but on large real estate deals, avoiding that 15.3% self-employment tax can result in significant savings!
Wrapping Things Up
Investing in real estate is a great way to diversify your income and secure yourself some long-term security. We’ve outlined four substantial tax benefits you can enjoy if you get into the game, but there are many more!
If you want to get started in the real estate investment game, we recommend consulting with a business attorney who specializes in real estate investments to make sure you’re taking advantage of all the tax benefits that you can.
Taxes For An LLC: How the IRS Sees Your Limited Liability Company
If you're a real estate investor, you should be aware of how the tax code and the way you structure your business will affect how much money Uncle Sam takes from your bank account.
For example, the IRS has a lot to say about your Limited Liability Company (LLC) and how taxes for an LLC are handled.
If you don't already have one, it's time to create an LLC. Not only does owning your properties and other investments through an LLC protect you from liability, but it can also save you some serious tax dollars if you make the right elections for your business.
Buckle up! It’s time to learn the basics of how the IRS sees your LLC and what the tax benefits of an LLC are.
What Is An LLC?
An LLC is a business structure that offers its owners limited liability from the business’s debts. That means if you are the owner of an LLC, your personal assets are protected from any debts or obligations incurred by the company. You and your LLC are considered to be separate legal entities.
This type of legal structure is helpful for real estate investors because it's cheaper and easier to create than other entities like a corporation but still offers the all-so-crucial protection from personal liability.
The people or entities that own an LLC are called its “members.” There is no maximum number of members an LLC can have, and most states will allow single-member LLCs, which have only one member, to be formed.
LLC Tax Classifications
For the purposes of taxes, LLCs are considered “pass-through” entities. This means that LLCs do not pay taxes. Instead, the LLC’s profits are reported on its members’ income taxes. However, depending on the number of members in the LLC and the tax elections chosen for the business, the IRS will treat an LLC as a corporation, partnership, or a disregarded entity.
Disregarded Entities
If you own a single-member LLC, the default tax status for your business is called a “disregarded entity,” which means that the IRS ignores your LLC entirely and just considers its profits to be your personal income. This is the same way that the IRS taxes sole proprietorships. When you file your federal income tax return, you will also need to submit a Schedule C form, which details the profit or loss from a sole proprietorship.
Many states also allow LLCs to be treated as a disregarded entity when the LLC is solely owned by a married couple. However, if you form a married-couple LLC in a community property state, it will be taxed like a multi-member LLC, so it’s crucial that you do your homework before making any decisions.
Partnerships
The IRS will automatically tax multi-member LLCs like a partnership, which means that each member will receive a Schedule K-1 and include their portion of the LLC’s profits as taxable income on their personal income taxes. When LLCs are taxed as partnerships, each member must also include a completed Form 1065 for partnership taxation with their tax returns.
Corporations
Although the default tax classification for an LLC is either a disregarded entity or a partnership, members of an LLC may choose to be taxed as a corporation by submitting Form 8832 (Entity Classification Election) to the IRS. For tax purposes, there are two varieties of corporations- S-Corporations and C-Corporations.
Like LLCs, S-Corps are pass-through entities, where corporate income, losses, deductions, and credits are passed through to the business’s shareholders for federal tax purposes. With C-Corps, on the other hand, the business itself is taxed, and then each shareholder is taxed again on their earnings when they pay personal income taxes.
C-Corps are generally not the best choice for an individual real estate investor, but, in some situations, an S-Corp can save you a significant amount of moolah on single-member LLC self-employment tax.
While you must pay yourself a reasonable salary from the LLC’s profits, you can receive any income your business makes on top of your salary as a shareholder distribution instead of in a paycheck. Because the IRS considers distributions to be “passive” income, you don’t have to pay self-employment/ payroll taxes on the money you receive as a shareholder distribution.
However, this move only pays off if your LLC makes enough income to support a reasonable salary for yourself on top of shareholder distributions. Generally, this threshold is around $75K annually for a single-member LLC, but this can vary depending on your particular circumstances.
What Is The Best Tax Classification For My Business?
Unfortunately, this is not a question that any blog or article can answer for you. Not even the all-mighty Google can give you advice on this issue. Because everyone’s circumstances are different, we strongly recommend that you meet with a business attorney or tax professional to discuss the tax classification that will save you the most money.
Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation. TAKE THE TAX DISCOVERY QUIZ
How Does A Reverse Mortgage Work?
Actor Tom Selleck (Magnum, P.I.) is the latest celebrity shilling for them on television.
Maybe you have an older family member or neighbor who has gotten a phone call from a financial institution offering them.
But what are reverse mortgages and how do they work?
If you are a senior homeowner with most of your net worth tied up in your home, these loans can sound pretty appealing. If you're a real estate investor, you may be wondering if you can use a reverse mortgage to your advantage.
In this article, we'll explain what a reverse mortgage is, the pros and cons this cashflow option can offer to some older Americans, and how you can decide if it's right for your financial strategy now or in the future.
WHAT IS A REVERSE MORTGAGE?
A reverse mortgage is a type of federally insured loan available to Americans age 62 and over. It gets its name because it works in the opposite way as a standard home loan.
With a regular mortgage, the bank gives you a lump sum that you pay back with interest over a set period of time.
With a reverse mortgage, the lender makes payments to YOU based on the equity you have built in your home. You have the option of receiving monthly payments, a lump sum, a line of credit, or a combination of the different options.
Over time, the amount you owe in interest and fees on the loan grows while your home equity declines. You retain the title to your home, and the balance isn't due until you or your heirs sell your home.
WHO QUALIFIES FOR A REVERSE MORTGAGE?
Reverse mortgages are only available to a specific set of homeowners. In order to qualify for a reverse mortgage, you must:
be at least 62 years old
own the home outright or have built up a considerable amount of equity in the home
live in the home as your principal residence
not be delinquent on any federal debt
be current on property taxes, insurance, and any homeowners' association fees
pass a credit check
complete counseling session about reverse mortgages from an approved counselor
Reverse mortgage loan values may be influenced by the home's value, how much equity is in the house, and other factors. And older borrowers are eligible for greater total loan amounts because age directly correlates with limits.
WHAT ARE THE ADVANTAGES OF A REVERSE MORTGAGE?
With life expectancy in the U.S. growing closer to 80 years, many Americans are outliving their personal retirement savings. As a result, they may be unprepared for the rising cost of living and the mounting medical expenses that often accompany aging.
Reverse mortgages are ideal for older homeowners who may not have much in the way of savings or investments but who have built up wealth in their homes. In other words, this type of loan allows you to turn an otherwise illiquid asset into a liquid asset without having to move out of your home.
Whether they're living with the results of an investment gone awry or the difficulties of a fixed income, any senior with cash flow issues may want to consider a reverse mortgage.
Here are some of the other attractive features of these home loans.
FLEXIBLE LENDING OPTIONS
This type of loan offers flexible disbursement options, meaning you can borrow only the amount you need. Investors may choose to accept the loan as a single lump sum, in monthly installments, or even as a line of credit. This amount of control the borrower has in this regard is greater than most loans.
If your need is more about your long-term budget, try to put a number on what you need for, say, one year. This amount will help you and anyone helping with your financial planning determine what a conservative loan amount for you might be.
MORE CASH ON HAND
For some cash-strapped retirees, a reverse mortgage allows them to remain in their long-time homes without having to downsize. Some borrowers even use the proceeds of a reverse mortgage to pay off their existing home loan.
You can use the money from your reverse mortgage for any purpose, including:
Paying off other debts
Investing in mortgage notes
Taking a bucket list trip
Investing in assisted living facilities
Acquiring investment property
Starting a charitable trust
We'll discuss below why you'll need to account for reverse mortgages in your estate plan. However, if you just want to live out your golden years comfortably, you can do so and even plan to pay off your mortgage at the same time.
Lock In the Value Of Your Home
If we've learned anything about the economy in recent years, it's that anything can happen. If for whatever reason, the value of your home ends up being less than the amount owed on the reverse mortgage, you are protected. In practical terms, that means, if home prices fall in your area, you or your heirs won't have to worry about paying the balance.
INTEREST LIMITS
The reverse mortgage has an interesting set of rules regarding interest. On the plus side, you're not charged interest while you continue to live in the reverse-mortgaged home as your primary residence. Interest is also capped on the first $100,000 worth of debt.
NO TAX LIABILITY
The IRS considers the funds you receive from a reverse mortgage as a loan advance rather than income. That distinction means the money is not taxed, unlike other retirement income from distributions from a 401(k) or an IRA.
WHAT ARE THE DISADVANTAGES OF REVERSE MORTGAGES?
A reverse mortgage isn't for everyone. There are some risks to this type of loan that you should carefully consider.
Here are some of the potential downsides of taking out a reverse mortgage.
DECEPTIVE OR INFLEXIBLE TERMS
Although we have come a long way since the unscrupulous practices by some lenders in the 1990s and early 2000s, not all reverse mortgage providers are ethical. Some will assume you won't do your due diligence and will take advantage of you.
Carefully vet a financial company before considering a loan, and have someone you trust to read the fine print. This person could be a CPA, financial planner, family member working in the industry, or even another investor you know who's successfully used a reverse mortgage and knows what to look for in a loan agreement.
You're examining the documents for any terms that the sales reps haven't disclosed. Any added terms should serve as red flags that you need to shop around with other lenders.
Also, be on the lookout for inflexibilities. For instance, reverse mortgages are often challenging to refinance. Ask your salesperson about your refinancing options, and then be sure to see how these claims compare with the written agreement. Any time a salesperson's word vastly differs from a written offer, it may be time to walk away.
Do not respond to unsolicited ads for reverse mortgages.
Be wary of anyone claiming that you can own a home with no down payment.
Do not sign any agreement that includes terms that you do not understand.
Do not accept any payment for a house you do not own.
Get advice from a reverse mortgage counselor of your own choosing.
REVERSE MORTGAGES ARE NOT FREE
Some of the unscrupulous ads of the past have promoted reverse mortgages as a means to get free access to your own money. These loans do have the following costs associated with them:
Counseling fee. Before getting the loan, you must participate in a counseling session with a nonprofit housing counseling agency. The typical counseling fee is around $125.
Lender fee. You'll pay an origination fee of either 2% of the first $200,000 of your home's value or $2,500 or (whichever amount is higher) plus 1% of your home's value above $200,000. (There's a cap of $6,000).
Closing costs. You'll need to pay for a home appraisal, home inspection, and title search. In some cases, you may also have charges for a credit check, escrow services, land survey, flood certification, and pest inspection.
Insurance premiums. The Federal Housing Administration (FHA) charges an upfront mortgage insurance premium equal to 2% of your home's value. These loans also have annual mortgage insurance premiums equal to 0.5% of the outstanding loan amount.
You may have the option of rolling some or all of these fees into your loan balance, but, of course, if you choose to do that, you'll receive less money.
YOUR LOAN MAY BECOME YOUR FAMILY'S DEBT
If you fail to make an estate plan or somehow account for a way to pay your debt after your death, your reverse mortgage may be subject to probate. Probate can take time and cost money, and in the meantime, your heirs do not have access to your estate.
If you die with debt, the debt gets passed on, just like your assets and earnings do. You can offset this downside of a reverse mortgage in two ways:
By minimizing your loan to what you're confident you can pay directly from your estate
By updating your estate plan to account for the reverse mortgage
Our suggestion is to take care of this critical detail immediately after seeking the loan. You may pay it off during your lifetime or pre-arrange for your estate to make payments. However, interest is likely to increase if you delay, and your beneficiaries must pay off the debt.
ASSETS ENCUMBERED BY DEBT CAN'T PASS TO HEIRS
Let's say you take out a substantial loan against your home's equity. If you pass away before making payment or fail to update your estate plan, your heirs may be unable to inherit the home until the loan is paid off in full. If you lack the funds in your estate, that could mean one less asset for your heirs.
Also, it's important to remember that a reverse mortgage diminishes the equity you have in your home. By the time the loan needs to be paid off, there may much equity left for your heirs to inherit.
Difficulty SECURING OTHER LOANS
A reverse mortgage is relatively easy to obtain if you meet the qualifications, but it doesn't necessarily "look good" to traditional hard lenders. Some seniors who take out reverse mortgages may find it difficult to secure additional lending elsewhere. This factor can be problematic for investors who rely on good terms to make their deals profitable.
This type of loan also could limit your ability to qualify for other need-based government programs such as Medicaid or Supplemental Security Income (SSI).
SHOULD YOU GET A REVERSE MORTGAGE?
If, after weighing the pros and cons of a reverse mortgage, you're still unsure if it is right for you, here are some factors to consider. A reverse mortgage could be a good option for you if:
Your home is increasing in value. In this case, you may be able to take out a reverse mortgage and still have money left over for your estate.
You plan to live in your home for a long time. The longer you live there, the more the upfront costs associated with the loan are worth it.
You can cover the current cash expenses – including property tax, insurance, and maintenance -- of living in your home.
As with taking on any form of debt, you should take your time deciding on a reverse mortgage. Although it is a relatively easy way to boost your cash flow in the short term, it could put your finances at risk down the road.
Make sure you fully understand the pros and cons of reverse mortgages and enlist the help of professionals to help you make the judgment call. Even a close network of fellow homeowners and savvy borrowers with experience in reverse mortgages can be a valuable source of information.
Learn everything you can about these financial tools, shop smart for a lender, read the written loan terms carefully, and be sure to ask plenty of questions. If a reverse mortgage doesn't feel like it's for you, you can always explore other financial options.
Lawsuits Are A Plague On Small Businesses—Here’s What You Can Do
Small business owners take a lot of risks to be successful. Nothing ventured, nothing gained, right?
But risks can create stress. Dealing with difficult customers, and worrying about employees all contribute to the headaches. Even a self-employed real estate investor who doesn't have "customers" or "employees" has a ton of problems to keep him or her awake at night.
The threat of litigation is another major concern for business owners. About three-quarters of all owners worry about this on a daily basis.
Lawsuits Are The Scourge of the Small Business Community
Over half of all civil lawsuits involve small businesses. A company with $1 million in earnings wastes about $20,000 per year on lawsuits. In sum, small businesses pay $20 million of their own money to settle tort liability claims or satisfy jury awards.
While major corporations have the resources to devote to both the time and costs of lawsuits, as an owner of a small real estate investment business, you do not. Therefore, you must protect your assets and give potential plaintiffs no incentive to sue you.
Insurance Is Not the Answer
Most diligent business owners turn to general liability insurance and similar coverages to protect their assets. While well-intentioned and a necessary step for any company, small business insurance is not enough. That’s because insurance companies are businesses as well. They readily accept your premiums and may even be helpful for minor issues like a slip-and-fall case.
But things turn sour when you file a big claim. You may get dropped and have to go through the hassle of suing the insurance provider to honor your claim. Instead of helping, the insurer will blame you or manufacture exceptions to your policy that void the claim.
Protecting Your Small Business Assets
So you can’t rely on insurance when you face a major lawsuit targeting your real estate assets. Instead, you must rely on another asset protection strategy. This involves two components—anonymity and series LLCs.
Anonymity
The prospect of lucrative settlements or significant jury awards drives lawsuits. In other words, a small real estate investment business must have substantial assets to be worth suing. If you can hide your assets from plaintiff lawyers, you take away their incentive to sue.
The way to hide assets is through anonymous trusts. These own your real estate properties instead of you.
Here’s how they work. You have real estate investments. Each piece of property is owned by an anonymous trust, and the business holding entity is an LLC. This makes it difficult for a plaintiff’s attorney to trace the property back to you. That’s because when the LLC is filed, the anonymous trust is listed as its member.
When the plaintiff’s attorney researches county records to find the owner of your property, they will simply see the trust listed as the owner. However, trusts are private documents not filed with the state or county. Therefore, the lawyer runs into a brick wall.
Series LLCs
This structure is a great way to protect real estate assets. It works like this. Assume you own three properties in a city, located at:
100 North St.
100 South Blvd.
100 East Rd.
You create a parent LLC, called the series LLC. Then you form a separate LLC for each piece of property. For the three properties here, you would have the parent LLC and three subordinate LLCs. One owns the 100 North St. property, another the 100 South Blvd. property, and the third owns the 100 East Rd. asset.
This structure has several advantages. The main one is that if a plaintiff’s lawyer wants to file a lawsuit against you for something that happened at the 100 North St. property, they will face two major hurdles. First, because of the anonymous trust, they will have a hard time pinning down the actual owner. Second, the only asset impacted by the lawsuit is the 100 North St. property. The other two properties, at 100 South Blvd. and 100 East Rd., are untouchable. So are all your other business assets unrelated to these properties.
In addition to making suing difficult and unproductive for plaintiffs’ lawyers, series LLCs have several other advantages:
Low startup costs. Your lawyer can easily and inexpensively set up the parent and subordinate LLCs.
Less complexity. A series LLC, with its multiple LLCs, is a much simpler business structure than a similar setup with a parent corporation and subsidiary corporations. Also, the documentation and requirements are easier for an LLC than a corporation.
Lower sales tax. While rules vary from state to state, you may be able to avoid any rent paid by one LLC to another.
Taxation. In most states, only the parent LLC files a tax return. This simplifies an already complex tax filing.
The Series LLC Experts
The attorneys at Royal Legal Solutions focus on protecting our small business clients’ real estate investments and minimizing taxation. Part of this protection may involve the use of anonymous trusts and series LLCs. With this asset protection strategy, you can stop worrying so much about lawsuits and concentrate your time on real estate investments.
How to Calculate Cash-on-Cash Return (And When To Ignore It)
In this article, we’ll teach you how to calculate cash-on-cash return—and why it’s one of the most important calculations for real estate investors.
Much of the real estate industry, including investors and agents, use this formula (sometimes called the equity dividend rate) as a quick way to analyze an investment’s cash flow.
More specifically, it calculates a percentage value based on how much money you’re making (or going to make) divided by how much money it takes to acquire the property.
We’ll go over what the metric tells you, as well as what it doesn’t tell you. It’s just as important to know when not to use this metric, because you don’t want it to influence you to make a deal that, upon more extensive review, actually isn’t that great. And, the next time a realtor tries to sell you on a property that has a “fantastic” cash-on-cash return, you’ll be better equipped to determine whether or not it’s as good as it sounds.
This should be one tool in a toolbox of other important metrics and formulas that you consider when looking at a deal. It shouldn’t be the only tool.
With that said, let’s get started.
How to Calculate Cash-on-Cash Return
Cash-on-cash is a simple formula: income earned divided by cash invested. It’s a pre-tax figure that takes place over the course of a year.
The easiest way to explain it is probably through an example.
Let’s say you buy a single-family rental property for $300,000. You put $60,000 down and the seller covers closing costs. The property has a tenant inside who’s renting the place for $2550/month. After factoring in all of your expenses (mortgage, maintenance, insurance, etc), you find out the property generates about $300 per month in positive cash flow.
You also need to factor in vacancies and subtract that from the total cash flow. For the purposes of this short example, let’s assume that this property is located in an in-demand area and the tenant has no plans on leaving any time soon. For reference, though, the average vacancy rate is about 6.8%. It’s up to you to know what it is in your market area.
So, to find out the cash-on-cash return, you’d take the income earned, $3600* and divide it by the cash invested, $60,000.
All in all, the formula (or formulas, for each variable) looks like this: Annual Pre-Tax Cash Flow / Total Cash Invested
Annual Pre-Tax Cash Flow = (Gross Rent + Other Income (think parking spaces, pet fees)) - (Expenses + Vacancies + Mortgage Payments)
*It’s a yearly figure. The property generates $300/month, so you multiply $300 by 12 to get $3600.
What Does Cash-on-Cash Return Tell You?
So, what does 6% even mean, then? Is it good or bad? Should you invest or skip out?
Compare Different Investments
Cash-on-cash returns give you a fairly easy way to compare different investments, as long as you know how much income they generate and how much they cost to maintain. For example, let’s say you find another tenant-occupied property that’s selling for $190,000 and generates $205/month in cash flow. On the surface, it doesn’t seem like it would be very easy to compare the two. Your gut might tell you that the less expensive property is the better investment, or your gut might tell you that the property that generates the most income is the best investment.
What’s worse is that, in the real world, there are more than just two properties that look like this (and a lot of them don’t cash flow).
So, let’s calculate the return of the second property. In order to purchase the rental, you put 20% down. In this case, that’s $38,000. After closing costs, you end up paying $42,000.
The result is .058, or 5.8%. That means this property, according to this formula, is a slightly worse investment than our first example.
Play Around with Leverage
But what if you only had to put 10% down? And let’s imagine you get a good deal on private mortgage insurance so it only costs $50/month. Your annual pre-tax cash flow is $155/month or $1,860/year. After closing costs, you spend $23,000 to acquire the property.
So, annual pre-tax cash flow ($1,860) divided by total cash invested ($23,000) gives you 0.08, or 8%. Using leverage, you completely changed the numbers.
This way, you can easily compare different investments -- even if changing one factor might change a lot of factors. Maybe you’re looking at investing in a REIT that’s projected to grow at 10% annually -- you might skip out on the rental property entirely.
What Does Cash-on-Cash Return NOT Tell You?
No Equity
One thing you may have noticed, though, is that in our examples above, the tenant covered 100% of the mortgage payments. This formula ignores the fact that every time you make a mortgage payment you’re building equity. Instead, we’re only looking at how much money you have in your hands at the end of twelve months.
If we go back to our first example, with the tenant paying off a $300k property, the equity alone is desirable for many real estate investors.
No Taxes
Furthermore, taxes can completely throw off a deal. What if the taxes for the $300k property are the same as the taxes for the $190k property? If you’re just looking at this one metric, you’ll completely ignore that important variable.
No Risk Adjustment (Leverage Looks Great)
Finally, what if you could buy a $200k property that generates $1,000 in annual cash flow by only putting 3.5% down (with the seller covering closing costs)? Total cash invested is a whopping $7,000, and your cash-on-cash return is 14.2%.
Buy, buy, buy! Right?
What if you got such a great deal on that property because it’s a waterfront that’s expected to be literally underwater in five years?
This formula makes leverage look fantastic. You might as well go out and scoop up as many rental properties as you can for as little money down as possible—but anyone who has watched some investors’ entire fortunes get wiped away by a downturn or some other unexpected event knows otherwise.
Conclusion
Cash-on-cash return, or equity dividend rate, is pre-tax cash flow divided by total cash invested. It tells you how much money you have in your hands at the end of the year.
It’s an easy way to compare different investments, particularly different rental properties and commercial real estate investments—and even stocks and bonds.
It isn’t perfect, though. The formula ignores equity, doesn’t take taxes into account, and makes leverage look greater than it is.
Make sure that, when you’re using this formula, it isn’t the only formula you’re relying upon.
Selling a Rental Property: 3 Things You Need to Know
Thinking about selling a rental property? There are a few things you should know before you do.
For one, the capital gains tax on a rental property is much steeper than it is on a primary residence.
Also, when it comes to a tenant-occupied property, the process is a little more complicated. Your tenant, after all, still has leasehold rights.
Finally, "as-is" clauses can protect you from a slew of costly lawsuits.
Now that you've gotten the "tldr" version, let's take a deeper dive ...
Capital Gains Tax: What to Expect
When you sell your property for a profit, you owe capital gains tax. The 2020 capital gains tax rates are as follows:
0% for anyone earning $0-$40,000
15% for anyone earning $40,001 to $441,450
20% for anyone earning $441,451 or more
So, most of the time, you’ll end up paying at least 15-20% for capital gains tax. You’ll also have to pay capital gains tax on the amount that you claimed in depreciation over the course of your ownership of the property. If you claimed over $25,000 in depreciation, and you sold the house for $75,000 more than what you bought it for, then you’ll have $100,000 of total taxable capital gains.
If you just want the money, you’re going to have to pay the tax-man. However, if you’re looking to re-invest, there’s a strategy to avoid the capital gains tax.
Invest in Like-Kind Property
One way to get around the tax bill is to immediately re-invest the money into like-kind property, also known as a 1031 exchange. As long as you choose a new property in 45 days and close the sale within 6 months, the IRS allows you to keep the money you made in escrow, deferring capital gains, until you put that money into a new property.
You could do 1031 exchange after 1031 exchange, never having to pay for capital gains, as long as you hold the properties for longer than 2 years to avoid triggering “dealer status,” according to the IRS.
However, if you realize that you don’t want to be a landlord or you’re trying to raise money for another venture, you’re just going to have to pay the taxman.
Incorporate Your Real Estate Investments
Another way to avoid a sizable tax bill (albeit not entirely, of course) is to incorporate. You might have less access to the gains, but the savings on your tax bill will likely make this a desirable option regardless. There are some serious tax benefits to using an LLC structure. You might want to discuss the details with a qualified CPA.
Incorporating also helps you protect your assets from any liability issues, as well as protecting your anonymity.
How to Sell a Rental Property with Tenants Still Living There
What if you’re selling a rental property but there’s still a tenant living on premises?
The easiest option, by far, is to wait for the lease to expire. You might want to check the lease for an early termination clause. That way, if you can prove that you absolutely need to sell, you might be able to break the lease.
Additionally, you could try to incentivize your tenant to move by offering them cash to cover the cost of moving. This is only a good option if you know that your property is going to sell for much more than you bought it for. If you’re cutting it close, you don’t want to cut it even closer by having to pay to get a tenant to move.
And, finally, you could try to find another real estate investor interested in buying a tenant-occupied property. The downside here is that your property is much less marketable. There’s a wider swathe of possible buyers for single-family homes, but a much narrower market for rentals.
As-Is Clauses Can Protect You From Costly Lawsuits
What is an as-is clause? An as-is clause is a condition clause: the buyer is purchasing the property “as-is.”
It typically states that “the buyer accepts the item for sale in its presently existing condition without modification or repair.” Without it, the buyer is relying upon the seller’s representation of the property. In some cases, that gives the buyer solid footing for a lawsuit.
Now, that doesn’t mean that the seller can engage in any knowingly misleading behavior, or attempt to hide a defect in the property, but it does provide additional coverage in case there are any disagreements. Sometimes there are issues with the property that the seller doesn’t even know about, but that won’t stop some buyers from filing a lawsuit.
To avoid the worst-case scenario, include an “as-is clause” in the sales contract when you’re selling your rental property.
Conclusion: What To Know When Selling A Rental Property
When it comes to selling a rental property, there are three things you need to know:
1) The capital gains tax for rental properties is not the same as for primary residences, and it can take a serious chunk out of your potential profits. You might be able to avoid capital gains tax (or minimize it) in one of two ways. First, you could do a 1031 exchange. Next, you could incorporate to see if you can take advantage of certain tax benefits.
2) Selling a property with tenants still there is not an easy task.
3) When you do sell your property, make sure to include an “as-is clause” to avoid the potential for certain lawsuits. Interested in learning more? Read our article “The Rental Property Asset Protection Checklist.”
When Real Estate Investors Hire Registered Agent Services For Their LLCs
As alluring as owning a real estate investment company may seem, those beautiful profits always come with a few risks.
To minimize those risks, you have to set up a limited liability company (LLC). These corporate structures, paired with the right legal tools, give your business a basic level of personal liability protection, asset protection and tax benefits.
And the logical thing would be to set up an LLC in your home state, right?
Maybe. But what if you happen to live in a state that isn’t friendly to small business?
The quick and easy solution is to form an LLC in another state, one where the tax laws are a little more favorable to what you're wanting to accomplish. This strategy can work brilliantly, and it’s 100 percent legal and even commonplace.
In fact, it’s something we help our clients do every day, every year.
But it comes with a caveat:
To remain on the right side of the law, you are required to name a person (or company) to act as your registered agent. This is the person who is responsible for sending and receiving all of your company’s legal correspondence.
If you have an out-of-state LLC, your registered agent is your point person for business matters in the state where your company is formed. This agent will be legally responsible for maintaining your LLC’s legal and tax documents and for sending and receiving all of your company’s legal correspondence.
A Professional Registered Agent Means You Sleep Easy
Your registered agent serves as your LLC’s “face.” Think of this person as your brand ambassador, but the duties go beyond simply making you look cool on Instagram. Your agent bears the responsibility for your legal and tax documents.
To have the peace of mind of knowing you are meeting the business requirements of the state where you incorporate, you need someone to assist you. Designating a registered agent for your LLC is one thing, but a registered agent service for LLCs will give you this peace of mind.
Can I be my own registered agent?
Some investors wonder if they can also serve as their LL's registered agent. Sure you can! However, you need to know this may be tedious. Will you be able to properly keep track of your LLC's documents?
Unless you’re an attorney or a CPA, you probably don’t want to serve as your LLC's registered agent. Residency can be difficult, even if you’re splitting your time between states. You must be able to perform the registered agent’s role competently throughout the life of your business. For this reason, the vast majority of successful real estate investors do not serve as their own registered agents—and they’re better off for it.
Should I get a registered agent service for my LLC?
Ideally, it is best to have a qualified professional as your registered agent. There are law firms, CPAs and other professionals who can act as registered agent for real estate investors. A qualified legal practitioner will always be aware of changes in the law. He/she has enough knowledge in matters of law.
Every state is different, but here are three common rules of thumb when hiring a registered agent for your LLC.
He/She must be a resident of the state.
He/She must have a physical address in the state.
He/She must operate during normal hours from Monday through Friday.
How Can a Professional registered agent service help?
Remember, to remain within the law, you are required to name a person (or company) to act as your registered agent.
Many real estate investors form an LLC in another state (at Royal Legal Solutions, we recommend the Texas LLC). This strategy can work brilliantly, but to remain within the law, you are required to name a person (or company) to act as your registered agent. As mentioned, this is the person who is responsible for sending and receiving all of your company’s legal correspondence. He or she will be legally responsible for maintaining your LLC’s legal and tax documents.
Registered agent services for LLCs come with a few other perks:
Peace of mind that comes with knowing someone for your LLC registered agent is is handling all legal issues
You get informed about important information and legal changes; your registered agent has everything covered.
Anyone can forget things, but your registered agent service will take note of every deadline and never miss out.
Not designating a registered agent for your LLC is downright reckless. If you get caught, you can expect a legal backlash that may include anything from fines to exclusion from the court system, which will make it very difficult (and illegal) to run your business. Some states may even pursue criminal charges.
Knowing this, would you really risk prison time to save the $45 to $95 it’ll cost you to hire a registered agent service for your LLC? This tax-deductible fee should be regarded more as a small investment in asset protection than a shrewd cost-cutting opportunity.
A professional agent can help you focus your efforts where they belong: on your business.
Forecasting Rental Cash Flow Returns The Right Way
One of the best ways to build wealth is with rental properties. And one of the first things new real estate investors need to learn about is how to calculate rental property cash flow. Running a profitable investing business depends on it.
In fact, I can spot a new investor a mile away. These guys think cash flow is simply “income after expenses.”
They'll say something like "My mortgage is $1,500 per month and the rent is $1,100, so I'm going to be making $400 every month.”
Sadly, this investor is about to lose money. There are a lot of unforeseen expenses they aren’t thinking about.
Let’s take a closer look.
What is Cash Flow, Exactly?
Cash flow is used to figure out just how much income rental real estate such as apartments, duplexes, or commercial buildings can generate. A property can have either positive cash flow or negative cash flow. Positive cash flow, in case you haven’t guessed, comes with more income than expenses. That’s what we want.
Boosting the cash flow of a property could make your business sustainable in the long term. You want a strong return on investment (ROI), but is that the same thing? Not really: Cash flow measures how much cash an investment property will actually generate, whereas ROI measures total value over time.
Ok. So why do so many investors get the cash flow forecasts for their properties wrong?
4 Factors That Make Up The Flow
Long-term expenses make up the true cash flow return, and these expenses differ based on the property type. They aren’t the same every week and every month and every year. That’s why it’s important that you can calculate the average.
To calculate what it will cost your company to maintain a specific property, you need an accurate, long-term record of what has been spent on repairs, vacancy rates, property management services, and property insurance.
Repairs. In one month you may not have any repair costs. Does that mean your repair costs over three years will be zero? Of course not. You have to budget for those inevitable nuisances like broken circuit breakers or crappy old toilets.
Don't go "low flow" with your "cash flow."
Vacancy Rates. What’s the worst thing about a great tenant? They can’t live there forever, that’s what! When they vacate your rental, you need to make some changes to keep it attractive for new tenants. It may take time for you to market the property for prospective new renters. This process includes making repairs, screening tenants, and getting them signed. For a normal market, your vacancy rate can sit at 8 percent.
Property Management. Even if you claim to be a jack of all trades, managing your property all by yourself may be difficult. Budget for property management. Property managers charge for screening and signing a lease agreement with new tenants. However, you should pay yourself if you insist on managing your property yourself. Saving money is an admirable goal, but remember—this job is a lot harder than looks.
Property Insurance. Connect with an insurance company to rates for properties in your market. There are all kinds of ways to insure your rental units; for example, "rent default insurance” is used to protect against late rent. If your tenant stops, insurance pays for it. That’s a great example of optional insurance that will affect your cash flow forecast.
Using the “50 Percent Rule.” The “50 Percent Rule” says that landlords should expect operating expenses to be 50 percent of gross income. This rule can help you figure out how profitable your rental property will be. NOTE: Mortgage or loan payments are not part of these expenses; they come out of the other half. (See how you can get in trouble by not estimating your costs up front?)
Get Organized!
Learn how to accurately forecast both your expenses and your revenue before you get into the rentals game and you'll save yourself a lot of headaches. The best way to monitor cash flow is to prepare a cash flow report.
With this report, you are able to see the cash you received and cash paid out at the end of every month. Tracking on a weekly or daily basis may be a good idea depending on the size of your portfolio (assuming you have a knack for spreadsheets!). If you’re buying a property, try to get this information—in as much detail as possible—from the previous owner.
In fact, if they CAN’T provide it, that’s a red flag.
Proper cash flow forecasting matters for every rental property investor. You should know how to measure the rate of return for your property. Investing in properties with positive cash flow is the key to your success as an investor.
How The Qualified Personal Residence Trust (QPRT) Shields Your Home From Estate Taxes
A Qualified Personal Residence Trust (QPRT) is a specific type of irrevocable trust that allows you to remove your primary residence or another personal home from your taxable estate. While creating can be a QPRT complicated process, doing so lets you avoid estate taxes and reduce the amount of gift taxes you have to pay.
And guess what? When the feds take less, your heirs get to keep more of the wealth you’ve worked your whole life to accumulate.
For estates of several million dollars or more, a QPRT can allow you to keep the value of the home out of part of your estate that is subject to estate taxes. Although the QPRT is not used as often as other estate planning tools, it can save you a significant amount in taxes.
In order to create a QPRT, you have to transfer the title to your home to a trust. However, as part of the terms of the trust, you’ll include a provision that allows you to continue to live in the home for a specific period of time before passing to your heirs. The time in which you can continue to live in the home is known as a qualified term interest or a retained income period. So, while you won’t own your home anymore, you can still live there until this period expires.
How Does a QPRT Avoid Estate Taxes?
While there is technically no limit on how long you can keep your interest in the home, if you pass away before the end of your qualified term interest, the value of the home will be included in your taxable estate. So, you should always make sure the term chosen makes sense given your age and future life expectancy.
If you survive until the interest expires, the title to the home will pass to your heirs and will not be included as part of your estate upon your death. After your heirs inherit the property, you can pay rent, relocate, or figure out other living arrangements. Any rent payments you make to continue living in the home will further reduce the value of your taxable estate.
QPRTs and Gift Taxes
Although a QPRT can help you avoid estate taxes, Uncle Sam isn’t going to let you get off scot-free: the transfer of your home is subject to gift taxes. However, since you’re retaining a qualified term interest, the property’s gift value will be lower than its fair market value, which means you’ll owe less in gift taxes.
This deduction can translate to significant savings, particularly when younger homeowners set up QPRTs with extensive qualified term interests. The longer the retained income period, the lower the gift value of the home, the lower your tax bill from the IRS. Just remember that you have to outlive the qualified term interest for your heirs to reap the rewards of your estate planning. An experienced estate planning professional can help you decide on the most strategic term for your situation.
Another way a QPRT saves you money is by avoiding gift taxes on appreciation. When you transfer your home to the trust, you pay the gift tax on its current value, even though the title won’t pass to your heirs for years to come. That means that any increase in your home’s value during your qualified term interest won’t be subject to the gift tax, which can also save you a substantial chunk of change.
Why You Should Talk To A Pro
While the QPRT can be a great estate planning tool for shielding your home from estate taxes, it’s not the right solution for everyone. It’s important to keep in mind that specific requirements must be met to qualify for the tax savings. There is also a complicated set of special QPRT/grantor trust valuation rules for estate and gift tax purposes, which are outlined in Internal Revenue Code §2702 and related regulations.
As with most estate planning strategies, you should consult with an attorney who specializes in this type of law to determine if a QPRT is right for your situation. An estate planning lawyer who knows their stuff can help you decide on the best methods for saving your money from the IRS, determine if you can qualify for a QPRT and make sure it’s set up correctly if you choose to take that path.
Real Estate Sponsorships: How To Get Started
Anyone who is interested in commercial real estate investing should have at least a rudimentary understanding of how the real estate sponsorship process works. Before you invest in a development project, it’s vital that you properly vet the sponsor to make sure they have the necessary experience to lead a successful commercial real estate project.
Fortunately for the rookie real estate investor, we’ve put together a crash course on getting started with real estate sponsorships. While we can’t make you an expert with one article, we can explain the basics and give you some valuable tips on how to decide if a sponsorship opportunity is a good investment.
What Is A Real Estate Sponsor?
In commercial real estate jargon, the term “sponsor” refers to the person or business that essentially runs the show on a commercial real estate project.
A sponsor manages every aspect of the transaction from conception through completion, which usually includes taking on the following responsibilities:
Finding the deal
Negotiating the terms of the acquisition
Preparing investor marketing materials
Aggregating capital and financing
Conducting due diligence
Signing loan documents
Handling all ongoing operations
Overseeing renovations, leasing and maintenance
Managing project finances
General and Limited Partners
The sponsor is often referred to as the syndicator or the General Partner (GP), while the other equity investors are called Limited Partners or LPs. LPs usually have a more hands-off role in the management of the real estate project, so you might also hear an LP referred to as a “passive” or “silent” partner.
Because of their limited involvement, silent partners also have limited liability. This means that if the project goes belly up, LPs can’t lose more than the amount they’ve invested.
As a novice real estate investor, you might think you have to take whatever sponsorship you can get. However, nothing could be further from the truth. Savvy investors know they can’t afford to throw away their hard-earned money on failed projects, and getting a return on your investments is particularly crucial if you’re just getting started in the commercial real estate game. Since some sponsors have much stronger qualifications than others, you need to find a sponsor you can trust.
Here are a few things you should consider when evaluating a real estate sponsor for a potential investment:
The Sponsor’s Successes
You should evaluate the sponsor’s prior success— not just with real estate developments in general, but in the particular location and asset class of the potential investment. For example, you probably don’t want to partner with a sponsor who has only worked on apartment buildings on a retail property development project. Instead, look for a sponsor with experience working with the type of asset involved in the investment project.
The Sponsor’s Failures
The sponsor’s track record when it comes to failures is just as important— if not more important— than their successes. While most experienced sponsors will have a few black marks on their record, it’s essential that you understand what went wrong and how the sponsor handled it. It’s a major red flag if a sponsor has a history of keeping silent partners in the dark when things get tricky.
The Proposed Payout Structure
Obviously, getting paid is the reason you’re looking for a sponsorship in the first place. With that in mind, make sure you review the payout structure and understand how you and the sponsor will make money from the investment. Be wary of structures that are overly favorable to the sponsor, and make sure the proposed payout aligns with everyone’s interests.
Project Management And Investment Strategy
Make sure to thoroughly evaluate the systems and processes the sponsor uses to make sure the project is appropriately managed. Look for a sponsor that has a coherent and consistent plan in place. The sponsor should also be able to confidently articulate a clear investment strategy for the project and explain how it will make income.
Don’t Settle For A Bad Sponsor
Just because you’re a new real estate investor doesn’t mean you have to settle for a sub-par sponsor. Investing in a commercial real estate development project with a sponsor you can’t trust to manage it well will not only cost you a lot of headaches, but more likely than not, it will also cost you cold hard cash.
Whether you’re a brand new investor or you’ve been doing this for years, you should never forget that you always have the power to walk away from a bad sponsor. If you can exercise the patience and wisdom to wait for the right deal, you’ll end up with a much better investment opportunity.
7 Real Estate Investment Strategies
One of my favorite things about real estate investing is that there are so many different ways you can do it.
As one of the most accessible types of investments for the average Joe (or Jolene), real estate investing offers a variety of exciting strategies to explore. If you take the time to learn about your options, you can find a strategy that suits your financial situation, the level of risk you can tolerate and the amount of time you have to spend nurturing your investments.
To help you along on your real estate investing journey, we’ve put together a list of seven common real estate investment strategies that everyday people can use to make real money from real estate. This list is just a starting point, but it will give you some background information on some of the most popular types of real estate investments.
Strategy #1 — Buy And Hold
The buy-and-hold strategy is one of the most common types of real estate investing, and it is also one of the simplest. Essentially, you purchase a property and rent it out for a period of time. Depending on the deal you got at purchase, you can make income from the rent, or you can simply use the rent to cover the mortgage and let the property appreciate. There are many variations on the buy-and-hold method to explore, but the key to successfully investing using this strategy is to understand property valuation and find good deals.
Strategy #2 — Invest In Rental Properties
Investing in rental properties can make you money in the same ways that the buy-and-hold strategy does— income from rent and appreciation in the value of the property. While dealing with tenants may not be everyone’s cup of tea, investing in apartment complexes or other multi-unit rental properties can generate substantial cash flow, particularly with market rental prices rising in many cities across the country.
Strategy #3 — Flip Houses
House flipping is one of the most well-known real estate investment strategies, and it continues to grow in popularity thanks to the handful of TV shows that spotlight house flippers. For those of you who haven’t seen these shows, flipping houses involves buying a property at a discount, remodeling, repairing and improving it and selling it for a profit.
While there is a fair amount of risk associated with flipping houses, especially for new investors who don’t have the best grasp of the costs associated with repairs, many flippers learn from their mistakes and develop the skills they need to make substantial profits in a short period of time.
Strategy #4 — Real Estate Investment Trusts
Real Estate Investment Trusts (REITs) are companies that own, manage or finance real estate investment projects. REITs are modeled after mutual funds, where numerous investors pool their capital to make an investment. This model allows individual investors to profit off real estate without having to purchase, operate or fully finance a single property.
Because of the way they are structured, REITs are much more focused on earnings from generated income, and most REIT investors make very little money from appreciation. Some REITs will have a required minimum investment for you to get involved. Still, as long as you have the funds needed to satisfy this requirement, REITs are a straightforward and hands-off method of investing in real estate projects that would otherwise be cost-prohibitive for the average investor.
Strategy #5 — Pre-Construction Real Estate Investment
Pre-construction real estate investment is one of the riskiest real estate investment strategies, but it also can earn you serious, serious profits. (Think millions of bucks!) Pre-construction investing is just what it sounds like: before ground is broken on a development project, you purchase an “option” on the property. This allows you to buy real estate at a fraction of the value of a fully-developed property.
Pre-construction investments are the most successful in high-demand areas that often experience housing shortages. In these locations, prices can rise quickly, and new units can even be sold before they are completed. In some neighborhoods, your investment can appreciate in value before the project is finished. However, when things don’t work out, you could be facing substantial losses.
Strategy #6 — Wholesaling Real Estate
The process of wholesaling real estate is relatively straightforward: you find an excellent real estate deal, write a contract to acquire the property and sell the contract to another buyer for a fee. In other words, you’re not purchasing real estate; you’re a deal-hunting middleman. The fee you receive, called an assignment fee, usually ranges from $500 to $5,000 per property, but larger deals can come with an even higher payout.
Some wholesalers will sell contracts to retail buyers, but most of the wholesaling market is other real estate investors, commonly house flippers. These types of investors are usually cash buyers, which means the wholesaler can get paid their assignment fee within days or weeks. Wholesaling is an excellent strategy for new investors who don’t have a lot of capital but want to get started in the real estate investment world. Since you never have to actually purchase the property or pay to repair and manage it, you can get started in wholesaling with very little financial investment.
Strategy #7 — Crowdfunding Real Estate
Crowdfunding real estate is a fairly recent development in the real estate investing world. While crowdfunding, in general, is well-known due to platforms such as GoFundMe, the concept of crowdfunding real estate is just starting to grow in popularity.
Crowdfunding can allow investors who don’t have the capital to purchase property on their own to pool their resources to invest in real estate. If you can't raise the funds you need through traditional methods, you can try crowdfunding your purchase through a real estate crowdfunding website, social media or another online platform.
For what it's worth, Investopedia lists its top crowdfunded real estate investing platforms as follows:
These seven strategies are only a few of the many ways you can make money investing in real estate. There really is a niche for everyone, so if the seven strategies discussed in this article aren’t what you’re looking for, don’t give up. There are plenty of other options out there!
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