Strategies to Lower Capital Gains Taxes

Capital gains taxes are the bane of investors everywhere.

There's no wonder they stoke a little resentment among real estate investors: Uncle Sam likely had little to do with the profitability of your property. And with upcoming changes to the way capital gains are taxed, there's more uncertainty than ever. But you’ve still got to pay up.

And of course you should, but not without knowing a few of the ways you can lower your capital gains taxes or make their payments more manageable. Here are some of our top practical tips you can really use to handle cap gains taxes.

Can You Get Rid of Capital Gains Taxes?

Not entirely, at least not usually. But that doesn’t mean that they cannot be managed. What we can absolutely do is look at creative ways to lower our tax rates, ways to pay our taxes that will work out to our advantage, and any circumstance that could cut us a break. So that’s exactly what we intend to do.

The following are a selection of the tactics investors like you can use to make capital gains taxes more manageable. You may find one, several, or even a completely alternative method works best for you. Think of these techniques like tools in an arsenal that you can get out at will. In some cases you may find you’re able to get your costs so low as to be almost negligible. At the very least, you should be able to cushion the blow. Let’s talk about deferment first, then move on to some methods for reducing your overall costs.

REN 8 | Solo 401(k)

How To Defer Your Capital Gains Taxes

Since we can’t simply abandon our capital gains tax obligations, we have to approach the problem with a bit more nuance and creativity. While we can’t make the taxes disappear, we can absolutely put off paying them by employing various tactics. Let’s talk about some fan favorite techniques for deferring these payments.

The Clever 1031 Tax Maneuver: Drop and Swap

You can also use a 1031 Exchange to delay the problem of capital gains taxes. Now, if you go about using this method, you’ll want to bone up on the requirements for 1031 exchanges. Essentially, the idea is that as long as you’re willing to sell your property and use the proceeds to purchase a similar one, you can defer paying the taxes for as long as you have the second property.

Where you go from there is totally up to you. In theory, you can drop, swap, and swap again until the end of time if you can meet the basic 1031 rules. You usually have 180 days from closing to reinvest, for instance. Properties must also meet certain legal requirements. Learn more about using the 1031 exchange for real estate success now.

Pour Your Capital Gains into Opportunity Zone Investments

The U.S. designated certain economically depressed areas ‘Opportunity Zones’ in 2017. To attract investors like us, capital gains reinvested into opportunity zones get a few preferential perks:

Some creative and hands-off investors take advantage of funds known as Opportunity Zone Funds, which are usually collections of properties pre-selected by a firm, fund, or financial institution. This method may appeal to someone wishing to take advantage of these tax opportunities but lacking the time or ability to do thorough due diligence alone. It’s also a way to test the waters on this strategy if you’re considering incorporating it into your long term plan.

Strategies to Lower Capital Gains Taxes

While we can defer capital gains with many tools, there are ways to also simply lower the number. But you’re definitely not going to like all of them. Yet you may find lower capital gains taxes to be a silver lining in a less-than-desirable financial situation or as an unexpected result of your circumstances.

Here are some ways to reduce the overall tax burden easily.

Sell When Your Income is Relatively Low

If you’ve had a “low income year,” that’s actually a good thing for your capital gains tax rate. After all, it’s directly linked to your tax bracket and therefore your income. If you’ve had a year where you’ve only earned passively or simply not earned for any reason, this can be an ideal time to sell your property. You’ll pay less in taxes than if you sell when you’re in a better position overall.

Know What Expenses to Track For Primary Residences

If you’re planning to sell your home, you may be able to deduct certain expenses from your cap gains taxable income. Chief among these are any costs you pay to improve or renovate the property and any expenses associated with the sale of the property. Such expenses might include fees paid for professionals, appraisals, inspections, and of course, any upgrade--no matter how small--is worth documenting. As long as you document the expense, you can later use it to your advantage.

Let Your Asset Protection Entity Ride to the Rescue

We’ve talked before about the critical role your business entity plays in your asset protection plan And while asset protection is a completely valid reason to set up these types of business structures, you can also enjoy tax benefits on top of your peace of mind.

Which tax benefits, of course, will depend on the type of entity, whether you’ve made certain choices regarding how the entity is taxed during formation, and of course, the rules we all have to play by to keep our friends at the IRS nice and happy. But let’s take a look at an example, shall we?

Edmund Green is a Texas-based investor who uses a Traditional LLC shell company and asset holding company to defend his real estate assets and other valuables. He’d heard through the grapevine that asset protection entities could be used for equity stripping. Never one to just take anyone’s word for matters affecting his finances, Edmund decided to bounce the idea off of his CPA and was able to save himself far more than if he’d continued operating as a sole proprietor. With the help of his attorney, he has established his asset protection plan and it essentially hums along in the background while he lives his life and runs his business. The last time we talked to Edmund, he didn’t have any complaints. And his strategies can work for others, too. That said, it’s crucial that you ensure your asset protection plan is tailored to your personal needs and goals.

If you’d like to follow Edmund’s example, you easily can. Take a look at the structures you’re considering using for asset protection and do a bit of very basic research. More importantly, make notes of any questions you come up with as you read and learn for your own experts.

Bottom Line: Capital Gains Can Be Managed, and Often With the Same Tools Protecting Your Assets

When you establish entities, trusts, and other asset protection structures, you almost always have a tax opportunity. Do all investors take advantage of all of their opportunities? Certainly not. But some will go further for you than others. However you choose to handle your capital gains taxes, simply being aware of the opportunities at your disposal puts you a cut ahead of the clueless investor waiting to be blindsided by the problem. As usual, proactivity will place you in a better position than procrastination.

Is a 1031 Exchange Investment Strategy Right For Me?

1031 Exchanges offer real estate investors tax benefits and access to unique deals. Making the decision about whether using this strategy is the right move for you can be difficult. It’s important to understand the 1031 exchange process and consider the value of its benefits in your own situation. We’ve broken down some of the points we think are most important for investors to know below.

Are 1031 Exchange Solutions Tax-Free?

Not exactly. 1031 exchanges are tax-deferred. Suppose you swap out your current duplex for another. When you sell the second duplex, you will pay taxes on it. Of course, there may be ways to minimize your tax burden, and you should absolutely run questions on the subject by your CPA. But the point is, yes, if you keep within the rules, you can accomplish a tax-free transition of property. But the piper will eventually be paid.

Types of 1031 Exchange

All 1031 exchanges must conform to some basic rules we’ve covered before. Properties must be investment or business-owned (not personal residences), and the property acquired must be of greater or equal net market value than the one sold. Finding deals that will fit these terms can be challenging, but in many cases, worth it.

Traditionally exchanges must be executed inside of 24 hours. These are known as simultaneous exchanges. The logistical difficulties of finding and coordinating such deals mean that many investors opt for deferred exchanges, which offer more leeway on the timeline.

When Should I Do a 1031 Exchange?

If you're new to real estate, you may not yet know about the capital gains tax. This tax kicks in any time you sell a property at a profit, and avoiding it is one of the primary benefits of the 1031 exchange strategy.

If you’re in the position of having a valuable property for sale, congratulations. But the downside to this good fortune is the tax burden. A 1031 will offer relief here, at least for the time the new property is owned. But just know that if you use this strategy, it isn’t a permanent way around the capital gains tax. What the 1031 Exchange will offer investors selling at a high profit level is time. The use of the exchange means your gains will be deferred until the acquired property is sold

At that point, you may use other perfectly legal tactics to diminish capital gains taxes or even exchange the property again. For the creative investor, especially with an equally innovative attorney by their side, 1031 exchanges may play a role in solving a broad range of real estate “problems.” But to really get the most out of them, you’ll need some appropriate professional guidance.

Get an Expert’s Opinion Before Jumping Into a 1031 Exchange Deal

Are you considering making your first, or even yet another routine 1031 exchange deal? It’s never a bad idea to have a lawyer take a look. The time to do that is before signing anything. Never fear. Our skilled real estate legal team can assist you with any kind of real estate deal. If you’re considering a 1031 exchange and need to protect the asset--or any other type of real property investment--don’t hesitate to schedule a consultation with one of our experts.

Why Millennials Aren't Buying Houses

Blaming millennials for everything has become a national pastime. One problem with cultural assumptions about entire demographics of people is these assumptions can water down or outright mislead our understanding of the real issues we're facing.

Like it or not, millennials’ habits will dictate real estate trends over the coming years. As real estate investors, we should be mindful of broader trends in the market and population. 

Millennials Are Record Low Home BuyersMillennials Set Record For Lowest Home Ownership

Folks born between 1981 and 1996 aren’t buying homes at the rate of generations before them, but not necessarily by choice. The real estate deck is stacked against first-time homeowners in a manner unprecedented in collective memory. America has become a much more difficult place to secure an affordable mortgage. “First homes” (single family homes, even multis under $250,000) make up less of the market than ever before.

The reasons come directly back to us investors. After the 2008 crash, we scooped up hot deals on these kinds of properties, enjoying a single-family budget property free-for-all. By now, most of us have upgraded these homes, up-sold them, or at least maintained them to be competitive. But that means the homes are worth more than appreciation alone would account for. Yet it’s the same asset we got cheap after the crash. Fast forward to the present day, and our prospective 18-35-year-old tenants? They’re the generation with the most people in crisis, struggling to transition from renters to buyers

Yesteryear’s Stats Don’t Apply: What REIs Need to Know About Millennials

Assuming people under 40 are still the  “home-buying age group” is foolish and inaccurate. Ask any 18-year-old how likely they are to own a home in the near future. Seriously. Any college student, even. Those who aren’t laughing uncontrollably may conservatively guess a decade. 

Millennials face a different world: student loans and debt are all but certain for those beginning 4-year college. This generation’s unique challenges include:

Millennials are also more likely to move in with their parents than any other generation. Many in their 20s move home under financial duress, while others lack that option and live with housing insecurity.

Taking these problems seriously shows how such factors are genuine barriers to home ownership. We haven’t even delved into this generation’s many cultural crises. Everything from later marriage age to the ongoing opioid crisis that continues to rage through mid-2019 can affect how this population rents and buys.

Why These Trends Matter for Real Estate Investors

Most investors count millennials among their tenants or desired demographic. Single-family investors and those starter home owners can stand to benefit in a seller’s market. Or, they can stand to lose if they command a rent that’s not practical for the area. 

If you own such an asset in an unfamiliar market, learning the employment situation can give you tons of insight into prospective tenants.  If you have a property worth under $250,000, you’re sitting on a high-demand property. Buyers are competing, and investors can play fair while profiting.

Millennials sometimes turn to REI to “escape” debt or employment barriers. All real estate investors could benefit from understanding the struggles their millennial tenants, partners, and fellow investors face. 

Real Estate Investing Fraud: Schemes to Know About 

Investing in real estate can be both a satisfying and lucrative way of building your portfolio. However, the complexity of buying and owning property can make you vulnerable to some unscrupulous characters.

From corrupt builders to phony appraisers, the real estate market can be tricky to navigate for investors of all experience levels. Unlike the typical tax scam or trustee fraud, real estate investment schemes can lure in even the savviest investor with promises of making a lot of money quickly with low risk. Many fraudsters are so good at what they do that it takes a careful eye to see them for what they really are.

Here are 13 real estate investing scams you should know about.

Buy and Bail

In this scam, the homeowner is up-to-date on their mortgage payments, but the home’s value has dropped below the amount owed on the loan. The homeowner applies for a mortgage on a similar home with a much lower price. After falsely saying that the first home will be rented out and securing the new loan, the homeowner allows the first home to go into foreclosure.

Builder Bailout

The builder artificially boosts the purchase price of newly constructed properties by offering false down payment assistance or by using straw buyers or shell affiliates. This scheme creates the impression that the builder is able to successfully sell units while also leaving the lender with loan exposure that exceeds the actual value of the property.

Chunking

Also known as a Ponzi scheme, this scam occurs when a third party convinces an investor to buy the property or a group of properties at artificially inflated prices with the promise of high returns and low risks. The third party, who is often an owner of the property, acts as the unsuspecting investor's agent.

joker cardDouble Selling

In this scheme, an unethical loan officer copies a borrower’s loan application and sends it to several different lenders, asking that they fund the loan. All of the closings are scheduled within a few days of each other, and the various lenders have competing loans against the same property.

Fake Loan

A mortgage broker uses a real person’s identity to create a phony loan application. The loan is funded, and the “seller” receives payment for a property that does not exist.

Flipping

This fraud occurs when two parties buy and sell the same property to one another and then obtain fraudulent appraisals as a way to inflate the property value.

Phony Appraisal

There are a few ways to accomplish this scheme. One way is to offer an appraiser a bribe to artificially inflate a property’s appraised value. A related scam involves a real estate investor providing the appraiser with falsified vacancy rates, rental rates, or expenses for a property.

Skimming

Here’s the scenario for a skimming scam. An investor uses a loan that covers 80% to 90% of a home’s purchase price. Then the investor pays a 10% down payment and rents the properties but does not make mortgage payments.

Modification and Refinance Fraud

A borrower understates income or gives false primary residence information in order to persuade the lender to accept loan terms that benefit the borrower.

Mortgage Servicing Fraud

This scheme involves a mortgage servicing company diverting principal, interest, or escrow funds from the underlying lender and retaining the funds for its own use.

Phantom Sale

A scammer files a false deed on an abandoned property and then transfers the property to another scammer. That scammer applies for a mortgage loan and pockets the loan proceeds.

Reverse Mortgage Fraud

In this scheme, a fraudulent person obtains title to a property and then deeds it to a fake individual who qualifies for a reverse mortgage. Then the fraudster gets the lump sum payment option on the reverse mortgage.

Short Sale Fraud

Short sale fraud can be conducted by either the homeowner, the lending institution, or an outside party. Generally, short sale fraud involves withholding facts or using false information to defraud the lender or induce a homeowner to sell a property for less than the mortgage debt owed.

How To Fight Real Estate Investing Fraud

How can you avoid these and other real estate investment frauds? Here are some key steps to stay safe.

Solid real estate investments take time and careful consideration. Before you make an investment, do your due diligence and consult someone you trust and who you know has your best interests in mind.

Image by Alexas_Fotos from Pixabay

11 Productivity Tips For Real Estate Investors

Real estate investors wear a lot of hats. The ones who do well must figure out how to manage their time. Making smarter investment decisions and seeing higher returns depend on it.

As a real estate investor, your success depends on how you use your time. You need to make every minute count. These productivity tips will help you stay focused on your goals and push your business in the right direction.

#1 Prioritize Tasks for the Next Day

Prioritizing tasks for the next day will ensure that you are prepared. Separate the next day's tasks into two categories. First category will be tasks that you will be handling on your own. The other category is tasks that you  assign to others. When you prioritize, you leave nothing to chance.

Prioritize tasks that must be done first due to a deadline or any other reason.

#2 Make a To-Do List

Each day should have more than 24 hours so you can finish everything, right? Until that happens, time management is the key to making sure that you don’t miss out on any task that needs to be completed on a given day. 

Prepare a to-do list that features all the tasks you face. This will help you stay on top of almost everything related to your projects.

#3 Learn the Art of Delegation 

If you are a hardcore DIYer, you need to change a little to be more productive. It is figuratively impossible for you to complete all the work you have on a given day all by yourself. Learning to delegate can help you get more done in less time. 

Real estate investors are all over the map. In a given day, you may have to visit a new property. Prepare a listing on your own. Or plan a kitchen renovation. There will be other routine tasks to take care of as well. You can delegate many of these tasks one you find reliable people whom you can trust to do them correctly. And of course, that's the hard part.

#4 Take a Break 

Too many real estate investors believe that taking a break is a sin. Keeping your work hours crammed could negatively impact both your physical and mental health. Taking breaks every now and then will help you stay refreshed and enthusiastic throughout the day. So take a quick walk or grab a snack. Or you can take a power nap to recharge yourself. 

#5 Stop Multitasking 

Contrary to popular opinion, multitasking doesn’t improve your productivity. When you are handling more than one task at a time, it's hard to keep your focus. By not giving an important task the attention it requires, you may complete it with substandard quality.

Real estate investors should rarely multitask. When you try to perform more tasks than your body and mind can handle, you end up creating a mess. Don’t let anything distract you while you are doing tasks that are harder for you or that you don’t find too interesting.

Multitasking will do more harm to your productivity than good. So stop multitasking and start focusing on one task at a time to improve your productivity.

#6 Ditch The Meetings 

Even self-employed real estate investors have to meet clients, financial advisors and attorneys on a regular basis.  However, if you can reduce the number of meetings, you will be rewarded with improved productivity. A lot of meetings can be handled with an email exchange or a quick phone call. Get back the time you need to focus on tasks that can actually help you get more out of your investments. 

#7 Limit Social Media Time 

Social media is a big distraction. But you don’t need to stay off it completely because it is often the best place to get industry updates (speaking of which, check out our Tax, Legal, & Asset Protection Secrets For Real Estate Investors mastermind group if you aren't already a member).

What you need to do is be smart about the time you spend on social media. You can access your social media accounts during breaks or whenever you feel stuck on something. It is a great way to get your mind off something that you cannot get through and then start afresh. 

#8 Turn Big Projects Into Small Milestones 

The biggest reason you need to break a big project into smaller milestones is not to feel overwhelmed. By doing this, you will be better positioned to manage the smaller tasks or milestones, which will help you complete the entire project on time. 

This will also allow you to delegate a few of the smaller tasks to other people in your team, which will help take some of the burdens off your shoulders.

#9 Make Time for Networking

Networking gives you the opportunity to interact and communicate with others in your industry as well as those that could be your potential clients. So when you build a network, you establish professional associations with people and set the stage for business possibilities.

So it is very important for every real estate investor to make some time for networking in their daily schedule. Real estate investors thrive on relationships. No wonder networking is given so much importance. 

#10 Leverage Technology to Boost Productivity 

You need to make the most of the time and resources available to make your real estate investing business a success. One way of doing this is to leverage technology. There are tools that can help you do a lot more with your day than you end up doing. For example, using technology can help you avoid contract drafting mistakes in your real estate transactions.

Technology can help you with tracking listings, scheduling tasks, managing expenses, organizing documents, and screening prospects amongst other things. 

#11 Review Your Week on Friday 

Measuring your performance every week can help you improve your performance. Did you achieve the targets that you set at the start of the week? If you didn’t, where did you fall short? On the other hand, if you succeeded in achieving your targets, you will have the entire weekend to celebrate your success.  

Reviewing your week will also help you maintain workplace discipline. And you can figure out how differently you need to approach different tasks so that you don’t fall short going forward.

 

4 Property Investing Tips to Remember

When most people think of investing, stocks, bonds, and mutual funds often come to mind. For most Royal Legal clients (including members of our mastermind group), the investment avenue of choice is real estate.

Investing in property such as rentals, commercial office space and multi-family housing isn't everyone’s cup of tea, though because it can be challenging and risky. It also requires dedication, knowledge, and planning.

There is no shortage of online resources if you want to get your feet wet in this highly competitive industry like this one. Before you start taking notes about the basics of real estate, check out these four property investing tips that increase your chances of success.  

Property Investing: runner at starting lineTip #1: Make a Plan

Investing in real estate is no different than any business. If you intend to be a serious investor, you need a plan. Having a roadmap allows you to see the whole picture and focus on what’s critical instead of being distracted by unavoidable setbacks.

Start with deciding your goals. Are you looking for capital appreciation or yield? The answer will depend on how you view facing challenges. If you’re a risk-taker, you’ll buy properties based solely on their potential for growth and long-term returns. Or you might look at assets that offer rental income for instant profits.

Setting a timeframe for achieving results is another determinant of which investing method you’ll adopt. Deciding what you’ll do will enable you to formulate a specific plan instead of a shoot-and-miss approach.

Be sure to regularly review your strategy so you can take immediate action when needed to stay on course. No matter how well you prepare for the future, you’ll need to be able to deal with curveballs when they come at you.

Your knowledge of the market and keeping abreast with news will help you anticipate most events and make the right decisions.

Tip #2: Location Is All-Important

You’ve heard the saying, “location, location, location." Every real estate investor will tell you that the primary factor in buying landholdings is where they’re situated

Don’t buy based solely because the assets are low-priced. Do your research on the area so you’ll know the reason for its current value and the potential it offers. Not every inexpensive property can be profitable.

You should identify areas where the demand for buildings exceeds its supply. This shortage will ultimately push prices upwards. 

It’ll take due diligence on your part to check the neighborhood and what it offers in terms of return on investment. As part of your assessment, be sure to study the following: 

Tip #3: Get Advice From Property Investment Specialists

Before buying your first investment property, get professional help with your financial affairs. Taxation laws are complex, and you don’t want to get on the wrong side of the IRS and lose money to penalties and fines.

It’ll be beneficial for you to work with an accountant who’s well-versed with real estate when you plan your strategy. The ability to prepare cash flow projections is vital to providing you with valuable and timely fiscal information. With expert advice from a CPA and an attorney specializing in asset protection strategies, you can use legal structures tailored for property investment to save on your tax liability. Your advisors will also counsel you on whether to invest as an individual or corporate entity for risk management reasons.

Tip #4: Have an Exit Strategy

Knowing when to sell is just as important as when to buy. It’s all about timing. 

Be vigilant and continuously watch the market. If you need to cut your losses, do it and move on. There’ll always be other opportunities. Having a plan in mind at the onset makes it less stressful when it comes to disposing of your asset.

Property Investing Can Be Profitable

Any investment is risky, but as long as you exercise due diligence and prepare for the challenges, you can attain your investment in the long run.  Remember: any people have built their real estate empire by following fundamentals. If you do the same, you can be successful too.

 

 

Basics of Land Investing

Are you tired of all the inconveniences that come with real estate investing, like tenants and structural repairs? The landlord life is not for everyone, and it's getting old for you, it might be time to try something new.

Land investing provides a variety of profit opportunities. Whether you choose to invest in farmland or property for development, such as vacant lots and raw land, there is money to be made in land. Whether you want to develop an unoccupied property or purchase agricultural farmland, real property investments can create long-term and dependable revenue streams. 

Basics of Land Investing: overhead shotTips For Investing In Development Property

If you're interested in taking the development route, here are a few tips and tricks to follow when investing in your first tract of raw land.

Location, Location, Location

As a savvy real estate investor, I'm sure you know that it's all about location. Whether you're buying a new rental property, a home for your family, or a vacant lot, location is one of the most substantial contributing factors to a property's investment value. 

While you can usually improve or change the property itself, you're stuck with the neighborhood where it's located. For this reason, you should never forget that you aren't just investing in real property; you are investing in the location as well. When you have found a property you may want to purchase, check with a commercial real estate broker to learn more about the site and surrounding areas.

Zoning Laws

An unavoidable aspect of land development is local zoning laws, limiting the way you can use it. For instance, if you buy a property that's zoned for residential use only, you can't build a strip mall or a factory on it. It's nearly impossible to change the zoning for a tract of land, so you should always make sure the property's zoning corresponds with your development plan before you buy it. 

Environmental Site Assessment

In addition to zoning and the surrounding area's qualities, you should always investigate the land itself by conducting an Environmental Site Assessment (ESA). An ESA consists of four evaluation phases that will confirm whether the land can actually be developed according to your plan.

Utilities And Easements

You'll also need to check with the local utilities about the process for setting up the electric, water, and sewage. If you have to cross someone else's property to access the land, you'll need to obtain an easement before you can start developing the land.

Cost Analysis

While you are probably already familiar with the costs associated with real estate investment, it can be more expensive to get started when purchasing land. First, since banks consider vacant lots to be riskier investments than real estate, you'll likely see higher interest rates than you're used to with traditional mortgages. To save some dough on interest, it helps to put down as much cash as you can. 

Here are a few other back-end expenses to consider: 

farmland agricultural landTips For Investing In Farmland

The American economic system was built on agriculture, and farmland remains an integral part of our economy and cultural heritage today. As one of the least volatile types of real estate, farmland is also a stable and relatively low-risk investment method. 

The primary reason that farmland is such a low-volatility investment is simple: humans need food. As long as we rely on farmers to grow our food, there will be money to be made investing in agricultural land. Additionally, farmland will always retain value because it is a limited resource: there is a finite amount of land suited for agriculture. For this reason, farmland is rising in popularity among real estate investors looking for long-term and steady gains.

Returns from Farmland

Strategic farmland investors can see dependable returns from both the appreciation of the land value and the income made from agricultural activities on the farmland itself. While agricultural land may appreciate more slowly than typical real estate investments, you can realize short-term returns through direct income, either by renting to a farmer or operating the farm yourself.

Tax Advantages

Agricultural properties come with a variety of tax advantages that make them an even more attractive investment. Here are a few ways the tax laws can work in your favor when purchasing farmland:

Funding Options

You don't need to have piles of cash to invest in farmland. Here are a few creative ways to finance an agricultural land purchase if you're not rolling in dough:

Do Your Research

Whether you want to check out development land or farmland, it's essential to do your due diligence before diving in. If you do your research to make smart property choices, land can be an excellent investment and an exciting diversion from standard real estate. 

 

Real Estate Contingency Clause Examples: How Buyers Avoid Getting Burned

Real estate is more than just about selling and buying. It's also about signing contracts that say exactly what you want them to say. You may or may not enjoy doing the "backend" paperwork, but it's just as important as all the other work involved when it comes to buying and selling properties.

Which brings us to contingency clauses. Contingency clauses are some of the most important parts of a real estate purchase contract, and can provide significant protections to buyers of real estate.

Whether you're buying or selling real estate, it's essential that you know how to cover your rear with the correct contract language. To that end, let's look at a few real estate contingency clause examples.

Land Trust with Multiple BeneficiariesReal Estate Contingency Clauses 101

Let's say you want to buy a rental property. A contingency clause often states that your offer to buy property is contingent upon X,Y, & Z. For example, the contingency clause may state, “The buyer’s obligation to purchase the real property is contingent upon the property appraising for a price at or above the contract purchase price.”

Under this contingency, you're relieved from the obligation to buy the property if the you obtain an appraisal that falls below the purchase price. Because contingency clauses provide you with a way to back out of a contract, they can be great tools for real estate investors who make offers on properties.

Interested in learning more? Check out our articles Real Estate Contingencies: A Guide For Buyers and What Is A Bump Clause In Real Estate?

Common Contingency Clause Examples

Here are three contingency clauses to consider in your real estate purchase contract.

Appraised Contingency

An appraisal contingency protects buyers of real estate and is used to guarantee that a property is valued at a specific amount. If the appraisal comes in lower than the amount, the contract can be terminated. Another perk to this contingency is that you'll probably get your earnest money back as well.

Financing Contingency

A financing contingency might say, “Buyer’s obligation to purchase the property is contingent upon buyer obtaining financing to purchase the property on terms acceptable to Buyer in Buyer’s sole opinion.”

Some financing contingency clauses are not well drafted and will provide clauses that say simply, “Buyer’s obligation to purchase the property is contingent upon the buyer obtaining financing.”

A clause such as this can cause problems as the buyer may obtain financing under a high rate and may decide not to purchase the property. However, because the contingency only specified whether financing is obtained or not (and not whether the terms are acceptable to buyer), the clause can be unhelpful to a buyer deciding not to purchase the property.

Some financing clauses are more specific and will say that the financing to be obtained must be at a rate of no more than 7% on a 30-year term. They'll add that if the buyer does not obtain financing at a rate of 7% or lower then the buyer may exercise the contingency and back out of the contract.

Inspection Contingency

An inspection contingency clause might state, “Buyer’s obligation to purchase is contingent upon buyer’s inspection and approval of the condition of the property.”

Another variation states that the buyer may hire a home inspector to inspect the property and that the seller must fix any issues found by the inspector. If the seller does not fix the items specified by the inspector then the buyer may cancel the contract. Inspection clauses help guarantee that the buyer is obtaining a valuable asset and not a money pit.

Details In The Fine Print Of A Contingency Clause

The devil of contingency clauses is in the details, which of course, often come in small print. Due to the nature of contingency clauses, you want to make sure you pay attention to certain key terms and phrases. All it takes is one sentence to either win or lose you a dispute over one of the following issues.

Earnest Money

One thing that's usually vague in real estate purchase contracts when it shouldn't be is what happens to the buyer’s earnest money when the buyer exercises a contingency.

Does the buyer receive a full return of the earnest money? Does the seller keep the earnest money? If the contract is silent and if you as the buyer exercise a contingency, don't bet on getting your money back. It's likely you'd lose even more money!

Make sure your contract clearly states something like, “If buyer exercises any contingency, Buyer shall receive a full return of any earnest money deposit or payment to seller.”

Contingency Deadlines

You don't want to miss one of those!  Most contingency clauses have deadlines well before closing. Those dates being typically somewhere from 2 weeks to 2 months from the date of the contract, depending on the purchase and seller disclosure items and the type of property being purchased.

For example, single family homes will typically have a shorter window as financing and inspection can occur more quickly than would occur under a contract to purchase an apartment building.

Whatever the deadline is, make sure that the deadline is set so that you can complete your contingency tasks. You need to make sure you have enough time to obtain adequate financing commitments, to properly inspect the property, and that you have enough time to review the seller’s disclosure documents.

Setting a two-week deadline is sometimes done. But two weeks is usually not enough time to complete financing commitments, inspection, and due diligence activities. All of which are necessary to determine whether you will or won't purchase a property.

If contingency deadlines are fast approaching and you need more time, then ask the seller for an extension before the deadline arrives. If your seller refuses an extension, point to your contingency and tell them to read it and weep.

Exercise your contingency in writing. Yes, even in the digital age, the pen and paper still go a long way as far as contracts are concerned. If you do exercise a contingency and decide to back out of the purchase of the property, make sure you do it in writing.

Don’t count on telephone calls or even emails (unless the contract permits emails as notice). Make sure that the reason for the contingency and that the date of the contingency are put in writing and are sent to the seller in a method where the date can be tracked.

For example, if your contract requires a contingency to be noticed by fax or hand delivery, don’t rely on an email to your seller or your seller’s agent. That won't invoke the contingency, and you may end up unhappy to say the least.

The Importance of Contingencies for Real Estate Investors

Let's say you're the buyer again. Once the deadline to exercise a contingency has passed, you're obligated to purchase the property and may be forced to buy the property. Or at the least you will lose your entire earnest money deposit.

Contingency clauses are your best defense against a bad deal and should always be used by real estate buyers. Hopefully by now you've realized that your purchase contracts are only as good as the contingency clauses behind them.

If these kind of details make your head spin, don't worry. That's what us real estate attorneys are here for. Schedule your consultation now to never fall victim to the "fine print" again.

Are Real Estate Contracts Binding in the Era of Coronavirus?

It’s been a few months since a worldwide pandemic took hold of this country, leaving a multitude of questions and complicated legal situations in its wake. Whether you are a real estate investor, a home seller, a Realtor, a landlord, a property manager, or a tenant, you likely have questions about the real estate contracts you’re part of right now, in the age of COVID-19.

 

 “I’ve never seen anything like this,” says Jim Goldman, a partner with the firm Miller Barondess in Los Angeles. Goldman, whose practice is focused on litigating complex commercial real estate, financing and professional liability, was referring to the new world of complicated legal issues that have arisen following the worldwide COVID-19 pandemic. He participated in this Q&A to help provide some clarity.

Q: What are the most common issues you’re seeing right now?

 

A: Right now, we’re mainly seeing a lot of landlord/tenant issues, because with rent due, often at the first of the month, that is something pressing that is happening right now. Our commercial tenants started contacting me in large numbers in mid-March, asking what kind of contractual provisions and governmental requirements might relate to mandatory business shutdowns and how they might relate to paying rent or a mortgage.

 [See also: How COVID-19 Affects Foreclosures]

Q: With so many questions from homebuyers and investors in residential real estate regarding deals in progress, are you seeing flexibility in contract deadlines to handle the delays?

 

A: True, there are a lot of delays. For instance, shelter-in-place orders have prevented property inspectors and appraisers from doing their jobs. So, buyers can’t complete their due diligence in the time allotted and lenders may not have what they need to approve financing. It puts closings at a standstill. Not to mention getting documents recorded. We are in uncharted waters right now and kind of at a standstill with extensions of contracts.

 

Q: Buyers who started the process before the outbreak and widespread stay-at-home orders have likely seen their financial situation change, or may feel like they’re now overpaying for their house. Are buyers able to get out of contracts?

 

A: Even though we are in unprecedented times, in general you cannot just walk away from a contract because your situation has changed – even if it was because of an event beyond your control. Unless some sort of provision was written in the contract allowing a cancellation for this type of unforeseen event, you may still be legally obligated – for now. It’s hard to say what will be allowed when this is over, because no one knows how long this pandemic will last, or how any new laws and ordinances will affect everyone’s rights. And since we’ve never had what is close to a nationwide shutdown of the economy, there is no legal precedent for this situation.

 

Q: Does a global or national pandemic not fall under a “Force Majeure” provision for forces beyond your control?

 

A: It depends. Many “Force Majeure” provisions are merely designed to protect one or both parties from being liable for damages as a result of not being able to perform. But there are other legal theories that one party or the other might be able to rely on in not performing or delaying performance.

 

For instance, say the Coronavirus has prevented a builder from receiving shipping materials on time from China, so he or she won’t be able to finish the project on time. The builder might not be entitled to scrap the project, but they might be entitled to extend the time it takes to complete it. 

 

Q: How did the H1N1 Swine Flu epidemic from 10 years ago change contracts and provisions and does that affect this situation?

 

A: Some leasing contracts and insurance policies were re-written with provisions that prevent liability due to pandemics. But the economic fallout from that crisis wasn’t nearly as severe as what we have now, so such provisions don’t necessarily cover the current situation.

 

Q: So what can current homebuyers and investors do to protect themselves? Is now a good time to buy while prices and interest rates are low?

 

A: Honestly, right now I wouldn’t advise buying!  If you absolutely want to put yourself out there, I would say you have to write in good loan contingencies if you need financing, and as long of a due diligence and closing period as you can get.

 

Q: Do you think this pandemic will affect the way future contracts are written?

 

A: Yes. Anyone preparing a contract is going to have to consider the circumstances we have now and who bears the risk. I suspect insurance policies will also be revised to make it clear what is covered or not covered related to a similar outbreak. There’s probably a way for a Rider to cover it, but it’s got to be addressed. Leases and purchase agreements may also include provisions to address pandemic-related issues.

 

Q: Are you seeing a lot of lawsuits filed over these contractual issues?

 

A: Not yet. They will no doubt come, but there’s now there’s too much uncertainty. Also, the courthouses are generally closed except for true emergencies. The only filings we’re doing are for existing cases. For right now we have to see how this all plays out. It’s pretty much wait and see.

Which Housing Markets Are Most Vulnerable To Coronavirus Impact?

A recent analysis of housing markets all over the country has shown that more than half of the 50 housing markets most vulnerable to collapse due to the coronavirus pandemic are centered in the Northeast and Florida. 

The largest northeastern cluster is in New Jersey and includes 14 of their 21 counties, including five in the New York City suburbs, with four surrounding counties in New York state and three in Connecticut. Another 10 were in Florida, but the only west coast area at risk was a single county in California.

A few of their findings:

 

 

These findings correlate with previous predictions for good cash flow markets being largely found in Texas and the Midwest.

ATTOM Data Solutions came to these conclusions after analyzing risk based on the number of foreclosure notices received in Q4 2019, the percentage of homes underwater in Q4 2019 and the percentage of local wages needed to pay the expenses associated with home ownership. Using a sample size of 483 counties who reported the data, they then ranked the counties from lowest to highest in each category and combined those rankings.

“It’s too early to tell how much effect the xoronavirus fallout will have on different housing markets around the country. But the impact is likely to be significant from region to region and county to county,” said Todd Teta, chief product officer with ATTOM Data Solutions. 

“What we’ve done is spotlight areas that appear to be more or less at risk based on several important factors. From that analysis, it looks like the Northeast is more at risk than other areas. As we head into the home buying season, the next few months will reveal how severe the impact will be.”

Diamonds in the Rough: The Keys to Finding Your Ideal Investors

 

In real estate syndication, no decision is ever made in a vacuum. When an investor decides to close on a given property, for example, they are not just choosing to buy that property—they are choosing to buy that property instead of buying one of the many other similar properties that are currently available. All decisions are made, at least to some extent, with opportunity costs front of mind.

 

Deciding to invest or partner in a specific syndication is no different. There is a finite number of investors who hope to work with some sponsor, even if they are not entirely sure who this sponsor might be. When they do make a final decision and direct their finite capital resources towards a specific project, they are simultaneously rejecting many other alternatives.

 

While many people aspire to enter the lucrative syndication market, there are only some investors that are actually in a position to act. Conditions are likely even more competitive now that COVID-19 has affected our economy and has caused many wealthy individuals to become extremely risk-averse with their investments.

 

Knowing that quality investors are scarce, it becomes absolutely crucial for real estate sponsors to continue the search for the proverbial “diamond in the rough.” Without a continuous, data-driven, and targeted campaign, it is quite likely that your firm will end up losing opportunities to the countless alternatives.

 

Generating an Accurate Profile

In order to find the ideal investor, you will first need to begin by generating a detailed understanding of who, exactly, that person might be. What is this person’s current career and financial situation? What motivates them to make an investment? What are their fears, concerns, and challenges? What is this person’s background and where can you effectively communicate with them?

 

Answering these questions about your prospective investor can be challenging because, frankly, you have never actually met them. But generating a detailed profile – your ideal investor avatar – such as this can help you begin shrinking the pool of possibilities and narrow your search to individuals that are authentically qualified. Generating this profile needs to occur during the preliminary portions of your campaign because, ultimately, it will affect every decision you make along the way.

 

The decisions you make when generating a digital marketing campaign aren’t for you—they’re for your potential investors. While it can be very tempting to “fall in love with your business” and center the campaign on your personal tastes, it is important to remember that you are not marketing to yourself, but marketing to others. Every component of the campaign—the articles, the social media content, the e-mails, etc.—needs to be written with your end goal (convincing a targeted party to take a specific action) in mind.

 

Adjusting Your Message

Reading the room is something that anyone can do to improve the ways they communicate. Whether your relationships with prospective investors began online or in-person, you will only have one chance to make a first impression. Trust is one of the most difficult things to build in the syndication industry, which is why it is so crucial to know as much as you can about your immediate audience and speak to them in a specific way. Not only is trust extremely difficult to build, but trust is something that is also easily lost.

 

Projecting your message in a way that makes your firm seem professional, experienced, and trustworthy will help you begin earning the attention of just about any target audience. But from there, your message will need to be adjusted even further. Knowing which changes and tweaks need to be made will involve having a thorough understanding of the audience, along with a thorough understanding of what your business has to offer.

 

You know your target audience is concerned about maintaining revenue flows during a recession. Your messaging should all be crafted with this in mind.

 

You know the audience has a high net-worth but is unfamiliar with the broader syndication market. Again, this is something that your messaging needs to directly reflect.

 

The best way to answer questions from prospect investors is to answer them before they even need to be asked. You are not going to be able to simply attract investors without scrutiny; you are fighting an uphill battle, a race for capital with many other racers. With effective targeting and coordinated messaging, you will be able to remain ahead of these competitors and continue moving forward.

 

Ultimately, there are a finite number of tools that a firm seeking an investor will have at their disposal. Sure, they could also invest in better data or better tech, but the possible paths to success still remain finite. Information is, and will remain, your most powerful tool. To succeed, you must use the information at your disposal, generate an accurate profile, and tailor your campaign to address that specific profile.

 

While there will still be work that needs to be done, these initial steps will remain absolutely crucial.

 

 

Adam Gower Ph.D. is an authority in content marketing and online communications for the real estate industry. He has more than 30 years and $1.5 billion of transactional experience in commercial real estate finance and investment. Over the last five years he has built a digital marketing agency at GowerCrowd.com and advises clients on how to raise capital during good times and bad. To learn how to raise capital from high net worth investors online, watch Dr. Gower’s whiteboard workshop by clicking here.

 

How COVID-19 Affects Foreclosures

COVID-19 rightfully has a lot of homeowners (and real estate investors)nervous about the risk of foreclosure. Though a lender has to wait 180 days to initiate a foreclosure, both the private and business mortgage sectors are wondering what will happen to the economy and timely mortgage payments in the aftermath of this worldwide pandemic.

Foreclosure Auctions

If you’re looking for a steal of a deal on a home, now is the perfect opportunity to mask up and head to the county courthouse. As of this writing, foreclosure auctions are still active in many states if you’re willing to brave a trip to the courthouse. Texas currently has half a dozen homes still listed, so now may be the perfect time to snatch up that 3 bedroom investment property in El Paso you’ve been daydreaming about for an incredible price of $30,000 and minimal bid competition.

Nearly 2,000 foreclosure auctions were cancelled in the past month in Texas, but those will need to be relisted again someday. Keep an eye on foreclosure auction listings in your target investment area and you may just get lucky.

Commercial Loan Relief

In late March, Freddie Mac and Fannie Mae announced a relief plan for owners and renters of multifamily apartment complexes. To reduce the financial burden from the COVID-19 outbreak, they offered 90 days of deferred payments on commercial mortgages financed through the mega-funders, which provided relief to both landlords and tenants. In the wake of that announcement, the federal government also went big.The 'Cares' Act

Three days after Fannie and Freddie’s announcement, the President signed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) into law. Specific to foreclosures, the bill offered up to 180 days of forbearance to any borrower with a “federally backed mortgage loan” who was experiencing financial hardships due to the national emergency. A second forbearance period of an additional 180 days may be requested following the first, regardless of delinquency status.

The bill also included protections against foreclosures, preventing servicers of a federally backed mortgage from initiating of any judicial or non-judicial foreclosure, moving for a foreclosure judgement or order of sale, or executing a foreclosure-related eviction or foreclosure sale for not less than the 60-day period beginning on March 18, 2020.

Evictions & Covid Relief

Borrowers for multifamily properties were also granted a 30-day forbearance on their federally backed multifamily mortgage loans provided they were current on their payments as of February 1, 2020. These property owners who participate are barred from evicting tenants “based solely on non-payment of rent during the forbearance period.” This, combined with the $1,200 stimulus check provided by the federal government, is intended to keep tenants in their homes during this global crisis.

“Renters should not have to worry about being evicted from their home, and property owners should not have to worry about losing their building, due to the coronavirus,” says FHFA Director Mark Calabria. “The multifamily forbearance and eviction suspension offered by the Enterprises should bring peace of mind to millions of families during this uncertain and difficult time.”

 

Pandemic Foreclosures = Opportunity For Real Estate Investors

COVID-19 rightfully has a lot of homeowners (and real estate investors) nervous about the risk of foreclosure. Though a lender has to wait 180 days to initiate a foreclosure, both the private and business mortgage sectors are wondering what will happen to the economy and timely mortgage payments in the aftermath of this worldwide pandemic.

Foreclosure Auctions In A Pandemic

If you’re looking for a steal of a deal on a home, now is the perfect opportunity to mask up and head to the county courthouse. As of this writing, foreclosure auctions are still active in many states if you’re willing to brave a trip to the courthouse.

Texas currently has half a dozen homes still listed, so now may be the perfect time to snatch up that 3 bedroom investment property in Austin you’ve been daydreaming about for an incredible price of $30,000 and minimal bid competition.

Texas canceled nearly 2,000 foreclosure auctions in the past month, but those will need to be relisted again someday. Keep an eye on foreclosure auction listings in your target investment area and you may just get lucky.

Commercial Loan Relief Protects Landlords

In late March, Freddie Mac and Fannie Mae announced a relief plan for owners and renters of multifamily apartment complexes. To reduce the financial burden from the COVID-19 outbreak, they offered 90 days of deferred payments on commercial mortgages financed through the mega-funders, which provided relief to both landlords and tenants. In the wake of that announcement, the federal government also went big.The 'Cares' Act

Three days after Fannie and Freddie’s announcement, the President signed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) into law. Specific to foreclosures, the bill offered up to 180 days of forbearance to any borrower with a “federally backed mortgage loan” who was experiencing financial hardships due to the national emergency. Borrowers may also request a second forbearance period of an additional 180 days, regardless of delinquency status.

The bill also included protections against foreclosures, preventing servicers of a federally backed mortgage from initiating of any judicial or non-judicial foreclosure, moving for a foreclosure judgement or order of sale, or executing a foreclosure-related eviction or foreclosure sale for not less than the 60-day period beginning on March 18, 2020.

Evictions & Forbearance Periods

Borrowers for multifamily properties who were current on their payments as of February 1, 2020 were also granted a 30-day forbearance on their federally backed multifamily mortgage loans. Property owners who participate are barred from evicting tenants “based solely on non-payment of rent during the forbearance period.” This, combined with the $1,200 stimulus check provided by the federal government, is intended to keep tenants in their homes during this global crisis.

“Renters should not have to worry about being evicted from their home, and property owners should not have to worry about losing their building, due to the coronavirus,” says FHFA Director Mark Calabria. “The multifamily forbearance and eviction suspension offered by the Enterprises should bring peace of mind to millions of families during this uncertain and difficult time.”

 

Interested in learning more? Check out our article 3 Things Landlords Should Do As The Eviction Moratorium Comes To An End.

Real Estate Markets & Coronavirus: Construction & Home Buying In a Post-Pandemic World

It’s not an exaggeration to say that nearly everything has changed in the past month due to the coronavirus—and real estate markets are no exception. Almost every single sector of the economy is facing unprecedented challenges, but especially the construction industry.

Starting with supply chain interruptions from China when that country was facing the worst of the pandemic, there have been slowdowns at nearly every turn. Now that the US is dealing with the virus, projects are taking longer and longer to complete as appraisers and inspectors can’t get into homes while families shelter in place there. While this isn’t their fault, many homebuilders feel completely at a loss.

“We’re reacting to news and dealing with it accordingly,” says Joe Fowler, president of the Home Builders Association of Greater Austin. “This is so fluid and things keep changing based on whatever is happening on any given day.”

Ripple Effect Hits US Real Estate Markets

A significant percentage of building materials, estimated at 30% by Richard Branch, chief economist for Dodge Data & Analytics, is exported from China. These exports can be everything from copper and steel to cabinetry and fixtures. With factories in China closed or at reduced capacity in response to the virus, production slowed or even halted entirely. The impact of this was delayed for American homebuilders, but we are finally feeling the effects of this. Toll Brothers, one of the country’s largest homebuilders, recently announced that shortages of lighting fixtures and small appliances will delay the sale of some of their new homes in California. While some builders have been able to find alternative suppliers here at home, it hasn’t been easy.

“In construction, everything comes down to time and money. With the coronavirus, we don’t know how big it’s going to be, how long it will last, and what its full impact is going to be,” says attorney Steve Lesser, a past chairman of the American Bar Association’s Forum on Construction Law. 

Economic Uncertainty Makes Home Buyers Timid

In January of this year, Fannie Mae economists forecasted a stellar 2020 for the housing industry. Thanks to low unemployment, solid wage growth and low mortgage rates, housing starts were predicted to jump from 1% per year to 10% in 2020, which would have made it one of the best years since the last housing boom in 2007. Now, with unemployment at record levels and climbing daily combined with unstable financial markets, buyers and commercial developers have all but disappeared.

Home builders are still building new homes, though sales centers and Realtors with open houses are seeing a marked drop in foot traffic -- likely due to both social distancing and economic insecurity. Similarly, online real estate portals like Zillow and RedFin have seen a significant drop in both web traffic and new listings since the outbreak began in the States.

The National Association of Realtors released a survey that found nearly half of agents agreed that home buying interest had declined due to COVID-19. Home buyers who are still actively seeking to purchase are opting to minimize risk with virtual home tours or having their Realtor give them a video chat walkthrough.

Construction Delays Lead to Unanswerable Questions

 

Even for buyers ready to make a purchase, the process is unavoidably delayed by things out of anyone’s control. Appraisers and home inspectors aren’t able to do their jobs as long as the current homeowner is sheltering in place there. Planning and zoning departments are taking longer to approve permits due to limited access to historical records and blueprints while they work from home. These backups can cause delays for lenders, who are already facing a tidal wave of refinance applications as well. This chain of setbacks can leave homeowners, home buyers and Realtors scrutinizing their contracts and insurance policies to see who may be liable for increased costs or delays.

“There are many terms that will be relevant to those discussions, including the various contractual terms relating to the contractor’s schedules, substantial completion, delays, liquidated damages and other contractual provisions,” said Michael Keester, a partner at law firm Hall Estill in Tulsa, OK.

How Does This Affect Real Estate Investors?

There’s a glimmer of hope in all of this if you’re an investor. As many learned after 2008, an economic downturn or recession is fertile ground for investment real estate. Because of forbearances and temporary forgiveness, it may be a few months before foreclosures hit the market en masse, but there are still sellers who need to sell now. Due to the current economic climate and the increasing lack of demand, the market will likely quickly become a buyer’s market.

Between that and current financing rates at record lows, now is a great time to form your Series LLC and buy because while the home buying market may fall, experts say the outlook for the home rental market looks good. Landlords who can provide single family housing with a yard or the ability to accommodate multiple family members working from home will be a very valuable thing in the coming months. Epidemiologists say we may be facing up to 18 months of varying levels of social distancing, so renters will be looking for housing that can make this new normal more viable.

 

✅ Checklist for Buying & Managing Your First Investment Property

You’ve finally decided to get into the real estate game, but now that you’re faced with the task of purchasing your first investment property, you’re just not sure where to begin. 

Investing in real estate can be an effective way to bring in additional cash flow and grow your savings. But accurately assessing your chosen market and finding the right building can be complicated. The following tips will help you research various neighborhoods, decide which type of property is right for your portfolio, and spruce it up for your first tenants without breaking the bank.

Deciding Where To Buy Your First Investment Property

When you decided to invest in real estate, you might have assumed that you would purchase a property within your own city’s limits. But in some areas, even prices for investment properties in need of extensive renovations can be prohibitively expensive. 

Don’t hesitate to look at properties in other cities where your dollar can stretch further. Just make sure that if you choose to do this, you have the guidance of an investor-friendly real estate agent who is familiar with the area and home prices (Austin homes have sold for an average of $425,000 over the last month). Check out neighborhoods in cities with expanding job markets and a high demand for rentals. 

The Right Type of Property

You may be torn between purchasing a single-family property or a multi-family building. According to Rentler, single-family homes can be easier to manage because you will be working with fewer tenants, but with more tenants paying rent in a multi-family property, you’ll be able to make more money off your investment. Before making your decision, consider how much time you will have to attend to your tenants’ concerns. 

Buying Your First Investment Property

To buy the ideal property, you could work with an agent, or you could go down a different route and purchase a turnkey property from a real estate company. According to Fortune Builders, turnkey properties are typically move-in ready when they hit the market, so you won’t have to spend as much on maintenance or repairs, and the company will handle many important management responsibilities. However, first-time investors should be aware that this path to investment property ownership can be quite expensive. 

Renovating Your Investment Property

After putting a portion of your savings toward your down payment, you may not have much to spend on repairs and cosmetic work for your property, so you may want to explore cheaper options for renovations. 

For instance, carpeting is an affordable flooring option, and you can lower the cost of carpeting by utilizing carpet tiles (DIY installation averages $575), personally removing your existing flooring, and purchasing your materials from big-box home improvement stores. Other budget-friendly renovation projects include swapping out older fixtures like faucets in your kitchen and bathroom, updating lighting, and adding more shelves and cubbies to create extra storage space. You can save big on all your renovations by using your own tools and materials whenever possible, waiting for deals at hardware stores, and enlisting your family and friends for help. 

Write Up the Lease

You need to draw up a lease that will protect the financial interests of you and your tenants. Nolo recommends being very clear in regards to your repair and maintenance policies and your terms for your tenant’s security deposit. Have a third party look over your lease before you begin advertising to prospective tenants. This will help ensure that you did not forget to include any important details. 

Finding Tenants For Your Investment Property

When it comes to choosing tenants, careful screening is key. You want to find a tenant with steady monthly income, a rental history clear of evictions, and plans to stay in the area for the next few years. Make sure to ask for proof of income and previous landlord references!

As you research potential investment properties in your area, it can be tempting to jump on the first good deal you see. Although you may be eager to purchase your new asset, intensively researching every aspect of your preferred real estate market will help you invest your money wisely, increase your income, and even purchase additional investment properties in the future. 

Benefits of Forming an LLC (And A Few Risks)

By reading this article you are either a real estate investor or an aspiring real estate investor. You have surely talked with people discussing LLCs (Limited Liability Companies.) One of the struggles investors run into is finding reliable information that they can trust. Learning about the benefits of forming an LLC is no different.

Today I will tackle how to start an LLC. I will also list the risks involved in operating an LLC. After all, knowing the weaknesses of an entity can allow you to build a stronger strategy. This allows you to sleep well at night knowing all your bases are covered.

Benefits of an LLC

There are many benefits to using a LLC as the foundation of your real estate business. The most important benefit is that this entity limits liability and minimizes personal exposure in the event of a lawsuit. When a LLC owns a property it will be responsible for the property in court, not you. If the lawsuit it lost, the losses are limited to what is in the LLC.

Avoids the issue of “double taxation.” The LLC gives you the ability to file the property as a pass-through entity. You list any profits, or losses, on your personal tax return. But LLCs are flexible! They can be taxed differently depending on your needs. See our article on the tax benefits of the LLC for more.

The LLC can be formed and operated in all 50 states and is uniformly upheld across the United states. You can choose to form a LLC in your local state or in a any other state, depending on your needs.

A LLC can also function as a “operating company.” Sometimes also referred to as a “shell company.” Using a LLC in this way allows investors to limit their exposure even further! Utilizing a LLC as an operating company means that it holds the liability for your business operations. The difference is that you don’t place any assets in it. When it gets involved in a lawsuit you aren’t risking your properties, just your LLC. This article and video explains what this structure will look like.

 

Risks of an LLC

There is no “perfect” business entity, and the LLC is no exception to this rule. The important thing is to understand its strengths AND weaknesses to ensure your asset protection strategy is effective.

Most LLCs will have an annual fee and corporate management requirements. This will vary from state-to-state, so be sure to know what your state requires.

You need to form and operate the LLC to ensure it provides the liability protection you want. If you don’t form and operate the LLC properly, you are investing into an entity that does not protect you! This type of work needs to be done right the first time. You can also pay someone experienced who will file the entity and teach them you how to operate it right from the start.

The LLC will require separate banking, records and tax returns. This is to ensure that you are able to prove it operates separately from you. This also means more work for you. Once you get the hang of these entities it is very simple, but the learning curse can be rough.

All properties owned by a LLC are held in a “pool,” and are not protected from each other. This is why we recommend that investors with more than a single investment property use the series LLC instead.

How to Protect Yourself as a Real Estate Money Partner

One of the more elegant features of the real estate world is the way the whole ecosystem encourages symbiosis. Investors often are stronger together, especially in the face of an obstacle. For most investors, start-up capital or even cash flow to expand will become issues at some point in an REI career. Money partnership is one creative way REIs are helping each other by offering complementary skills to one another and combining forces on an investment. This is a clever way to square a capital issue or get help finding deals, depending on your role. Everybody wins when these arrangements work out. Here are some of the things you need to know to make sure yours does.

Money Partners and Credit Partnerships Explained

The money partner is the term for the person in this arrangement who has capital to spare. As for the person that has time or scouting skills or other resources, they are sometimes called the entrepreneurial partner. Other terms for these types of arrangements include credit partnership and partner funding.

Many of our investor clients are at the stage in their careers where they’re richer in capital than time. But don’t get discouraged, most beginners start out rich in resources other than cash. It may be your willingness to spend time researching, number-crunching, your day job skill set, or even your charm or tenacity--but there is certainly something about you that makes you valuable to another investor even if you’re cash-poor. Eventually, as your career progresses, your time will become “expensive” enough that you may assume the other role. Many REIs transition into mentorship.

How to Protect Yourself as a Money Partner

If you’re the “bank” in any kind of deal, you’ve got to look out for yourself. Money partnerships aren’t any different. You’re taking a risk, so of course you want to take the steps you can to mitigate that risk. Here are some of the most important tools you can use to keep yourself protected.

Option #1: Create Clear, Thorough Contracts

If you’ve got concerns about what your new partner may do if they’re not responsible in their duties. But that’s why the smart folks in our early legal system (and its predecessors) gave us contracts: to get everyone’s roles, responsibilities, and rewards in ink. Simply using basic contracts to solidify your verbal agreements can prevent nasty disputes, and even lawsuits, down the road.

If you have specific concerns, address them in the contract. Ask your attorney what some wise provisions would be given the specific fears or worst case scenarios you’re aiming to prevent. Odds are good you can rule out a lot of shenanigans by simply taking the time to create an effective contract. Anyone who wants to make money with you should be willing to sign a contract with fair, reasonable, comprehensible terms.

Option #2: Use Entities To Limit Your Personal Liability

Where a contract can’t always help you out is in the realm of lawsuits. Unfortunately, partners sometimes get bad blood. Deals sometimes don’t go as planned. Of course, most people get angry and play the blame game. Some people’s preferred venue for the blame game just happens to be the courtroom.

Don’t become a victim to your partner revealing themselves to be bitter or litigious. Protect yourself by creating an LLC and operating it in a manner to a venture-specific LLC. Use your Operating Agreement to clarify your relationship to as fine a degree as you like, and even divvy up profits and losses as you agree is fair. The great thing is you can have equal power if you like, or a money partner may want a greater share of profits. These are all the details you can get on paper when you file your LLC, but filing your LLC serves a second purpose: asset protection.

The LLC limits liability around real estate investments. Moreover, a Traditional or Series LLC separates you from the asset and its problems. You’re separate and no longer “own” it, but control it. What’s great about not owning something is it’s impossible to lose it in court. But of course, you retain legal control. Clever business structures can have many benefits on top of helping you CYA in a money partnership.

5 Strategies For Protecting The Equity in Your Personal Residence

Equity stripping is something of a varsity-level real estate move, but it’s also an asset protection classic for a reason. The whole idea is to make your property look extremely undesirable on paper, even if it’s a beautiful and pricey asset to behold. Today, we’ll be talking specifically about five ways to protect the equity in your homestead or personal residence, and you’ll be icing greedy litigants and creditors in no time when you follow our tips.

1. Know Thy Homestead Exemptions (And Use Them!)

Ah, the homestead exemption, arguably one of the best “gimmes” a homeowner can get on the equity stripping front. Understand first that American law provides greater protections for our personal homes than any investment. 

Now, the exact value of your personal homestead exemption depends on a variety of factors, including where you live. Each state’s formula for calculating homestead exemptions is different, so your mileage may vary. But everywhere that has a homestead exemption option is giving its homeowners a gift of sorts. For instance, one of this tool’s main uses includes capping creditors’ abilities to tap into your home’s equity to satisfy a debt. If your state offers an exemption, you should most likely take it (unless professionally advised otherwise).

If you do some research and learn your state doesn’t offer such an exemption, don’t fret. That’s what our next four tips are for, and you can make up the difference by using some of the other tools explained here such as home equity loans and lines of credit. 

2. Obtain a Friendly Loan

Friendly loans may come from actual friends or even institutions where you have a good reputation or rapport. Any loan with good terms or lien constructed deliberately for equity stripping likely meets the investing definition of “friendly” lending. There’s nothing inherently unfair, wrong, or illegal about receiving a favorable loan or gift from a person or business. 

Of course, finding and securing friendly loans can be tough, particularly for newer investors or homeowners. Those who follow our next tip won’t have this issue.

3. Create Your Own Mortgage Company 

Even seasoned REIs rarely know you can legally do this. Creating your own mortgage company for equity stripping is surprisingly easy, and incredibly effective. You use your own Traditional LLC to issue yourself notes. You can proceed to use it for your homestead or your investment assets, assuming your coloring within the lines of the law.

Learn more from our explainer on how to form your mortgage company and start your equity stripping strategy. This basic premise can be used to completely encumber a property, making it repulsive to the career litigant and (often more importantly) their attorney. After all, the lawyer who sees equity stripping knows they won’t be getting paid. Not until the mortgage is paid off, anyway. And given you’re the one setting up the terms, you can make this part easy.

4. Use a Home Equity Loan or Home Equity Line of Credit (HELOC)

Both home equity loans and home equity lines of credit (HELOC) offer handy tools for the homeowner in need of equity stripping. The loan version is limited to the amount of equity presently in your home. Those who take out home equity loans receive the equity value in a single lump cash sum, a “riskier” move for the lender than a line-of-credit. 

By contrast, HELOCs are easier for most people to qualify for, and for many homeowners, easier to manage. When you have a HELOC, you only touch the money when you need it or for a planned reason. Both of these home equity-reliant options encumber your home further, serving your creditor and asset protection goals.

5. Second Mortgages May Be Options for Seniors

Qualifying seniors who own their homes outright may use second mortgages as both a way to get some much-needed cash on a fixed or dwindling income and for protecting their homes. Second mortgages may be difficult to qualify for, will be limited to seniors with high equity in the home, and can certainly have drawbacks, so learn the specifics about second-mortgages before considering using this type of encumbrance for equity stripping.

Using Corporations to Manage Real Estate LLCs: The REI's Basic Guide

It’s important to set up your real estate LLCs the right way.

Improperly established, noncompliant or mismanaged LLCs are pointless at best and costly at worst. Your entire asset protection can be undermined by one poorly structured or managed entity, because the entity is such a crucial piece of any asset protection plan.

No matter what kind of real estate LLC you use—Traditional LLC, Series LLC,  a combination of both, a special variation like a married couple LLC, or even multiple LLCs with other structures on top—you must ensure your business choices are clearly conveyed in your paperwork. This includes your Operating Agreement, which can be amended, but functions as your LLC’s Bible. So, it’s actually best to get your agreements with any partners, rules, expectations, and plans for dividing profits and losses in lockstep and recorded in ink accurately from the moment you form the company.

It’s equally critical that you know who is going to manage the LLC and how. After all, you do get to make this decision. All too often, members of multi-member LLCs don’t understand the depth of their options, but you’re not going to be one of them.

Here’s the straight dope on using a corporation to manage an LLC, what alternatives you have, and how to decide if corporate LLC management is right for you.

Can a Corporation Manage an LLC?

Usually people ask if a corporation can own an LLC, but this is an example of someone asking the wrong question for the information they seek. Of course a company can buy an LLC, but we’re referring to using a corporation in lieu of a single human manager.

So yes, a corporation can manage an LLC. But it’s far from the most common type of LLC management.

Ways You Can Manage Your Real Estate LLC

To know if going the corporation management route is right for your LLC, you’re going to have to consider the other ways investors manage their companies. Most people go with one of two options:

Investors usually choose their management style. If you have a great person in mind and nobody on your team will rise to the occasion, a manager’s a great way to go. If each member has confidence the manager is trustworthy, and all ensure that the Operating Agreement of the LLC accurately reflects their desires, then a manager can be a great thing for a real estate LLC.

When a corporation manages your LLC, you can think of the corporation as standing in for a human manager. There’s actually a long history in American law of treating corporations as people, a concept known as corporate personhood in legalese. Depending on the type of corporation you form, you may have several individuals collectively making decisions about your daily operations. Note that your corporation can actually have an unlimited number of managers internally.

Check out our article, Manager-Managed LLCs vs. Member-Managed LLCs: What’s Best for Real Estate Investors?

How Do You Form a Corporation to Manage Real Estate Investments?

Forming a corporation is easy. All you really need to form one is the help of a business or real estate attorney.

But first, are you sure you need a corporation? For many investors, using a corporation is overkill. Most are just fine with cheaper entities.

You need to have an idea of what you want to do. You also need to be clear on what a corporation actually is. First of all, we’ve got two options: the C-Corporation and S-Corporation. Of the two, the S-Corporation is far more popular.

Corporations require many more legal steps than LLCs, including:

Some businesses need the benefits of corporations, so the regulations are simply the price of admission.

A corporation only helps protect your assets if it’s in lock-step with your business plans. For this reason, many investors choose to form their own. That way they can be sure the corporation is friendly to the LLC. 

As I said, using a corporation is overkill for many real estate investors. Most are just fine with cheaper entities.

A Happy Medium: The LLC Taxed as an S-Corporation

The most obvious alternative to a corporation is using a more traditional management style for your LLC: member-managed or manager-managed. But you’ve got creative entity options, too. We’ve talked about some LLC and Series LLC perks already, but did you know that your LLC can be taxed as an S-Corp?

Real estate investors opt for this choice because:

Now that you’ve gotten the basics down, consider the details of your jurisdiction. In many states, including Texas where Royal Legal Solutions is based, you can convert an LLC into a Corporation. This detail may be helpful to ask your attorney about if you’d like to use an existing corporation. In states that permit such conversions, an investor with an unused LLC may be able to save some major cash by converting into rather than forming a corporation. That said, always check with your personal counsel to be sure this is true for you. 

Making the Choice: Is A Corporation-Managed LLC Right for Me?

Determining whether corporate management is the best move for you will depend on several personal factors. You may first consider whether such management is necessary. Small businesses may find that a corporation is more trouble than it’s worth, and that an LLC or two-company Series LLC and shell corporation structure is more effective. Professional help from a qualified real estate lawyer will be a necessity regardless of your entity choices.

While the vast majority of investors decide against managing their real estate LLCs with corporations, your situation may call for such a structure. Learn what you can about your alternatives such as taxing an LLC as an S-Corporation, as well as using other structures or management styles.

We believe it’s best to assess your members’ basic needs and study corporation management before making this judgment call. So keep reading. Finishing this article’s a great start. But we hope you’ll continue learning the best strategies for managing your business. 

How the SECURE Act Weakens 401(k) Protections (& What You Can Do)

It’s hard to deny that one in five Americans not having put a single cent towards retirement is a social problem. But the policy solution Congress is enacting to address this issue may affect your 401(k).

As investors, we love the 401(k), the 1978 amendment in the Tax Code that quickly became one of America’s favorite retirement savings vehicles. But Congress is actively changing your 401(k)s legal protections. We’re not letting any of our readers get blindsided by changes in law. Unfortunately, the well-intended GOP bill with the stated goal of encouraging more Americans to save has real consequences that threaten all account holders.

Here’s what the folks in Washington are up to, and why some policy experts and scholars fear the 401(k) will be ultimately weakened and undermined by the SECURE Act.

Summer of Savings or Losses 2019? Congress’s SECURE Act Threatens 401(k) Protections

As of August 1, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed the House of Representatives. “Passed” is actually an understatement, given the bill flew through the House with a landslide 417-3 vote in favor of passage. We feel current projections anticipating a similar cruise through the Senate are likely accurate, and time will tell.

That said, keep in mind a bill can change substantially in the days, even hours, before its passage. Whether it’s amended in committee, filibustered, or provisions shuffle in and out at the last minute, there are many ways a bill can change in the moments before it becomes law. There is a distinct possibility that the bill at the time of this writing won’t be the exact version that passes, so confirm any effects you expect to personally impact your retirement plans.

Now’s a great time to remember that not every legislator reads or fully endorses every item in every bill they pass. Doing so takes hours of specialized time. So often, tucked within popular provisions are smaller edits and amendments that can actually make a massive impact if they become law. The changes to 401(k) protections are simply an example of this phenomenon.

For more information, see our article, How The SECURE Act Impacts Inherited IRAs.

Your IRA’s Not Safe Either: Certain Beneficiaries Can Kiss Stretch IRA Strategies Goodbye

The long-beloved stretch IRA is no longer a viable strategy for children of IRA beneficiaries. The  conventional estate planning and asset protection wisdom that has historically worked in these cases must change with the law. Even our attorneys used to recommend stretch IRAs for child beneficiaries, who are now excluded from stretching IRAs along with other non-spouse beneficiaries.

Fortunately, there are reasonable accommodations for certain situations, such as beneficiaries with chronic illnesses or disabilities or beneficiaries within 10 years of the decedent’s age, but otherwise, if you are the beneficiary of an IRA, you have to take your distributions within 10 years now. You no longer can rely on the stretch method to spread a large IRA over a lifetime, a tactic long used to preserve wealth within families.

Now, you have to use it within a decade or lose it.  

Update Your Estate Plan and Asset Protection Strategies to Account for New Changes

The best way to prevent any of SECURE’s possible negative effects in your own life is to plan around them. Keep eyes on the law, especially in its final form, and don’t be afraid to ask your own trusted professionals about possible impacts on either your asset protection strategy or estate plan. After all, the two are linked.

Given we can no longer fully endorse the same-old 401(k) asset protection advice, we encourage investors seeking alternative asset protection vehicles to consider forming a living trust to address estate planning needs. This flexible vehicle remains unaffected by these legislative changes.

Most Americans who participate in 401(k) plans will likely need to make some adjustments to their estate planning, and some may opt to change course in their retirement savings altogether. Whether changes will drive Americans away from the enduring 401(k) or legitimately promote access to retirement accounts is a policy question that only time will answer.

Selecting the Appropriate Entity for Flipping Real Estate

Flipping is just different than other investing strategies. In terms of both the financial aspects and legalities of running this type of business, there are a few things flippers should know about organizing and defending their real estate portfolios. Chief among the things every flipper should understand is how to construct an asset protection strategy that adequately defends against lawsuits and forms a sound structure for active real estate businesses. Here’s how.

Do Your Homework Before Forming Your Entity: Special Concerns for House Flippers 

House flippers’ asset protection strategies should reflect their actual needs. Here’s a short checklist for you to consider before you start with entity formation.

When you form your real estate entity, consider how it will fit both within your asset protection and broader investment strategy. Here are some critical issues to consider:

If you have specific questions about these concerns in your life, speak with a qualified real estate attorney as well as an advisor you trust familiar with your investment market(s). Let’s shift gears and dive into the decision-making process you’ll use to select the entity for your flipping business.

REI Entities for House Flippers: What’s the Best Choice?

We’ll talk about a couple of popular choices for house flippers. Ultimately, the only way to know for sure what will be best for your business, portfolio, and plans will be the product of conversations with personal advisors. But feel free to use these rules of thumb as a starting point for your research and discussions about forming an entity for flipping real estate.

We’re going to talk about key strategies for house flippers with the understanding that flipping is a form of active trade. LLCs and S-Corporations are popular options. Learn more about the entities you can use and the key questions you’ll need to answer below.

The Limited Liability Company: How to Flip Houses With an LLC, Series LLC, or Both

It’s vital that those engaged in active real estate flipping businesses find a way to limit the many liabilities that can accompany this investing method. For many flippers, the Limited Liability Company helps square both the issue of liability and how to formalize the flipping business.

Now, the Limited Liability Company comes in a few variants. You’ve got your Traditional LLC, an affordable classic; the Series LLC, which allows you to quickly create an infinitely scalable network of mini-LLCs, as well as ways to use both types of LLC together for a formidable asset protection structure.

We hope to help you make the best decision for you by explaining how these companies protect your assets, how you can use them, and ways to approach some of the choices you’ll have to make whether you establish one Traditional LLC or a two-company structure. One of your unavoidable decisions is how your LLC will pay taxes, and yes, you get to choose.

The Tax Choice: Should You Consider Taxing Your Real Estate LLC as an S-Corp?

One reason flippers like LLCs is because you have options for taxation. LLCs may be taxed like partnerships or as S-Corporations. Making the S-Corporation judgment can be difficult for any investor, and we strongly recommend involving an REI-savvy CPA. But here are some things you can discuss with that professional, or anyone else assisting you with forming your real estate LLC.

S-Corporation makes sense as a tax savings strategy for some investors, but of course we all know there are no legal silver bullets for tax minimization. One huge benefit of using the LLC in general is pass-through tax treatment, which is still available if you’re taxed as an S-Corp. LLCs are beloved pass-through entities for investors, meaning profits and losses are simply recorded on the company members’ respective personal income returns.

There are certain advantages of S-Corp taxation for house flippers:

Be aware you may hear discussions of the S-Corp vs. the LLC as if this is an either-or proposition. Resist the temptation to listen to such reductive views, because you truly can have it both ways. One could in theory form a separate S-corporation entirely, but for most investors, opting to use an LLC taxed as an S-Corporation is a simple choice that preserves the beneficial features of both entities. Even better, the LLC taxed as an S-Corp is easier to run than a fully separate S-Corporation (complete with its many legal requirements). Not every flipper will even benefit from S-Corp taxation, but enough do that you should consider all options.

Combining Entities for Greater Protection: How to Use a Traditional and Series LLC Together

Some investors may be happy with a single entity, but many of our flippers and other investors love the tried-and-true method of pairing the Traditional LLC with the Series LLC. Under this model, the Traditional LLC serves as your operating or shell company. It manages day-to-day activities like collecting rent, paying employees, etc. 

Meanwhile, your Series LLC functions as an asset-holding company.  This company must never interact with the world, because that’s what the Operating Company does. To maximize the Series LLC’s effectiveness, all you do is create as many Series as you have assets, direct your attorney to help you make the appropriate transfers so each asset is in its own Series, and ta-da. You’ve got yourself a basic two-company structure. Use it correctly, and it can protect your real estate assets for life.

Using your entity correctly means ensuring liabilities go where we want them. In the case of the two-company structure, that Traditional LLC is the company we actually want a would-be litigant to come for. It doesn’t own anything. The company that does own all your assets, the Series LLC? It hasn’t ever been exposed to those liability-magnet business operations. By separating these functions structurally, you prevent many lawsuits before they even begin simply because it’s harder to sue this structure than a person. The system works, and your assets stay under your control.  

No matter what you decide, trust your experts, be transparent, and fearlessly gather information. We’re here to help you while you learn the best way to establish your flipping entity and protect your new business.

Selecting the Best Entity for Real Estate Flipping

Flipping is just different than other investing strategies. In terms of both the financial aspects and legalities of running this type of business, there are a few things flippers should know about organizing and defending their real estate portfolios. Chief among the things every flipper should understand is how to construct an asset protection strategy that adequately defends against lawsuits and forms a sound structure for active real estate businesses. Here’s how.

Do Your Homework Before Forming Your Entity: Special Concerns for House Flippers 

House flippers’ asset protection strategies should reflect their actual needs. Here’s a short checklist for you to consider before you start with entity formation.

When you form your real estate entity, consider how it will fit both within your asset protection and broader investment strategy. Here are some critical issues to consider:

If you have specific questions about these concerns in your life, speak with a qualified real estate attorney as well as an advisor you trust familiar with your investment market(s). Let’s shift gears and dive into the decision-making process you’ll use to select the entity for your flipping business.

REI Entities for House Flippers: What’s the Best Choice?

We’ll talk about a couple of popular choices for house flippers. Ultimately, the only way to know for sure what will be best for your business, portfolio, and plans will be the product of conversations with personal advisors. But feel free to use these rules of thumb as a starting point for your research and discussions about forming an entity for flipping real estate.

We’re going to talk about key strategies for house flippers with the understanding that flipping is a form of active trade. LLCs and S-Corporations are popular options. Learn more about the entities you can use and the key questions you’ll need to answer below.

The Limited Liability Company: How to Flip Houses With an LLC, Series LLC, or Both

It’s vital that those engaged in active real estate flipping businesses find a way to limit the many liabilities that can accompany this investing method. For many flippers, the Limited Liability Company helps square both the issue of liability and how to formalize the flipping business.

Now, the Limited Liability Company comes in a few variants. You’ve got your Traditional LLC, an affordable classic; the Series LLC, which allows you to quickly create an infinitely scalable network of mini-LLCs, as well as ways to use both types of LLC together for a formidable asset protection structure.

We hope to help you make the best decision for you by explaining how these companies protect your assets, how you can use them, and ways to approach some of the choices you’ll have to make whether you establish one Traditional LLC or a two-company structure. One of your unavoidable decisions is how your LLC will pay taxes, and yes, you get to choose.

The Tax Choice: Should You Consider Taxing Your Real Estate LLC as an S-Corp?

One reason flippers like LLCs is because you have options for taxation. LLCs may be taxed like partnerships or as S-Corporations. Making the S-Corporation judgment can be difficult for any investor, and we strongly recommend involving an REI-savvy CPA. But here are some things you can discuss with that professional, or anyone else assisting you with forming your real estate LLC.

S-Corporation makes sense as a tax savings strategy for some investors, but of course we all know there are no legal silver bullets for tax minimization. One huge benefit of using the LLC in general is pass-through tax treatment, which is still available if you’re taxed as an S-Corp. LLCs are beloved pass-through entities for investors, meaning profits and losses are simply recorded on the company members’ respective personal income returns.

There are certain advantages of S-Corp taxation for house flippers:

Be aware you may hear discussions of the S-Corp vs. the LLC as if this is an either-or proposition. Resist the temptation to listen to such reductive views, because you truly can have it both ways. One could in theory form a separate S-corporation entirely, but for most investors, opting to use an LLC taxed as an S-Corporation is a simple choice that preserves the beneficial features of both entities. Even better, the LLC taxed as an S-Corp is easier to run than a fully separate S-Corporation (complete with its many legal requirements). Not every flipper will even benefit from S-Corp taxation, but enough do that you should consider all options.

Combining Entities for Greater Protection: How to Use a Traditional and Series LLC Together

Some investors may be happy with a single entity, but many of our flippers and other investors love the tried-and-true method of pairing the Traditional LLC with the Series LLC. Under this model, the Traditional LLC serves as your operating or shell company. It manages day-to-day activities like collecting rent, paying employees, etc. 

Meanwhile, your Series LLC functions as an asset-holding company.  This company must never interact with the world, because that’s what the Operating Company does. To maximize the Series LLC’s effectiveness, all you do is create as many Series as you have assets, direct your attorney to help you make the appropriate transfers so each asset is in its own Series, and ta-da. You’ve got yourself a basic two-company structure. Use it correctly, and it can protect your real estate assets for life.

Using your entity correctly means ensuring liabilities go where we want them. In the case of the two-company structure, that Traditional LLC is the company we actually want a would-be litigant to come for. It doesn’t own anything. The company that does own all your assets, the Series LLC? It hasn’t ever been exposed to those liability-magnet business operations. By separating these functions structurally, you prevent many lawsuits before they even begin simply because it’s harder to sue this structure than a person. The system works, and your assets stay under your control.  

No matter what you decide, trust your experts, be transparent, and fearlessly gather information. We’re here to help you while you learn the best way to establish your flipping entity and protect your new business.

 

Interested in learning more? Check out our article Real Estate Flipping: LLC Taxation Issues To Know About. You can also see our article over at BiggerPockets called What’s the Most Powerful Business Entity for House Flippers?

Manager-Managed LLCs vs. Member-Managed LLCs: What's Best for Real Estate Investors?

When you establish an LLC, you must plan for its management. LLCs may divide decision-making powers among members or select a manager. If your LLC is single-member, you assume managerial powers, but multi-member LLCs must decide. To make the best choice, check out our breakdown of member-managed LLCs, manager-managed LLCs, their differences, and how to address concerns around manager-managed LLCs.

Member-Managed LLCs vs. Manager-Managed LLCs: The Key Differences

Every LLC must decide between a member-managed or manager-managed structure. A member-managed LLC is the norm. These function like democracies, as power is equitably divided among the members. A manager-managed LLC, however, designates one person for managerial powers. Manager-management can help particularly large companies make decisions.

Whether the manager’s a “professional” or picked from the LLC’s members, the critical thing to know is that they have power over the entire LLC. Consider these company-wide powers delegated to managers:

If you’re appointing a manager, read your LLC’s paperwork carefully before signing to ensure power is limited and manager responsibilities are clear. Even LLCs using managers don’t surrender these member powers:

Managers of LLCs must meet more compliance criteria than members. Managers have to play by both the rules of the company and the law.

Making the Choice: Does Your LLC Need a Manager?

The manager holds a specific legal role. You may select a “professional” manager, as some multi-member LLCs do, or select a manager from among your members. But here are the key issues to be aware of should you choose this route:

The good news is this: for every concern you have, there are ways to address it.

Using a Manager-Managed LLC: Tips for Mitigating Risks

A beautiful thing about the LLC is you have choices. Once you’ve made decisions, they’ll be in plain black-and-white ink for anyone to read in the form of your Operating Agreement. This is your LLC’s Bible.

For instance, some of the concerns about abuse of power are easily prevented by addressing these possibilities and creating checks (like requiring a member vote) in your Operating Agreement. You may choose to make amending the Operating Agreement more difficult or bar managers from making certain calls without member consent. In fact, any matter you’d like member consent on can be accounted for before LLC formation.

The best way to control for problems is in your Operating Agreement prior to forming your LLC. Of course, LLC members truly worried about hierarchy can side-step the entire issue easily by simply forming a member-managed LLC.