A typical real estate investor should be looking at a three-company structure.
The first of these companies should be a buy and hold LLC. The buy and hold LLC is going to be for long-term rentals. It's going to hold a number of different properties that you will be holding for longer than a year.
The next company that you're gonna have is your fix and flip LLC. Those are properties that you're gonna be holding for less than a year.
The reason that we need two of these is because they have different tax treatment. Your buy and hold is going to be a long-term capital gains taxation, your fix and flip is gonna be short-term capital gains.
Your third company will be your operating company (corporation or operating LLC). Typically we use corporations for some instances and LLCs for other instances. The corporation shields you from any personal liability in conducting your business. If you run your business personally, you're collecting the rent, you're negotiating with contractors, entering the contract, etc. This all can mean a lawsuit against you personally.
Even if you were smart and protected all of your assets inside of the LLC, what will happen is that a judgement against you gets recorded onto your credit report, impacting your credit score. The lower the credit score you have, your less ability to have financing. And that means real dollars out of your pocket.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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