First Things First – Business Structure

There are a number of ways to get started in real estate investing which I can cover.  Among them are flipping houses, wholesaling houses, investing in tax sales and tax liens, loaning money to individuals who rehab or to rental property investors, buying and holding property for rent, buying and holding property for lease-option, buying and holding while extending a short-term private mortgage (while helping your buyer fix less than stellar credit so they can eventually refinance with a conventional mortgage).  I am sure I am leaving some things out, and you may not know what each possibility that I have listed means, but I will get into covering these options for investing in future blogs.

When I say first things first, I do not only mean deciding on what type of real estate investing you want to initially pursue, but what structure your business will take and how you will account for the activity of the business.  You should always be aware that you must protect yourself legally as much as possible.  That usually means setting up an LLC (Legally Liable Company) or a corporation or even one or more trusts.  I have established many LLC’s for myself as well as for others without any problem because of my background as a CPA and my experience.   You may feel more comfortable hiring someone to care of this paperwork.  In Connecticut, the LLC is registered with the Secretary of the State for a fee of $120.00.   The LLC is established by submitting to that office a document that is known as Articles of Organization.  The Articles of Organization identify the name of the business, purpose of the business, business location, identifies one or more members or managers and also the individual being appointed for the purpose of receiving any legal notices. Soon after you receive the notice that the Articles of Organization document has been received and accepted, you must obtain a Federal Employer Identification Number through the Internal Revenue Service.  In some states, such as Connecticut, you must obtain a state tax number as well.  The governmental cost of establishing an LLC will vary from state to state.  For example, Connecticut currently charges a filing fee of $120 while Massachusetts charges a filing fee of $500.

A trust is a different kind of structure.  Establishing a trust may take the work of an attorney who specializes in the area, but I would suggest doing some research through a real estate guru.   Lou Brown, a real estate investor who has worked with trusts, is someone who can provide some insight (Street Smart website:  Doing a little research and having a discussion with a knowledgeable attorney will help you make your decision.   I have personally never used a trust. I have used the LLC structure exclusively, and the bulk of my investments have been through a  real estate IRA, so I have not necessarily needed to be concerned as much with a trust.

Business can be conducted initially under an LLC structure then the property can be moved into a trust.  In addition, an LLC can elect to be taxed as what is known as a Subchapter S Corporation.  Each individual must decide what is best for their situation.   Sometimes you may think you need a crystal ball to make the decision on how to be taxed.  It can be difficult to see into the future. I have also used a stock corporation structure, but that can be cumbersome, unnecessary and possibly not provide you with the best tax advantages.

So, if your idea is to start by flipping, buying and holding or even starting as a wholesaler or lender, I would strongly recommend conducting that business under an LLC rather than your own name or a stock corporation.  However, as always, the choice is yours and depends on your particular situation and the number of people involved in your business venture.  Often in situations where an investor is acquiring property to rent the acquisition is made through an LLC then, when a trust structure is the preference, the is property is moved into a trust.

In addition to being wise about the structure of the business, you must be wise about accounting for your activity.  Don’t wait until you have been in business for six months or a year to decide to keep track of your business activity.  Get set up for keeping track for your income and expenses at the beginning of your venture.  Not only do you need financial information and data to determine where your business stands from a profitability perspective, but you will need the information to provide to partners, investors and your tax accountant.  I have been very successful using QuickBooks for my real estate accounting, and have used it for more than 30 rental units without a problem.  However, there is software available specifically designed for managing rental property that is probably more equipped then QuickBooks in handling large numbers of rental units or for managing rental units for a number of different individual owners or investors.

When you have decided what type of real estate investing you would like to do and have taken the steps identified here, you are ready to get out and start your real estate investing activities.  Good luck and continue reading this blog for more pertinent information.