If you're thinking about getting into the real estate investment game, consider forming an LLC before you do. That can offer you significant protections if there are problems down the line. Here's what you should know about how a single-purpose LLC can help preserve your wealth.
What can go wrong with real estate investments?
Whether you're investing in an apartment complex or office buildings, real estate can be a great long-term investment. However, crises like the "bubble burst" that sent real estate prices crashing down in 2007 illustrate short-term dangers that investors can face. Real estate can plummet nationally for a variety of complex reasons, and local real estate markets can crash simply because a major employer in the area decides to take its headquarters elsewhere.
In addition, you can run into serious problems as the result of premise liability lawsuits. Anything from a slip and fall to a structural failure can put you in the middle of an expensive personal injury lawsuit. Natural disasters like hurricanes and unexpected flooding can also wipe out your property value within a few hours. If you are holding your property in your personal name, there's no way to protect your assets from being attached to pay any damages that insurance doesn't cover or to repay loans taken on the property.
How does a single-purpose LLC protect you?
A single-purpose LLC is a type of corporate entity that is formed for the sole purpose of investing in real estate. Rather than investing directly in the property yourself, the LLC holds the title and owes the loan on the investment property. One of the advantages of single-purpose LLCs is that you can create more than one, which enables you to separate your holdings. Not only does that protect your personal assets from being attacked if you run into problems with a property, it allows you to protect your other properties from judgments.
For example, if flooding causes a massive amount of property damage in one commercial building that you own and you end up in a foreclosure due to an inability to rehab the property and find renters in time to pay the mortgage, creditors may not be able to put any liens on your other properties or force you to liquidate them in order to pay off the debt. In addition, your personal property would be kept clear of any judgments as well.
A single-purpose LLC is not without its complications. For example, there are legal requirements that have to be observed in order to maintain the separateness of each special-purpose entity, such as keeping different bank accounts. In addition, a second LLC may have to be formed in order to manage the properties and contract with renters and service professionals (plumbers, electricians, janitorial staff, and so on). For a complete discussion of whether or not a single-purpose LLC is right for your situation, discuss the issue with a real estate attorney (like Steve Butcher Sr) in your area.
Share11 March 2016
While I took a few business classes in college, I left early to start my own business. I thought I had the knowledge I needed to become a great business owner and was eager to start my business. Soon, I had a new business that was actually performing pretty well in sales. Unfortunately, I hadn't taken any law courses in college, and I soon realized I made a few mistakes when starting my business that could cause me some legal trouble. Thankfully, a great business lawyer helped me correct my mistakes before I had any legal problems, but I then decided to take those business law courses. I want to help business owners and anyone else who would like to learn more about the law by starting a blog where I will share what I have learned and will continue to learn. I hope I can help you!