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Get Started In Real Estate Investing with an LLC

According to the July 2013 report from REAL Trends, housing sales were up 10.2 percent compared to June 2012 and the average prices of sold homes is up almost eight percent. This means that many who were hoping to sell homes are getting ready and the real estate investors are also looking to add to their inventory.  If you’re looking to become a real estate investor, it’s a good idea to create an LLC, Limited Liability Company. A personal home wouldn’t fall into this type of structure for a variety of reasons but if you have investment properties, a properly structured LLC provides great protection and benefits.

What Real Estate LLCs Should Do

The objective of an LLC is to protect your personal assets from potential liabilities like court judgments that derive from a variety of sources. A rental property has some inherent risks including potential contamination, slip and falls, fire-related claims and creating an LLC encapsulates the problem and protects your other assets.

A legal professional who knows and understands how to start an LLC will emphasize the protection of your personal assets from legal disputes. She will also let you know that having an LLC defends you against any IRS audits while providing you with great tax benefits. It also helps you to run your real estate business more efficiently and successfully.

Structure Your Real Estate LLC

The first things to do are research, choose, and register your name with the state. If you’re starting this LLC with others, you need to understand how each member is going to contribute to the business, and whether they will put up cash investments or provide services in lieu of cash towards the purchase and management of the property. You should also include the profit distribution percentages to make sure everyone knows their stake.  This operating agreement will need to be read, understood, and signed by all parties.

The Articles of Organization is the companies charter that indicates the business’ name, purpose (to buy and manage the real estate in its care, control, and custody), who has been designated to sign on behalf of the company and the name of all members involved. Once approved by the Secretary of State, the financials can be set up. The company will need to open a bank account under the business name. They will also need to create a business plan to show banks how much money will be collected and how the properties will be managed. You will also need to keep a record for tax purposes which could include buying accounting software or hiring an accountant; some companies choose to do both. Because it is an LLC, companies are required to hold regular meetings and keep minutes to prove that the LLC is a working business.

Having an LLC partnership can be tricky, so make sure that each member makes his or her proper contribution to the business. Make sure that you also include the ways members can leave or enter an LLC so that everyone knows how to properly sever ties or to add new members. If you have multiple properties, it’s good to assign each with its own LLC. It will take more work on your part but the last thing you need is to have the legal problems of one property contaminating another unencumbered property.

Image by Dvortygirl / flickr

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