What awesome legal technologies do we have available for Real Estate investment? LOTS!
A real estate LLC is a company set up to hold real estate property, either in a series or on its own.
What are we worried about with our Real Estate Investments? Well, basically just losing the investment! Thankfully, there are plenty of legal technologies that help us to protect these investment assets if set up correctly.
What is Limited Liability? This is an old legal technology that allows people to make investments and take risks with a company and not have that company risk ALL of everything you own. For example, if I invest $50,000 into a real estate LLC, and someone has an injury on the property, I can literally “limit” my liability to only the value of my investment into that LLC. Even if the injury’s legal claim sues for $5,000,000, my liability is limited to my $50,000 investment; I can keep my other investments, life savings, and everything else, safely separate.
But wait! It gets even better! If you set everything up correctly, there’s a way to even limit the exposure to that $50,000 investment! This gets a little more complicated, but the basic premise is to set up a real estate holding company that owns the title to the property, and an entirely separate property management company that will manage the property but, importantly, not own the real estate itself. We create a contract (lease) between the property management company and the tenant. If (God forbid) someone gets injured and sues for that injury, the only party that has a contract with them is the company that issued the contract (lease) between them, the property management company. This means that the $50,000 investment into the real estate property itself is “shielded” from the plaintiff’s lawsuit, from that liability, and the only liability left is handled by the property management company (that doesn’t own the real estate).
Look, obviously, I’m biased here, but to benefit from all of these things, setting up all of these companies must be done perfectly, and that usually means hiring an attorney. I don’t mean LegalZoom, either, I mean real, licensed, living and breathing attorneys that stake their livelihoods on doing this right. I’ve lost count of all the times I have people calling in that are going to lose their entire life savings and business value just because a non-lawyer legal services company mad-libbed their contracts. You don’t know until it’s too late. But it’s not too late now!
The first step of forming a real estate LLC is to pick a name for the LLC you want to set up. Some people like to just use the street address for the property that the Real Estate LLC will be holding. This gets confusing, though, if you want to “recycle” LLCs after a Real Estate flip or sale, so my suggestion is to pick something generic. You also may want to create a name that doesn’t point to you personally, so that you have some anonymity (not all states allow for this, but some do).
An LLC gets (some) rights of a real living breathing “person,” but it has to be linked to an actual living breathing human to function, and that human is the one who has to receive all of your Government audits/correspondence, and lawsuits. If these things get missed, you typically lose the entire lawsuit by default, so it’s always best to hire a professional lawyer to be your Registered Agent rather than DIY-ing it.
Your lawyer will need to write a special agreement based on the state’s laws that the property is located in and the overall structure of your real estate investments. The above example would make for very different Operating Agreements than if you are not using a holding company or property management company, and of course, the outcome and ways that it functions will change as well.
If you have any partners, even if your partners are family or they’re working on the property to renovate it, it is CRUCIAL that you get a lawyer to draft a good partnership agreement. I can’t tell you how many times I’ve had to get tissues for ex business partners, crying that their uncle turned on them, or the construction partner did faulty work and messed up the property, or the investor refused to pay for much needed materials to finish repairing a property, and on and on. These contingencies are easily handled with a partnership agreement, but nearly impossible to solve without one.
Not all Real Estate investment plans are created equal! We don’t typically charge for phone calls, either, so feel free to call us and pick our brains on how best to structure your Real Estate LLC!
Again, a lot of this stuff doesn’t work if you don’t have an attorney doing it correctly, and (worse) sometimes trying to do it without an attorney can backfire, and make you MORE liable for things than you otherwise would be. It’s a bit like brain surgery; you don’t want to get in there and “tinker” 😉
