Investing in real estate is a common and worthwhile investment to consider. Pursuing one may provide tax advantages and additional revenue streams. Although it requires a somewhat lengthy explanation, it is also a form of protection against inflation. One of the pitfalls is that many assume they are already in the real estate market or business. In other words, if you own a house, you are familiar with home-buying. You have the experience and capital to consider getting a second home as a rental property.
There is a fundamental difference between buying a home as an individual and getting one as an investor. It is common for people to refer to this as having “passive income,” and that is why we are publishing this blog. If you are considering buying an investment property, we encourage you to shift your mindset to that of a business owner. Secondly, don’t assume that passive income isn’t a byproduct of deliberate and active work.
Shifting Your Mindset
Anyone eager to purchase a rental property should be familiar with Limited Liability Companies (LLCs). Before we explain the connection and why they are so critical, you first need to ensure your lender will allow you to put your investment property into an LLC. (Again, buying a rental property requires a different thought process than purchasing one to live in.) If you put your home into an LLC and it isn’t ok with your lender, they may foreclose on your property.
So, why would you want your rental property in an LLC? LLCs shield you from liability. Imagine that you rent out your property to people who love to throw parties. On top of damaging your house, imagine a scenario where someone gets hurt at one of them. If that house is in your name, they can sue you personally. They can come after your personal assets. When you rent out a house, you want to put it in an LLC. Although you can do background checks on your tenants and conduct interviews, you have no control over what happens at your rental daily.
When someone gets injured on your property and sues you, it is likely in your best interest if they sue the LLC. That means the injured party cannot take the home you’re living in, the money in your personal accounts, the car, etc. Create a legal barrier between your personal assets and those that belong to the business.
Get in Touch with Jayaraman Law
Once your investment property is in LLC, you need to follow the formalities of corporate governance. If you have two properties, consider whether you need separate LLCs. Additionally, you must be aware that commingling assets (i.e., your personal assets with business ones) destroy your corporate governance structure. It’s referred to as piercing the corporate veil. After you put your properties in LLC, have a good accountant and an attorney to ensure you are personally safe. Contact Jayaraman Law to set up your free consultation.
Jayaraman Law
