Starting out, and curious about protecting my assets

[Nate Davis]

Hello,

My wife and I are currently looking into real estate investing to create passive income. We are looking at long-term rentals of multi-family homes. We plan on using the FHA loan for the first purchase in order to lower the initial investment. Obviously, I have a ways to go before I get to this point, but I wanted to get ahead of the curve; how can I best protect my assets and myself? I know I will need to set up a LLC, but I have seen some videos about owning the home through a Trust and the LLC manages it. Is owning it through a trust just another layer of protection? What are the benefits of that technique? Also, since my wife will be my partner, for tax purposes is it better to just have the sole proprietor LLC or set up a partnership?

[Charles Carillo]

@Nate Davis

If you are utilizing an FHA loan, the loan, and the property, will be in your name. After you set up an LLC, you need to quitclaim the property to the LLC; however, most (if not all) FHA loans have a "due on sale clause." This means that if ownership changes (i.e. you sell it or transfer the property into an entity); the loan is due. This is hurdle number one that you should discuss with your attorney. Hurdle number two is potential tax consequences. If one person buys the property, and it is transferred to an entity with different ownership (i.e. you buy it and transfer it into an LLC that is owned by you and someone else); there may be tax consequences. I would speak to an attorney and accountant prior to purchasing a property, owning an LLC or making any changes to the ownership of a property.