What’s needed in order to get started?

Question

I’m new to the site and new to the world of investing in real estate

Looking for a way to get to financial freedom and have been reading old posts on BP, listening to podcasts, and reading as many books as I can in order to get as much education as possible.

I’m Looking to get some insight in the behind the scenes of starting out. I’m planning on starting with buying and holding.

How does the financials and taxes aspect work? Curious on the necessity of creating an LLC or getting a business license. I’ve read on multiple old posts that there is no need to create an LLC until you have a few deals under your belt (I’m sure they are referring to the aspect of shifting the liability off of you) curious how this works come tax season if you also work a W2 job (as I do and plan on doing) where your gross income from a property would be say 12k for a year but your net income or cash flow is only 1K.

Do I need to classify my investment properties as a business before I get started or will it be no issue as long as I keep all records of expense?

Thanks for your help in advance I’ve been really over thinking this aspect and want to get it squared away prior to purchasing any properties in order to not get ahead of myself.

Ned Carey · Answer

@Wyatt Morgan

What’s needed in order to get started?

Basically all the things the gurus say you don't need.

An LLC has Little if any affect on your taxes for rentals.  if you are doing flips or quick turn deals of any kind then an LLC taxed as an S Corp may be of some advantage.

An LLC will provide you with some liability protection but it is not absolute and not as much as people think. You definitely need good insurance LLC or not.

This is why you shouldn't trust everything you read on the net. That includes here, and that includes what I write.  What if those first few deals are rentals? What if a tenant's child gets exposed to lead paint dust before you create the LLC?   You are personally on the hook.  In Maryland you could be on the hook for 20 years!

Justin Windham · Answer

@Trevor Maloney

An LLC alone does not allow you to setup a Solo 401k or contribute that much to it. Having self-employment activity (with or without an LLC) allows you to setup the plan as long as you do not have any full-time non-owner employees. Having significant self-employment earnings (roughly at least $180k) can allow one to contribute up to $56k per year.

Wyatt Morgan · Answer

@Justin Larese thank you that was my biggest question making sure if it wasn’t in a different entity that I could still separate the properties and write off the expenses because the income wouldn’t be what I was actually earning from each property.

George Blower · Answer

@Wyatt Morgan

Welcome to BP!

Trevor Maloney · Answer

because depreciation the rental will give u nice tax break talk cpa find out what get u best best result and on the llc question it also worth it because it allows u to hold upto 55k tax free annually  in a solo k 401k

Justin Larese · Answer

the IRS sees a LLC as a piece of plexiglass. It will keep the splatter of being sued from touching you personally if done right, where property insurance can provide an umbrella to help cover some liability, if it doesn't rain too hard with lawsuits, but the IRS still has you file your taxes the same as the owner unless you have partners in LLC. You will write off expenses for each property. Each property I own has a folder with everything in it with section of repairs that include labor and parts. You can get in trouble if you write off repairs for one property, but actually  had the work done on another. So keep good bookkeeping. If I have misspoken someone correct me, but that's how I've been told.

Wyatt Morgan · Answer

@Justin Larese thanks for the response. So putting other properties in your personal name you are still able to write off all the expenses for the extra properties?

Justin Larese · Answer

Everyone is different and there is no one mold fits all. Nick above went right into a LLC, where as I did not. I made sure my insurance had extra liability. There are also umbrella insurances as well. If you are buying a house for house hacking in a duplex/ multi or staying put and buying a rental you will have different advantages with interest rates, down payments, etc.  I agree with Nick and would recommend building up your team. Start with a CPA who can help you figure out specifics with the direction you wish to go. Find a good lender who is easy to work with, Then work on finding  great real estate agent who can help you start looking for what fits your business model. Good luck.

Nick Rutkowski · Answer

@Wyatt Morgan Do you have a CPA and a lawyer/title company on your team? These are great questions to ask them.

I started out by buying in my personal name then put the properties to my LLC. My reason, being new to the real estate industry creates a lot of liability. For me, the last things I want to lose are my personal belongings. Others will disagree with me about forming an LLC early on but it comes down to what you feel comfortable with doing.

What’s needed in order to get started?

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What’s needed in order to get started?