How to Set up Your Real Estate Business

Elite real estate investors all share one thing in common: they’re very organized as a result of a well constructed business system. Their organization consists of a legal business entity (usually a Limited Liability Company), a structured office setup and different forms of media that present a professional image to everyone they do business with. In this article, you’ll learn how to duplicate the basic business system that the most successful real estate entrepreneurs use in their day to day operations. This information will help new investors get their business off the ground. Seasoned investors will want to use this information as a checklist to ensure their day to day setup is airtight.

Business Infrastructure and Setup

Step #1: Set up your corporation. Before choosing a corporate entity, consult with a real estate attorney or an accountant that specializes in real estate taxation. The corporate entity you choose depends on the state you do business in. A corporation is a financial and legal shield for your business and investments. Its effectiveness in protecting your legal and financial well being varies by state. Check out this article found on Wikipedia which contains more state level data: http://en.wikipedia.org/wiki/Limited_liability_company

Most real estate investors rely on the formation of one or more Limited Liability Corporations to own and protect their assets. Real estate investors use a limited liability corporation (LLC) to limit their legal and financial liability in case there is ever a lawsuit against them pertaining to the real estate they own. In the beginning, you’ll only need to form one LLC. As time passes and you begin to hold more than one property at a time, it may be wise to form one LLC for every property you own. Doing so limits any potential plaintiff from being able to sue you for assets outside what your individual LLC owns.

Highly advanced investors rarely buy property using mortgages for their investments. They use money from venture capitalists, various private capital sources or they open up large credit lines. Credit lines are like credit cards. Investors with credit lines often use these lines for purchasing homes, paying for rehab expenses or possibly to cover advertising expenses.

Perhaps the best feature of venture capital and credit lines is that they make it possible for an investor to buy property through their LLC as an active member of their LLC; not as an individual. Contrarily, new and intermediate investors usually buy property in their own name – with a mortgage. Banks and lenders that create mortgages do not allow for an individual to buy as a member of their LLC. Therefore investors using a mortgage as a source of acquisition funds will have to quit claim deed every property they personally buy into their LLC’s name right after they close their purchase transaction. Exercising a quit claim deed to an established LLC limits an investor’s exposure in potential lawsuits, but the investor is still personally liable to pay the mortgage. It’s quicker to buy property through an established LLC with a credit line or with private capital. This method also limits personal financial and credit risk. The problem with credit lines is that the process to qualify for them takes time – usually 2 years or more to build the credit and the wealth necessary to collateralize a credit line – therefore new investors usually have to settle for a mortgage as the financing method for their initial purchases.

Quit claim deeding a property that was bought using a traditional mortgage into an established LLC does not remove the liability of paying the mortgage on the property. That mortgage will still show up on the property owner’s credit report until that mortgage is paid off.

If someone sues you personally because of an accident at a house you own, you could be liable to pay restitution to the plaintiff. Your wages can even be garnished from your job or business by the plaintiff if you personally own that particular home. But if you buy a home and transfer the title of the home through a quit claim deed into your LLC, you are protected much better from a legal standpoint. It is much harder to sue acorporation that owns property than it is to sue a person that owns property.

With your property in an LLC, whoever wishing to sue you would actually be suing a phantom, a ghost: They would be suing your LLC. Whoever owns the house is liable. Your LLC doesn’t have wages to be garnished. Your LLC doesn’t have any money – just a property. The LLC can be dissolved into thin air. Good luck disappearing into thin air if you are being sued personally. Do you see why forming an LLC is top priority? Either way you slice it, you absolutely have to form a corporate entity such as an LLC. Every property you own must be quit claim deeded into your LLC(s) for maximum legal protection if you are buying property using a mortgage as the method of finance.

A title company is your best friend besides your attorney when it comes to technical issues like Quit Claim Deeds, Purchase and Sale Agreements and all other real estate documents you use. Get with a title company and develop a relationship with their associates – they’re a wealth of information. Wise investors have preferred title companies they use.

Besides being a legal fortress, an LLC can also be used to establish something else: credit. If your LLC is able to show a profit over two years through tax returns, you are considered to be a true business owner by most large banks. Being considered a true business owner, you can begin to go to various banks to open up big lines of credit. Buying homes with mortgages takes a toll on your credit report and keeps you in a higher risk position from a credit standpoint. With a credit line, your credit report has less activity on it and you can start buying property in your corporate name which is safer to do. Plus, with credit lines you have buying power. This allows you to acquire property with much less effort. When banks, realtors, and other sellers know you play with cash, you get great deals expediently. Currently, I work with some investors that have millions of dollars in corporate credit. For them, just as it will be for you, their lines of credit all started with 2 year’s LLC profits on their tax returns and business bank account statements. They are now able to purchase homes 5–50 at a time, right from banks for as little as 10 cents on the dollar. They can close some of these deals in as little as 72 hours. That’s the power of an LLC with credit lines to back it up.

You are personally liable for your credit line(s) but over time, you can build your LLC’s own credit. Developing a business credit score allows you the benefit of purchasing homes in your LLC with no liability on your personal credit report. Building business credit takes years and is one of the top tiers of real estate investing.

You can form your LLC in minutes for as little as $25. To form your LLC, go to www.secretaryofstate.com. There, you will find the necessary forms and filing instructions to get officially filed as a legal entity with your state. You could also go to your state’s official website to create your LLC.  Don’t name your LLC with the words “investment”, “properties”, “real estate”, or anything having to do with real estate. Banks hate issuing credit lines to real estate investors (I know, it is completely surprising) even though they generally like lending mortgage money. Banks generally view private real estate investors as illegitimate business people. They feel the failure rate is too high for real estate investors and don’t want to take unnecessary risks by opening up credit lines for them. They’re also weary of fraud. Banks like to issue credit lines to businesses that are non-real estate based, more so than they like to issue credit lines to businesses that are real estate based. These facts are important to know before you try to open up credit lines.

Step #2: Acquire your Tax ID Number. You, as an individual, are identified by the US Government via your social security number. Your business on the other hand, has its own identification number known as anEmployer Identification Number or Tax ID Number, commonly referred to as an EIN. As you build your real estate wealth, developing credit lines is important, as you just read. These lines are based on the last 2 year’s profitability of your LLC shown on its tax returns. Banks can only tell how profitable your LLC is by looking at your tax returns. Just as you would file individual tax returns with personal information – including your social security number, your LLC’s taxes are filed based on its own information and it’s EIN. Your business is not a true business without forming an LLC and having an EIN to identify it with. You cannot open up a business bank account or line of credit without your LLC and EIN papers. Acquiring an EIN takes minutes, it’s cheap and it’s really easy. To get your LLC it’s EIN, simply log on to www.federaltaxid.us.

Step #3: Form your business bank account. If you haven’t done so already, you’ll obviously want to start a business bank account. To do this, you’ll need to supply your company (LLC) papers and your Employer Identification Number (EIN) in writing as I mentioned above. The bank will ask for these pieces of information when you meet with your personal banker to start your business account. It’s ok to shop banks to see which programs benefit your business the most. You may select which bank you wish to hold accounts at based on which banks are more aggressive with their credit lines offered to businesses or which banks seem to have the best account features for your investment activities.