Why You Need A Business Entity

Many real estate investors jump in with both feet, and the enthusiasm is one of the main reasons I love working with investors every day. However, to make it over the long term, that enthusiasm needs to be tempered with a little bit of foresight and planning. Working within a business entity, whether an LLC, an S-Corp, or even a trust, brings many benefits to the investor. Having a business entity helps the investor:

To secure funds

There are many lenders that work specifically with real estate investors, and these lenders only make loans to a business entity, they never make loans to an individual investor. I’m not talking here about your local hard money guy, I’m talking about institutional investors who specifically focus on real estate. It is possible to get funding for both the purchase price and the rehab costs of a fix and flip project. It is also possible to get a short-term loan for the acquisition and rehab, and then automatically roll it over into a long term loan once the project is stabilized. There are a lot of options for the real estate investor, but many lenders do not make loans to individuals, only to entities. It really helps streamline things if the entity is in place before you are on a timeline to close a loan.

To provide liability protection

From a liability perspective, there is no distinction between you, the investor, and your project, if you are operating in your personal name. This tremendous exposure can be reduced by operating within a business entity. It also helps to work with an insurance broker who is familiar with real estate investors and their unique needs.

To separate business and personal finances

Can your project survive unexpected turbulence, (a worldwide pandemic, for instance)? If the worst should happen and your project falls apart, how will it impact you financially? If everything is in your personal name, then there is no separation between your real estate business and your personal financial situation. If your project falls apart, can you take the financial hit? If you are operating within a business entity, and your business goes bankrupt, that DOES NOT have to mean you personally will go bankrupt. If your business is separate from your personal financials, then a bankruptcy in your business will not necessarily impact your personal financial situation. This kind of separation takes careful planning. Make sure you are planning for the worst that could happen, not just the best that could happen.