One of the most important things I recommend to investors or buyers considering buying a second or investment property is to strongly consider whether it should or should not be a Limited Liability Company or LLC for short. My reasons for this are many but here some pros and cons:
(Always consult with a real estate attorney for the latest information and/or law).
1. Pros: A lawsuit may offer you some limited protection. Example: You have a contractor work completed on a rental home such as a porch or deck repair. The repair fails, the tenant or guest gets injured, and the injured party files a lawsuit for an accident. In this case, your damages may be limited, and personal assets may be protected.
This is especially true when the owner of the property has limited equity in the home or suit exceeds insurance coverage.
Another example: Suppose your tenant has a dog that bites someone visiting the property.
Your insurance might have an exclusion or limit on dog bites. Most insurance companies in today’s world will not cover dog bites from Rottweilers, chows, and many other breeds. Consider getting a personal liability umbrella coverage policy for one or two million dollars.
Once again, talk with a real estate attorney to best sort out your options, whether LLC, S-Corporation, C-Corporation, or other. Or if you are great at this stuff you may be able to find an online source for the incorporation forms.
2. Cons: Financing – Using an FHA loan insured by the Federal Government to finance a property has advantages and only available for primary home purchases. The big benefit is that it allows first time home buyers to put down as little as 3.5% on their properties. Again, this product not available to companies, or LLC’s. But if purchasing a duplex/tri-plex, etc., and living in one of the units you are fine.
Bottom line: You can purchase a property for 3.5% vice 20%. This frees up more dollars for additional real estate investment. Keep in mind that your interest rate using the FHA product will most likely be significantly less than an LLC rate (company).
Tax breaks also come into play when considering FHA versus LLC. You will most likely get better deductions for your personal income (not corporation).
Capital Gains: Look at the laws regarding capital gains and the exemption offered for both single and married couples.
If I can be of assistance in helping you find an investment or second home property please contact me directly at 757-343-4949 or by using the contact form here.