LLC’s and Why Real Estate Investors Need One
So, you’ve done the research, followed the market, identified areas of interest, and now you’re ready to take the first steps in building your real estate investment portfolio. But one question still looms over the process: Should I start an LLC for real estate investing? At Asset Based Lending we want to arm our investors with the best practices and top notch support they need to bring their real estate investing goals within reach, and the first step is to establish your LLC.
What is an LLC?
A Limited Liability Company, more commonly known as an LLC, is a type of business entity that is registered with the state and the Federal Government. The main function of an LLC is to provide financial liability separation between its members and the company. In real estate investing, having an LLC allows for more control over the company’s profits and makes it possible to buy, sell, and rent out properties while limiting the risk and impact on personal assets.
The separation created by having a real estate investment LLC allows for a level of protection between the business and its members and can act as a shield if things don’t go as planned for your investment. This ultimately ensures that your personal assets remain separate from the LLC’s assets. Real estate investors use this tool to their advantage to protect their profits and build healthy investment portfolios.
Why Do You Need an LLC to Invest in Real Estate?
Forming a real estate investment LLC is a requirement for borrowers to be considered for a hard money loan through Asset Based Lending because, to put it simply, having one works to protect the parties involved in the deal. These direct bridge loans are business purpose loans rather than personal consumer loans, so an LLC protects the borrower’s personal assets and shields against liability if the business turns sideways. But there are many benefits to purchasing properties under an LLC versus as an individual.
The main reason to start an LLC for real estate investing prior to your first deal is to limit your exposure to liability as an individual. Limiting your exposure to liability means that if your LLC obtains a hard money loan for a fix and flip, for example, it will have no impact on your personal credit standing. This is especially important when considering the types of risks associated with real estate investing, such as high-cost renovations or reduced cashflow due to high vacancy rates. In these types of situations, an LLC will ensure that your personal credit score remains unaffected.
Applying for and receiving any loan will take a toll on your debt-to-income ratio, or the ratio of your total debt payments divided by your gross income. This calculation plays a big role in your credit score and ultimately your ability to receive any kind of financing, like applying for a new line of credit or buying a car. The good news is, if you receive a hard money loan under a real estate investment LLC rather than in your name you can avoid carrying that burden on your personal credit standing.
Once you’ve established your LLC for real estate investment properties and obtained a hard money loan with Asset Based Lending, the process of applying and being approved for your next hard money loan will become easier. In many instances real estate investors will create a new entity for each property or deal, while others will build their entire portfolio under a single LLC. In the instances where a borrower is establishing a new real estate investment LLC for each deal, ABL will still consider the borrower’s complete history.
What Do You Need to Set Up an LLC?
The first step in forming your real estate investing LLC is to pick a name that is not already in use in your state of formation. Many investors will name their LLC after the property’s address, or some will include words like “real estate” or “properties.” All should include the abbreviation “LLC” at the end.
An LLC can be formed with one or more members at varying rates of ownership. The level of ownership is detailed in an Operating Agreement which is a required document to form an LLC. This document outlines the members involved and what percentage of the company they own. The percentage of ownership is determined by the LLC investment partners, which informs the amount of the profits and losses each member is entitled to. However, if a member of the LLC is at least 20% of the entity ownership, then they must sign as a personal guarantor on the hard money loan. Not every loan guarantor needs to be part of the investment LLC- for example, it’s common for general contractors to guarantee a bridge loan so that an inexperienced real estate investor can qualify for more complex projects.
After the LLC name and Operating Agreement are created, it is then necessary to file Articles of Organization with the Secretary of State’s Office. It is also important to check what other steps are required to be compliant in the state your LLC is being registered, as well as the federal guidelines.
Once You Have an LLC, How Do You Get an ABL Hard Money Loan?
Once you have established your real estate investment LLC and identified a property you are interested in purchasing you will then need to shop around for a loan. This is a great time to start a conversation with one of ABL’s Loan Officers, whose job it is to help determine which of our loan products works best for you and your current project. To be approved for an ABL loan it is required that all borrowers operate under a real estate investment LLC and are not looking for owner-occupied properties.
ABL’s mission is to provide hard money loans to fund fix and flips, new construction, and cash out refinance projects without delaying your project or allowing you to lose a deal. As a doc-light lender we do not require mountains of paperwork or years of experience to be approved for one of our hard money loans. ABL’s Loan Officers can typically advise a borrower if they are qualified for one of our loan products after a 10-minute conversation, and work just as quickly to fund your investment.