When you are getting involved in the real estate profession, there are numerous avenues that you can take to establish yourself. You can start a corporation, though that is a big step in terms of getting your feet wet; you can also come in under someone else’s umbrella instead of working for yourself. However, perhaps the safest way to go if you are establishing your own real estate operation is to start a real estate LLC in Arizona. Also referred to as a limited liability corporation, an LLC helps to protect your assets when you launch into business for yourself.
This means that your personal assets, and those of your investors, are precluded from being considered should you run into problems with creditors. There are also tax advantages to setting up a real estate LLC in Arizona, which is a plus since the market has a tendency to fluctuate, depending on geographic location and the economy at large.
The process of setting up a real estate LLC is actually fairly simple. It consists of forms provided by your state’s Department of Business Regulation or Division of Corporations. You will need to provide a few details about your company and yourself. You should fill out this paperwork with an attorney to ensure that all of the pertinent information is included. There are sites that will charge exorbitant fees to undertake this task for you; avoid them like the plague. A good lawyer that specializes in real estate LLCs and tasks of that nature won’t charge you an arm and a leg – in most instances, anyway – to assist in getting your company set up. Moreover, you know that it will be done right, which is something that can’t be guaranteed when you pay an online service to do it.
This is also a great option for those that don’t want to set up a real estate LLC as a company, but rather to receive protections when investing in real estate. It should also be noted that when dealing with investment properties, you need to set up a separate real estate LLC for each one. This helps each property to remain self-contained and protected from one another should a deal go sour. This means separate feels to be paid on each LLC, but most investors are happy to pay it for the peace of mind this type of established identity provides.
When you are establishing a business, you want to ensure that you do everything by the book. After all, when you don’t do it right, that is when you are most likely to run into trouble down the road. Therefore, even something as seemingly simple as establishing a limited liability corporation (LLC), should be done by a professional. After all, if you are undertaking the process of setting up an Arizona LLC, you want to ensure that your hard work is not in vain.
A professional can help you to navigate potential pitfalls that exist in the process of setting up an Arizona LLC. From establishing a tax ID number to filing the proper paperwork with your state’s division of corporation to be formally recognized as an LLC, there is much to consider in the process. A professional knows each step and can not only walk through filling out the paperwork – or even doing it for you depending on the type of professional you’ve chosen to work with – but also providing advice on how to operate as a business once you’ve established the LLC.
Once you establish yourself as an official business entity, you need to conduct business as such. A professional can give you tips on how to do deal with financial transactions as an Arizona LLC as well as what the difference is between this particular business designation and others, like a corporation or DBA (doing business as), for instance.
You might not want to make the initial financial investment of becoming an Arizona LLC, since there is a filing fee associated with this business type. However, just like products you might sell or a brick and mortar business from which you operate, it is well worth the financial investment and the investment of your time to learn how to set up business in the proper way. Starting as an Arizona LLC in the right way can set you up for future success and ensure that down the road, you can easily transition to a larger corporation once your business starts to grow and thrive.
Home investment can bring about great opportunities for creating an extra stream of income. However, it can also be a financial nightmare if the process is not undertaken properly. One step, particularly when investing in Arizona real estate, is to create an LLC. An Arizona LLC for investments can help to protect your personal assets should anything happen during your investment undertaking to cause financial issues.
There are a ton of risks that come with investing in homes. From lacking in affordability to proper build, remodel or take care of the home to an inability to find a buyer – or even a renter in some instances – this is a risky endeavor that can cause more strain than a little on your pocketbook. In fact, those that invest in homes for the purpose of renting may then incur greater expenses as the home needs to be maintained over time. This can be costly and the investment can cause personal financial troubles.
However, an Arizona LLC for investments can protect your personal assets by setting you up as a business instead of a personal investment venture. When you incur debt on your residential investments, you are dealing with business debt and not personal debt, which can be a buffer between total financial ruin and financial problems tied to your business. LLC stands for “limited liability corporation,” which means that debtors tied to your investment business cannot try to recoup losses from your personal monies. With such a volatile real estate market in states like Arizona, this is not just an option, but a must-have for those planning to invest in residential real estate.
It should be noted that once you decide to establish an Arizona LLC for investments, you need to take some additional steps as well, including obtaining an EIN number from the IRS and establishing a business bank account (so you can keep your personal and professional transactions completely separate). Do your research before establishing an LLC, so you know just what kind of paperwork you need to properly set up your Arizona LLC for investment purposes.
We’ve been talking a lot about investing in real estate and how important it is to keep yourself protected should you decide to invest in the Arizona housing market. While I spend a lot of time walking clients through the process of living trusts and wills, there is a great deal of focus that has shifted to LLC paperwork for local investors. So, let’s talk about real estate investing for a minute.
The whole goal of investing in Arizona real estate is to grow your money, right? As I mentioned last week, the only way to invest safely and to increase your ROI is to protect that money right from the start with an LLC, which I can personally help you with. But, generally speaking, the goal of every home investor is to make a profit to cover to risk.
Understand the Risks
Investing in Arizona real estate means understanding the risks and weighing those against the possible profits. You must take into account taxes, utilities, insurance, and any fixes and/or renovations that need to be made. After all of that is taken into account, you can sit down and realistically consider how much you’ll need to ask as a down payment, and how much you’ll need to charge as rent.
Understand the Profit Game
Investors are in this game to make money, plain and simple. If you are successful at investing in Arizona real estate, you can make a great amount of money to build your investments and overall profits. If you are unsuccessful, however, you can find yourself filing for bankruptcy quite quickly. Here are some tips from About.com regarding the four simple steps that investors take to guarantee profit:
Real Estate Appreciation – when an Arizona real estate property becomes more lucrative and valuable over time due to upgrades in the area, new schools, new shopping centers, new parks, or renovations that you have added to the property. This added value will increase the price of the home, increase rental rates, and increase resale value.
Cash Flow Income – this form of investment real estate can be more commercially focused, where the rent that you make counts as continual cash flow. “Cash flow income can be generated from well-run storage units, car washes, apartment buildings, office buildings, rental houses, and more.”
Real Estate Related Income – this is where experience, connections, and the right mind-set become crucial. “Specialists” such as real estate brokers, real estate management companies, get to keep a percentage of monthly rent in exchange for managing the daily operations and keeping the property clean.
Ancillary Real Estate Investment Income – this is small real estate business can make huge profits based on the idea that vending machines constitute a small amount of real estate, but placed in thousands of office buildings can generate quite an income.
There are two crucial elements that must be considered before jumping into the Arizona investment pool:
First, you must sit down with an expert who can put together the Limited Liability Company paperwork to protect all of your assets and help you lower risks. According to About.com, “your 401(k) plan assets, Roth IRA investments, and other retirement accounts should be out-f-reach.” Contact us for more info.
Second, you must find an experienced realtor who has expert knowledge of the Arizona investment game, where you should by, what you should by, and how to measure out the risks vs profits. Contact Troy Reeves at RelocateAZ.com for more info.
Under the auspices of an Arizona LLC, the real estate investor is granted the legal protections of a corporate entity without the strict regulatory filing restrictions under other business entities. The ease of set up and lack of regulatory requirements is the main reason many real estate investors chose the business format. If you don’t form a LLC for investment property, the owner will be forced to assume all of the risks of liability in the event there is a lawsuit.
While many states allow individuals to establish an LLC online, it is best to speak with a trained professional who is experienced in the various business entity filing formats. While you will need to purchase property in your own name if you’re seeing bank financing you can transfer the property to your LLC after the closing by filing a quit claim deed. Once the property has been transferred to the LLC, all other transactions that relate to the property should be done under the name of the corporation.
Filing an LLC to protect yourself against liability and financial risk as a result of your investment real estate purchase. When it comes to tax consequences, filing taxes under an LLC means you will be taxed as a sole proprietor which means you will not pay taxes based on the income of the LLC but on your share of the profits and losses in the property.
Bear in mind that you will need to form a separate LLC for each investment property purchased – this protects the owner from “Spillover liability” from the other properties. Spillover means that if one LLC owns two investment properties, a tenant living in one of the properties could sue the LLC and could potentially obtain a judgment against both of the properties – meaning they could potentially receive a larger payout. Additionally, your bank may also require a separate LLC to limit the risks from underwriting properties that are not related to the property they are currently financing.
Taking steps to establish an Arizona LLC should be undertaken at the same time as your deciding what kind of investor to be in your real estate purchases.
If you’ve decided that the time is right to get into the real estate market in Arizona and to purchase some investment property, you will want to speak with your legal counsel and/or accountant. You don’t have to lose a lot of sleep or jump through a lot of hoops to establish a business entity to protect yourself and your investment property purchase, but you will want to establish a Limited Liability Corporation (LLC). Many individuals who have gotten into real estate investing – purchasing property and renting to others – have found that a simple way to limit personal financial risk and liability is by establishing the LLC.
Investing with an LLC
Before you decide to invest in rental property, investors should take time to think about the reasons they want to invest and the types of income they hope to reap from the property. There are four types of real estate investment income: tax benefit realization, property appreciation, principal reduction and cash flow.
You will also need to decide whether you will be a passive or an active investor and the type of property you want to invest in – apartments or commercial property.
As an active investor you will be involved in the day-to-day management of the property – from dealing with tenant issues, leasing the apartments, showing apartments to potential renters, working with contractors to coordinate repairs. You would truly be a landlord in the truest sense of the word as you will also be the go-to person for all items apartment-related.
Passive investors are not hands-on landlords. In many instances the landlord might not even live in the same state in which he or she purchased the investment property. Passive investors are able to purchase property wherever the real estate market is most advantageous to the investment purchase. As a passive investor, you will hire an on-site manager and become the CEO of the investment property.
Regardless of whether you’re an active or a passive investor you will still be best served by establishing the LLC for the real estate investment purchase.
Jump to Part II of “Establish an LLC”
There are many decisions that must be made when deciding to open a business in Arizona and one of those items that needs to be addressed is the type of business entity to form. The entity that you choose will determine many of the other business decision you make, from everything from tax implications to the liability the owner is opening himself up to, to the business control. Getting the right information from a trusted Arizona LLC and corporation expert should be your first step.
There are several entities available including: sole proprietorship, partnership, S-Corp, C-Corp and a limited liability company. Here is a primer on the various types of entities and that they mean:
C-corporation: It can take much longer and is more labor intensive to establish a C-Corp, but it offers the greatest amount of protection against liability and business risk protection. There are strict government regulations that must be adhered to as it relates to reporting, financial disclosure information and the company’s corporate structure is maintained. With a corporation the rights of ownership pass to the named heirs upon the death of the owner. A C-corp brings with it income tax flexibility and offers myriad tax deduction benefits. A caution to keep in mind, is that a C-corp can lead to double taxation if taxes and financials aren’t properly accounted for.
S-Corp: Under the auspices of an S-corp, you are able to combine the most advantageous features of several entity types. An S-corp gives owners the benefits of a limited liability entity while allowing the profits and losses of the company to flow through to individual business owners for income tax purposes. This filing benefit avoids the potential for double taxation. Governmental regulations, costs and legal requirements with starting an S-corp are fewer than with a C-corp.
Limited Liability: Much like an S-Corporation, a Limited Liability Company (LLC) is an amalgamation of the other entities. It contrasts with the proprietorship and partnership, an LLC offers owners limited liability (as the name denotes) for both business risk and debt from ownership in the company.
Sole Proprietorship: This business is owned by one individual and is the easiest to form of all the business entity forms. This form is by far the easiest to establish and operate as it relates to regulatory filing and requirements. The business owner, under a Sole Proprietorship will file a Schedule C for income tax purposes. Also under this entity, the owner assumes the business risk and all liabilities associated with the operation.
Partnership: As the name suggests, a partnership entity is for more than one business owner. It is easy to set up and establishes the successorship in the event of death or dissolution of the business.
It is always best to consult with an attorney and even your accountant to determine the best business entity for the type of business you are looking to establish in Arizona.