Okay, we are having fun now – if you are following along with our series about getting started in real estate investing, you now have a basic plan with some notes established and you are being purposeful! If you stumbled upon this post, you will want to read these posts first, Phase 1: Focus and Purposeful Investing and Phase 2 Finance Set Up.
Entity Structure Set Up
I know by now you are eager to start looking at property, but not so fast. We want to set you up for success. It is important to first establish your entity structure set up.
Real estate investing is an awesome vehicle to create wealth. Like anything of value, you want to protect that wealth. You want to park your new expensive car in the garage during bad weather. You want to keep your money in a bank, safety deposit box or a secure location. You do this because you want to protect it from bad things happening to it. Real Estate is no different. Real estate is an asset and like any asset you need asset protection. Part of asset protection is liability protection.
Imagine for a moment that the unforeseen would happen. Someone gets hurt on your investment property and wants to sue you. If you do not protect your family assets, a bad lawsuit can wipe them all out.
To avoid this, the seasoned investor will typically form a trust or an LLC (Limited Liability Company) and have this entity purchase the property. This protects your personal assets because a lawsuit will need to sue the property owner and the property owner in this case would be either the trust or the LLC. Indirectly this is your company, but in the eyes of the law and taxation department, the property is owned by the trust or LLC and therefore is the party subject to the lawsuit and not you. This will protect your personal assets from the lawsuit.
What exactly should I do here? The answer may be different for different people. A lot if it has to do with your personal goals and objectives. Here is where you will want to talk to your financial advisor or tax preparer. They will help you (based on your financial situation) to set up the best entity for you and your needs. Another great source here is your personal attorney. Your attorney looks out for your liability protection and therefore they may also set these up.
NOTE: an attorney who looks out for your liability protection and an accountant who looks out for your asset protection actually have two different yet parallel objectives. I always conference call (or take them out to lunch) and have them discuss this with each other. It is important that you get the best of both worlds. You want great asset and great liability protection and they can easily brainstorm what will be the best way for you to set this up.
I know, I know, you are asking yourself what is this going to cost? First of all shift the question to what is the value of this investment (thinking like an investor this step may give you a better return on your investment than any other purchase you make). The investment will vary by person and situation and complexity of the process. You may be between the $330 and $800 category. If it saves your personal assets, this entity structure set up consultation is worth every penny.
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