Property Investment Guidance

Property values plunged over the last few years thanks to the deeply rooted recession that hit the entire world. The hard lessons turned many people away for fear that they may be hurt in future. However, many others have seen this as a huge opportunity to make an investment that is considered to be one of the safest types around. But, there is the right way of buying real estate and the wrong way, and it is important to follow the right guidance to avoid losses.

All one has to do is look back to see some of the most famous multimillionaires who climbed the ladder by making property investments. Many of them purchased in neighborhoods that were to become some of the most popular communities, where their values doubled or tripled in short periods of time. Others purchased properties, renovated them and quickly flipped them, making a profit.

Buying real estate the right way involves research. Knowing the market perfectly in the preferred location is a must. By now, you must have heard the old adage, “location, location, location”. This is not just purchasing in the right town, it is about purchasing in the perfect area of that particular town. Even the smallest things can affect property value.

Of course, there are many other factors that can increase or decrease property value, such as a home located on a major boulevard would likely be less valuable than one on a quiet street. Every aspect of the purchase must be carefully considered because it is important to invest in property that brings the best ROI.

Many people purchase their homes strictly on an emotional basis, but there couldn’t be anything more wrong than that. Although there are emotions involved, one must carefully consider the property’s future value. One way or another, the property will end up being sold at some point in time, and you should always come out a winner.

These days, it is easy to find deals no matter where you look in the nation. Even high end neighborhoods have their deals because so many people lost out in the recession. These losses to these unlucky people bring opportunities to a new generation of buyers.

Before investing, however, you should carefully look at your own situation as well as the factors that can affect you. You want to ensure that you will be safe in practically any uncertainty. This is important in order to survive and thrive.

As a tax advisor, one of the most common questions I get from investors is “what type of legal entity should I hold my real estate in?” Unfortunately, the correct answer to this question is most likely “IT DEPENDS.” For real estate investors, the best legal entity to hold title to your investment properties should accomplish the following 5 objectives:

1) Minimize taxes due to the IRS and State agencies and in turn result in a higher overall return on investment

2) Allow for maximum asset protection against potential lawsuits and creditors

3) Provide privacy to the owner(s) of the property

4) Allow the investors to achieve a wide range of flexibility and options regarding the management and control of the property, and

5) Minimize the complexity and cost of maintaining the legal entity(s).

You may have heard people tell you “Always use LLCs for real estate”, and another person may say “Always hold your real estate in a Trust”.

As a real estate (R.E.) investor, it can be both confusing and frustrating to receive such definitive, yet contradictory advice. As a result, a lot of investors are left to wonder – just which one is correct?? Well, the answer again is: IT DEPENDS! Unfortunately, in our complex tax code, there is no “easy way” to provide an answer. Also, there is no “one size fits all” strategy that works for all R.E. investors. An analogy I often make is: Giving out tax advice without first understanding everything about the taxpayer is the same as a doctor prescribing medication without first doing a diagnosis. In both the financial and medical field, this is known as malpractice. Every taxpayer is different and unique. As such, the BEST legal entity(s) to hold title to your R.E. investments will depend on your personal, business, investing, and overall tax situations.

Here are a few examples of things I analyze when working with investors to determine the ideal entity structure for their R.E. holdings:

1) What type of property will be purchased? (Commercial, multifamily, single family, office space, etc.)

2) What is the length of the expected holding period of the property? (Long-term hold, fix and flip, wholesale, etc.)

3) What is the projected monthly/annual income for the next several years? What are the types of income to be earned? (Rents, management fees, commissions, vending income, etc.)

4) What are the investor’s exit strategies for the property? (Sale, lease option, seller financing, 1031 exchange, transfer to next generation, etc.), **TIP** – YOU SHOULD ALWAYS HAVE MORE THAN ONE!

And

5) Last but not least, what other types of income or investments is the investor involved in? (This includes a review outside of the R.E. and analyzes the taxpayer’s tax situation as a whole.)

The answers to all of the questions above will assist your advisor in determining the optimal legal entity structure for your investment. It is true that an LLC can be a great entity for those investing in R.E.. But there are times when holding your investments in an LLC will result in significantly higher taxes vs. in a Corporation or a Trust. In order to identify the ideal entity structure for YOUR R.E. holdings, here are the two action steps to help you get started: