The Benefits Of Incorporating Your Real Estate Investing Business
As we begin a new year and a new decade now would be a great time to incorporate
your real estate investing business if you haven't already done so. There are several benefits to running your investing business as a corporation as oppose to running the business under your own name.There are many different types of corporations that you can form in the United States. You have a C Corporation an S Corporation as well as a Limited Liability Company, also known as a LLC. Each entity has its advantages and disadvantages and the best one to select really depends on your personal tax circumstances and the strategies that you will be using to invest in real estate.
Therefore, before you make any decisions in regards to the type of corporation that you are going to form, I highly recommend that you speak to a tax professional in the form of a tax attorney and/or a tax accountant. This way your personal circumstances can be factored into the decision and you will select the best option for your circumstances. What we will provide here in this article is general benefits, only a professional can advise you as to the specific benefits that you will receive.
One of the primary benefits that a corporation provides to an investor is liability protection. Corporations became popular back in the 1400's and 1500s in Europe. Wealthy business owners would commission voyages on sailboats across the ocean to discover new trade routes. If anything was to happen to the ship under the corporation, the losses were limited only to the ship. Family members of the sailors on that ship could not turn around and sue the business owner.
Corporations today offer a similar benefit to real estate investors. As an investor of a property, there is the potential to create a great deal of liability if he or she is not properly protected. For example, if a person is injured on the property, the injured party can turn around and sue the property owner for damages.
Now you might argue "well don't I have insurance to protect me from that?" It all depends on how much coverage is provided for in your policy. The amount of coverage varies based on what you purchased when you brought insurance for the property.
Depending on the nature of the injuries, the lawsuit could potentially be for an amount greater than the amount of insurance covered on the property. If that is the case and you lose the lawsuit, the plaintiff can come after the building owner for the difference between the insurance amount and the total verdict.
Here is the danger of being a victim to a lawsuit that exceeds the insurance amount. As a real estate investor, it is likely that you have assets above and beyond the property that you own. You might own other investment properties, other types of assets such as stock, bonds, mutual funds, commodities and so on. All of these assets are at risk of being lost to recover the damages from a lawsuit if you own an investment property under your own name.
When the property is owned by a corporation that you set up, this gives you the ability to control the property while limiting the risks to the corporation itself. If you have 5 properties owned by a single corporation, a plaintiff of a lawsuit can only go after the properties owned by the corporation. Any assets owned by you or owned by other corporations that you control, a plaintiff cannot go after. Many investors set up separate corporations for each and every property that they own. This way liability is limited to just that one property, not all of the other properties that are a part of their portfolio.
Owning your investment properties under a corporation also protects you from liability that you might incur personally. For example, suppose you do real estate investing on a part time basis and you lose your job. Bills begin to pile up and creditors decide to go after you. They will most certainly be able to make claims on your personal assets such as the money in your personal bank account. However, they would not be able to go after any assets owned by a corporation that you own.
If you want to take your liability protection up and additional level, you can employ a strategy of a master protection trust with a corporation. The master protection trust owns the corporation. The corporation owns a land trust. You then have a separate land trust for each property that you own. This is a more advanced liability protection strategy that we can talk about in a future issue.
The second major benefit that running your real estate investing business under a corporation offers is tax benefits. Owning property under a corporation often results in the income that this property generates being taxed at a much lower rate than it would be if you owned the property in your personal name. This becomes even more important as your income increases.
For example, if you run your real estate business as a sole proprietorship, which is what you are doing if you are not investing under some form of corporation, there are a number of tax benefits that you are missing out on. A perfect example of this is federal payroll taxes.
Let's say your real estate investing business generated $100,000 in profit, after expenses are accounted for. Not running under a corporation will result in a self employment tax of 15.3%. This tax is how the IRS gets its money from business owners similar to what they would collect from a wage earning employee to cover social security and Medicare costs.
Certain types of corporations (An S Corp and some LLCs) can designate their income as a dividend disbursement. Dividends are taxed at only 15% currently and depending on your tax bracket it can be as low as 0%. These taxes are scheduled to expire in 2011, but it's certainly possible that political factors could cause politicians to extend them, at least for those individuals that make less than $250,000, which is the threshold President Obama has stated in which he would not raise taxes for. You do have to pay yourself a "reasonable" salary and that salary is subjected to traditional income taxes. However that salary could be low, especially if you are a part time investor.
As you can see, there are numerous benefits for running your real estate investing business under a corporate structure. Keep in mind that every tax situation is different so it is important that you speak with a qualified tax professional for specific advice on your particular situation.
Finally, there are a rapidly increasing number of commercial loans that are coming due. These loans were made at the height of the market, thus increasing the likelihood that they will be defaulted upon. Will the United States congress be willing to bail out smaller to midsized firms that don't have the same level of political capital as the larger firms? If not, it could get very ugly in the commercial market.
Adjustable Rate Mortgages Strike Again
Many people believe that the worse of the residential real estate crisis is over. Unfortunately, based on a recent chart that was produced by Credit Suisse, an international financial services group, the worse of the crisis may actually be upon us.
The first batches of mortgage resets were primarily subprime loans that were scheduled to reset in 2007 and 2008. We saw how that ended up. It created the largest foreclosure crisis in the history of our country. While it is true that most of those subprime loans have reset already, what you may not be aware of is that there is another group of loans that are scheduled to reset in 2010 and 2011 that is just as big, if not bigger than the subprime loans in 2007 and 2008.
There are two types of loans in this second group. There are Alt-A loans and Option adjustable rate mortgages. Alt-A loans are loans that were made to people with credit scores just above the threshold of subprime loans. Option adjustable loans are loans where the borrower could choose what payment they want to make, including a payment that contributes nothing to the principle.
If the prices of real estate drop, it is going to be impossible for many of these borrowers to refinance their mortgages before the adjustment takes place. In fact, with the option adjustable loans, there is a good chance that they are already upside down on the mortgage already. If these borrowers cannot afford the rate increases, you will see another large number of defaults, similar to the foreclosure crisis that cased the bailout program to be enacted.
.
With all of these trends, what is the forecast for real estate in 2010? It all depends on which side of the equation you find yourself. If you are a real estate investor with lots of cash and access to credit, 2010 is going to be a VERY good year for you if these predictions take place. You will be able to pick and choose from a wide variety of different investments to put your money and credit to work.
Commercial properties will be at prices that we haven't seen them at for years. While rents will decrease as well, the price of the property will likely decrease significantly more than the rent decreases. This is because many of these properties had loans made with very unrealistic cash flow expectations, thus creating a price that is severely inflated than its real world value.
The same will hold true if you are an investor in the residential market. Buying foreclosed properties, fixing them up and selling them will net you significant profits because there will be a number of properties that you will be able to purchase at prices significantly below market value.
Investors that utilize our foreclosure prevention strategies will also do well in this marketplace. Should these trends hold up, the number of foreclosures is going to increase, not decrease over the next couple of years. This gives you more people out there that you can help by offering to do loan modifications, work out forbearance agreements, short sales, as well as judgment liens and defaulted mortgages.
Many of the strategies that we teach with residential mortgages will also be able to be used in a commercial mortgage environment. Also, while the federal government might be willing to step in to help homeowners, there is no guarantee that similar help will be made for commercial property owners. Based on the previous crisis where help was limited to the primary residence, it's likely that an investor solution will be the only option for the property owner and the lending institution in the commercial market.
The Benefits Of Incorporating Your Real Estate Investing Business
By: Mike Warren Important Things to Consider When Building Up Targeted Business List Business Debt Help Find The Right Long Beach CPA Firm For Your Business Small Business Owner's Duties When Hiring Interns Emergency Loans for Bad Credit- Easy Way to Gain Cash with Poor Credit Things to Help Your Business Succeed at Telemarketing Cash loans for unemployed tenants-Help you during financial crisis Small Cash Loans –For Your Urgent Small Requirements Sales Forecasting – Help Your Business Grow by Looking Ahead No Credit Check and Cash Advance Loans- Hassle Free Payday Loans Online Orange County CPA Firms Benefit Southern California Business How to Get a Fast Business Loan For a Consulting Firm Doorstep Loans-Trouble Free Cash at Your Door