Business Management

An Invaluable Website Every Real Estate Investor Should Know About

Expertise: Business Management, Personal Finance
60 Articles Written
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It’s time to get serious about your real estate business. If you want to grow as an investor, you will need to structure your business in a way that saves you money, protects you from lawsuits, and fits your goals.

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There are more than a few options for structuring your business. You may choose to go into a partnership with others or establish your business in another state. Luckily, there are plenty of resources that can help you make informed decisions and build something that is profitable, protected, and personally fulfilling.

One of the best resources is the Small Business Administration. Use their resources, along with the resources of business planning and legal professionals, to choose the best structure for your real estate business.

What Does the SBA Do?

The SBA is a federal agency dedicated to helping small businesses grow throughout the United States of America. If you are starting a real estate business, you will get to know the Small Business Administration (SBA) very well. In general, a business is considered “small” if its net worth is under $7 million and net profits, after taxes, are under $2.5 million.

The SBA provides counseling, resources, and even funding to small business owners. Even if you have been a real estate investor for some time, keep the SBA’s website bookmarked on your computer.

Financing Options From the SBA

The Small Business Administration doesn’t just offer helpful advice. They can also offer loans to help real estate investors purchase commercial real estate. SBA loans offer longer terms and more competitive rates that are normally reserved to businesses with more resources.

These loans, including the SBA 504 loan and 7(a) loan, do have limitations. Investors can only use these loans to buy or repair owner-occupied real estate. Only 40 percent of the commercial property purchased with these loans can be rented out to tenants. If you meet these requirements, consider applying for one of these loans.

strip mall with clothing storefront in view

How to Choose the Right Business Structure for Your Real Estate Business

It’s possible to get a loan for a piece of real estate, buy it, and do as you wish without setting up an LLC or S-corp. But this may not work out well in the long run. Unless you have an asset protection strategy, your properties will be left vulnerable to lawsuits. Most asset protection strategies involve setting up a business that limits your personal liability.

Related: Landlords, Legal Liability, and LLCs: How Property Owners Cover Their Assets

Real estate investors should also consider taxes and ownership when choosing a business structure. Some business owners must only file a personal tax return and pay self-employment taxes. Other owners pay taxes as a salaried employee of their own business and pay taxes on the profits made by the business.

If you are not sure which option works best for your business, reach out to a legal services provider or CPA.

Different Options for Structuring Your Business

The SBA has laid out different business structures that are available for your real estate investing business. Once you have chosen a business structure, it’s time to register your business, get tax numbers, and start operating under that structure.

The different structures for real estate businesses include:

  • Sole Proprietorship
  • Partnership
  • LLC
  • Corporation (S-corp or C-corp)

There is a lot to consider when it comes to choosing these business structures. Let’s focus solely on how the different structures impact personal liability.

Related: The Difference Between LLCs, C Corporations, and S Corporations

Sole Proprietorship

If you are looking to protect your assets as a real estate investor, a sole proprietorship is not the way to go. Business assets and liabilities are not considered separate entities from the owner’s personal assets and liabilities. If you are hit with a lawsuit, your assets could be at risk.

Partnerships

Limited partnerships and limited liability partnerships are limited to businesses with two or more owners. Liability varies depending on the structure of the partnership, but at least one partner will have limited liability.

hard money-loan

Limited Liability Company (LLC)

If you want to separate your business assets from personal assets, consider forming an LLC. Real estate investors can put properties in an LLC for protection.

If the LLC faces a lawsuit, only the properties and other assets within that LLC will be vulnerable. Your personal home, car, or other assets can’t be touched. It’s possible to put one property in each LLC that you own, but that is just one asset protection strategy.

Individuals, partners, or larger groups can form LLCs. Single-member LLCs and multi-member LLCs are both suitable options for real estate investors who want asset protection.

Corporations (C-Corp and S-Corp)

Like LLCs, corporations are separate entities. The owners of a corporation will be protected from any lawsuits that are filed against the corporation. Creditors and plaintiff will only be able to touch the assets owned by the corporation.

It is possible for an LLC to be recognized as a corporation. The biggest difference between an LLC and corporation is how it is taxed and how owners can be paid.

Ready to Launch Your Real Estate Business?

If you are new to real estate investing or have a few properties under your belt already, consider having an asset protection strategy. Forming an LLC or corporation is just the first step in protecting yourself from lawsuits. We live in a litigious country, and a single lawsuit could threaten to take away everything that you have worked for in the past months or years.

Learn more about asset protection strategies and how the right structure could keep lawsuits from threatening your livelihood.

Have you visited SBA.gov? What have you found most useful about this resource?

Comment below.

Scott Royal Smith is an asset protection attorney and long-time real estate investor. His law firm, Royal Legal Solutions, helps thousands of real esta...
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    Jeremy Fay Realtor from Killeen, TX
    Replied about 2 months ago
    Hate to be the guy that does this but the first half of this article is probably not going to be useful for anybody investing in real estate. SBA loans require you to owner occupy at least 51% of the property in order to qualify for the loan. So even if one plans to buy and house hack a duplex, they do not meet the 51% rule by one single percentage point. It would be foolish for an investor to buy a property and then simply hold additional empty units in their name to qualify for the 51% rule. The information about structuring your business is wonderful but let's be real, no real estate investor is going to find SBA financing a viable option. If there's something I'm missing here, please prove me wrong. I'd happily be proven wrong and then go get a SBA loan. I need more deals!
    Jeff Bosaw Rental Property Investor from Saint Louis, MO
    Replied about 1 month ago
    Maybe if someone had a laundry mat below their home or ran a restaurant below their house then it could work. Dual-purpose properties are out there.
    Jacob Pereira Real Estate Agent from Austin, TX
    Replied about 1 month ago
    I was thinking the exact same thing. He did say COMMERCIAL property, though, so a duplex wouldn't qualify anyway. But not renting out half of your apartment complex seems wrong as well.
    Yolanda Brown from West Palm Beach, FL
    Replied about 2 months ago
    Thanks. That's good to know.
    Todd Hoggatt
    Replied about 2 months ago
    Agreeed
    Greg O'Brien
    Replied about 1 month ago
    Owning rental real estate in a C corp (not for flipping), is never advised. Owning long term rentals in an S also a bad idea. Both will result in severe tax consequences.
    James Gorman IV Investor from Gig Harbor, Washington
    Replied about 1 month ago
    Is the SBA still requiring lenders to charge (2) two or more percent above bank rates & Guaranteeing against banker losses to 80% or more of SBA Loan amounts? Are Demo/Socialist politicians still claiming SBA loans are to help "the little guy" ( ie small business) and not BANKS or lender wanting or trading in high paying government guaranteed securities?
    RC Lupton Contractor from Denver, CO
    Replied about 1 month ago
    The "Small Business Administration" , Lol. A government boondoggle, by the government for the government. Taxpayer scam.....
    EMMANNUEL CHRISTOPHER from MERRILLVILLE, IN
    Replied about 1 month ago
    @ Jeremy Fay Move a wall to gain that 1%, or add a simple functional 1% space to get that 51%. Get a duplex that needs rehab, then move a wall. Occupy both garages if it will help get that extra 1%.