Structuring a company

4 Replies

Hello all, 

I currently own a 5-unit, and two single family homes, and have my real estate license. I just got approval for funding that will allow me to purchase 8 single family homes, and generating about 9k in income per month on top of what I already own. I just have a few questions for structuring everything. 

I will hold the properties in an LLC that I own, but I want to start an S-Corp since other members of my family also own real estate. The goal would be to have the S-corp manage the properties, and we can all receive salaries out of the profit that the properties produce. This will then allow us to get more loans, and continue to build the entire portfolio.

Is this the correct move? What have others done in this situation that was successful? Are there other benefits of an S-Corp that I am missing? 

My 5-7 year goal is to buy enough real estate to generate 1M+ a year in gross income, and allow us all to have salaries as employees of the S-corp. 

Thanks for your help!

Nick

I have an s-corp that manages my properties, some of which are in an LLC. The idea of taking passive real estate income and turning it into self-employment salaried income doesn't sound right. Ludicrous, actually. It's all pass-through anyway, but now you've taken that wonderful 'passive income' and stuck into self-employment with all those wonderful taxes like fica/ss and medicare. Gotta ask a tax guy, but that's my first thought. Increasing taxable wages at high a$% tax rates just to show a bank so you can get more loans? Not me, no way. Good question, though! Curious to see what others say on this...

I don't think the taxable salaries are the way to go but I do agree with a separate LLC for management. If I'm understanding you correctly LLC-1 owns the rental and LLC-2 will manage it, collect rents and pay family members... if this is correct, my thought would be to make all of the family members, members of that LLC. All cash and expenses flow through to everyone's personal SSN.

But, don't confuse me as an attorney or CPA, you should seek local council for both!

Thanks for the responses! I was able to take the advice and find some material based off of the thought processes. I plan on meeting with our accountants and attorneys in regards to setting it up. If anything comes of substance from that I'll add it to the thread. 

Hey @Nick S.

@Steve Vaughan is right for the most part in questioning the motives behind turning Passive income into active income via a S-Corp. LLCs are generally the way to go with passive investments as you get to avoid the whole self employment tax liability that comes with an active business.

However, it sounds like this is going to turn into a serious business so you may very well benefit from running it through a S-Corp if you are materially and actively participating in the business. The owners that are not actively participating wouldn't be "salaried" but would instead receive distributions of the profits.

Additionally, have your members buy more stock in the S-Corp if you are trying to raise money and divvy up the profits that way. You have to remember that eventually, the S-corp will qualify for loans or you may get to a point where a bank won't finance you anyway and go the private money route. So paying everyone a salary isn't the best move.

Medium logo blackBrandon Hall CPA, The Real Estate CPA | http://www.therealestatecpa.com | Podcast Guest on Show #196

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