Should I start a buisiness or just continue purchasing rentals?

Question

Hi everyone. I have owned real estate for approximately 20 years now. I would like to hear from you about whether I should start a business or continue status quo, and what are my pros/cons for either.

My first home i purchased in Colorado turned into a rental after some time. Then, my wife and I purchased our home in Albuquerque. We lived there for several years, long enough to do a cash out refinance and pay off my first home. We moved later and bought our now home in Virginia, and rent out both other properties. We have since done another cash out refinance to pay off our now investment property in Albuquerque. We have 2 paid off rental properties and a mortgage on our primary home. Then we just purchased a 4-plex in Albuquerque which is producing positive cash flow. I felt, with our extra capital that purchasing another Triplex in Albuquerque would be a good deal. So we are in the process of that right now. I also am looking to sell my first home in Colorado now using a 1031 exchange to purchase a better cash flowing property.

Jonathan Pavkov · Answer

Hi @ThomasRoy Penland - Congrats on building a nice portfolio! I'm a CPA who doesn't work in your markets (I'm in Columbus, OH - I invest, am a REALTOR also). Doing taxes can be manageable on your own if you do the research. The main benefit a good CPA in your market would be to help you if you want to really scale and bring in other investors. Figuring that out can be a bit of a headache if you don't have the background.

However - keep doing what you are doing... seems like it's working for you!

Joshua Christensen · Answer

Hey thomas. Fear is a beautiful thing.  I learned a long time ago that my goals represent things not yet achieved and some degree of fear stands between my reaching those goals.  Overcome fear with some knowledge of your subject.  Surround yourself with others who have been there done that.  And then take massive action.

an accountant is your friend if you utilize him properly. DIY is a recipe for disaster as you grow.  Your time is better spent in other ways.

Levi T. · Answer

Technically you already have a business with your rentals.. So, follow your heart and do what speaks to you.. You can always do both!

David M. · Answer

@ThomasRoy Penland

As@Sean Morrison is asking, what you are you looking to achieve to start a business?

If you are just doing rentals, are you concerned with liability risk?  That's all the LLC's would help address.  But, they have their costs, sometimes hidden.  You need to use commercial lending since legal entities are not eligible for conforming residential loans.  If you transfer your properties to a LLC, you should have a LLC registered/formed in teh state the property resides.  Its a legal entity formed in a State, so it is only recognized in the State it is formed and another States it is registerd (as a foreign entity).  As human beings and citizens of the USA, we are legally recognized across State lines...  It looks like you have only two...

You mentioned taxes...  They basically will be the same...  If we assume you and your wife would be members of the LLC, then you have a multi-member LLC.  (FYI:  if it was one person and thus a single member LLC, the IRS considers it a "disregarded entity" so your Federal tax return would be identical --- that's what I have).  You'd have to file a partnership return which would spit out a K-1 form (think of it like a 1099 or W-2) which tells you what to put into your personal return.  Ultimately, the numbers will work out to be the same.

Having a legal entity doesn't provide tax benefits.  Its just more accounting and when operated properly, additional legal liability separation.

There are many investors who own many residential properties personally.  BP investors have posted owning 10+ with some even as high as 50+ in their own names.  Its a personal prefernce / risk tolerance.

Hope this helps.  Good luck.

Sean Morrison · Answer

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

If you're talking about creating an LLC, just remember that you're running a business even without it. The LLC is there for an additional layer of asset protection beyond insurance. It can be a good way to protect various assets (like properties) from other higher-risk assets. For example, a problem from property A can't take assets from property B.

However, also keep in mind that 1031 exchanges must be from the same person to person. A multi-member LLC that owns a property can 1031 to another property owned by that same LLC. But it can't 1031 to a new property owned by an individual. A single-member LLC may be able to do that. When starting down the 1031 path it is typically best to know what kind of entity, if any, it will have all the way to the end. And talk to CPAs and attorneys who do these kinds of things once 1031's are involved.

Joshua Christensen · Answer

@ThomasRoy PenlandI work with Hinkle & Landers.  They do a great deal of real estate businesses.  This is my first year with them, so I can't speak to their performance.  So far, I've liked what I've experienced.

Jens Nielsen · Answer

@ThomasRoy Penland Nice progress so far on your rentals.

When you say start a business, what do you mean? Are you considering going into RE investing full time, or are you looking to move your assets out your own name?As @Levi T. mentioned, you are already running a business with your rentals. It may be a sole proprietorship, but you should still treat it as a business. I own 75 units in Abq and have syndicated many large deals around the country, and I started my first LLC before I even had my first rental property. Taxes do get complicated, but that's why we hire professionals to do that work for us.

I'm also not sure it's a great idea to have two paid-off rentals. If there is ever a lawsuit from a tenant you have a lot of equity at risk in those properties. You should consider talking to an asset protection attorney about that.

Let's connect if you want to talk more.

Mark Hughes · Answer

@ThomasRoy Penland wow. We have a lot in common (including first home purchased in co, converting a couple previous primaries into rentals over the years and we also sold a hole to help fund small multi’s in Albuquerque!! We just did a 1031 last year to sell our rental in Aurora, co last fall and turned into a duplex in a mountain town in Colorado and it was a really smooth process!! Send me a private message if you want to chat more.

Mark

Reece Iovine · Answer

Real estate is a business :) Look at your long term goals can you achieve them with rentals? If you really really want to start something else, look into a business that is supplemental to what you are already doing in real estate.

ThomasRoy Penland · Answer

@Jonathan Pavkov

Thank you. I appreciate the feedback and encouragement. Yeah, as it is just me, it can still be manageable. Thank you.

Should I start a buisiness or just continue purchasing rentals?

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