When buying a 4-plex, or any investment property for that matter, what is the best way to "own" it for tax advantages/purposes? Should it be an LLC? Or perhaps another business account? Maybe a trust?
Also - what about financing? We're thinking to do an FHA loan, and owner-occupy, for 3.5% down to conserve precious capital. At some point, we're not going to want to keep living in the place, so are there any specifics on how long you have to live in it?
Anyway, not sure what’s best. We’re likely going to be buying and holding long-term, if that helps at all.
Thanks in advance.
Hey @Jordan Christensen ,
To get the best advice on how you should own your four plex, you should probably consult with a local attorney and CPA. That said, most folks here will hold their properties in LLCs for the asset protection benefits that the structure provides.
Here is an article that explains the benefits of the LLC structure - https://www.landlordology.com/landlord-rental-llc-... and another https://www.legalzoom.com/articles/forming-an-llc-...
As for the house hacking you are considering, if you go with an FHA style loan you'lll have to live in the property for a while. You'll need to check the specifics requirements of the loan type you are looking at but I believe you'll need to live there a year. See more info here - can-rent-fha-loan-3231.html
And some articles on house hacking you might find useful - https://www.coachcarson.com/house-hacking-guide/; https://medium.com/@benmizes/house-hacking-the-bes...
@Jordan Christensen I highly agree with Josh Stack. You should decide to either learn the intricacies involved in this yourself and/or commit to finding the best professionals to help you with it. There are plenty of online resources to help but it will take you a lot of time and study. If it's not your thing, just find the best professionals and pay them for their advice.
Having said that... how you hold title to the property is irrelevant from a tax perspective. The biggest reason to own it a different way is asset protection. So if you're fairly new to REI don't worry about it.
For financing, I think putting as little down as possible and getting a long-term amortizing loan is a great idea. However keep in mind that those loans are for people that intend to owner occupy. If that is not your real intention but you're just staying there awhile to qualify that is not what the loan is intended for.
You don't want to own real estate in an S- or C- corp. Owning Rentals in an S Corporation Might Be a Costly Mistake. For property management, which you might want to have if you manage your properties, there are some advantages (health plan, retirement plan) to have it taxed as an S-corp or C-corp, but it will be separate from your assets holding entity, and will not hold any properties or significant assets.
Financing makes a difference when holding in personal name vs an entity. Educated yourself on the pros and cons of that before proceeding in one direction.
Here is a diagram to help with these questions a bit:
Like the previous replies, most investors utalize an LLC structure mainly for asset protection purposes. I have always been told you want to avoid s/c corps for holding real estate investments.
FHA loans can be a great product to help you get into a property with low money down. They have their advantages and dis-advantages. Two things I like to point out to my friends/family is that
- You must live in the property for at least 1 year (house hack)
- You will be paying PMI when you put only 3.5% down
However, you should not let these things scare you away, because a great deal should be acted upon, and if 3.5% is all you have to put down, taking action on the property might still be the best choice! Especially if you can house hack and live free or extremely discounted. Best of luck!
@Josh Stack Thanks for the info - I appreciate it!
@Jeff Kehl I'm doing a lot of leg work myself, for sure. The reason for the post was more-so to gain some insight on other individuals' preferences - not to use it as legal advice haha! But yeah, we're trying to find the right property that we can live in (with 2 daughters) for about a year, which I believe is the FHA requirement, and then move out and rent it indefinitely afterwards.
@Costin I. Thanks for the diagram, I haven't seen that before.
@Jason Luongo Thanks for that insight. I've been told that you can pre-pay the PMI up front (obviously it only makes sense if you're planning to keep the property long term) and that by doing so, you could get a discount up to like 40% - have you heard anything about that?