Active vs Passive investing

8 Replies

Hi Everyone! I have a question looking to tap into your knowledge. I am just starting out and I read it's better to keep the active (flipping, wholesaling, etc) in one entity and the passive (rentals) in another. It makes sense to me however, what if my plan is to flip the house first and say after 3 months it doesn't sale so I decide to rent it out? How would that work if I had the 2 entities?

No reason to have two, The choice comes from your risk tolerance. How many investments you want to keep in one LLC. That is a whole topic in it's self. lol

I don't see rentals as passive investing, in fact, to do it right you need to be very active to find good deals, financing and manage them effectively. Passive investing is more like providing the capital and letting a management company do the work while (and probably not looking for a really good deal up front). Passive investing is more like adding something to your portfolio whereas active is more like a job, in my opinion at least. I think active wise, you start with flipping and what not until you can buy and hold, since buy and hold is the best way to build long term wealth.

This is a long and complicated discussion. You need to consult with your tax folks and legal folks. I disagree that there is no value in having two. There is a ton of value in having two if you structure things properly and have assets to protect. If you have no assets to protect you probably don't need to build too much in the way of defense at this point.

Agree with @Bryan Hancock on multiple entities. Talk to a tax professional about your activities. There can be huge tax implications if you are doing the same activity in different entities. My experience is LLC is good for buy and hold. Some type of corp (s, c) is better tax wise for flipping. You can possibly further reduce tax liabilities if you pay wife/partner salary. Talk to a pro. It's worth the discussion.

Thanks everyone. I will have to talk to the tax guys. I was wondering if you purchased the home as a sole proprietor and didn't sell it, if I had a rental LLC, could I rent it under the LLC then?

Seems like I can only tag one person per post.

@Bryan Hancock gets this one :)

or do an Umbrella Policy for CYA.

May want to weight out the extra coverage that an Umbrella Policy could offer in other areas vs. just do the LLC thing.

LLCs and Umbrella can be double the protection

@Mike York - Newbies often get bogged down in this kind of stuff. And they get caught up in analysis paralysis and often end up never even buying anything. Don't let these kind of questions get you bogged down. Go out there and find a killer deal and go from there.

Originally posted by @Steve McRory :

or do an Umbrella Policy for CYA.

May want to weight out the extra coverage that an Umbrella Policy could offer in other areas vs. just do the LLC thing.

LLCs and Umbrella can be double the protection

Agreed, if I was doing SFH rentals, I'd be comfortable just buying umbrella liability coverage for the first 10 or so. Cheaper and easier.

 p

Join the Largest Real Estate Investing Community

Basic membership is free, forever.