How We Tripled Our Portfolio Through Creative Entity Structuring [Video!]

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Most investors don’t realize how entity structure can help exponentially grow your real estate company. In today’s video, I share how we have grown our rental portfolio significantly over the last several years as a result of creative entity structure.

Now, I am NOT an attorney, however, as a result of being in the rental business for the last 10 years, I have learned a bit about structuring a business that involves multiple entities. I share how we got started with owning property in our own name to building and owning a company (DeRosa Group) that is our own property management company and is the flagship of our brand.

Related: How to Know When It’s Wise to Place Your Rentals in a C or S-Corporation

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How to Structure Your Portfolio to Prepare for Expansion

I discuss exactly how we are structured and hope this video inspires you to structure yourself properly in order to position yourself for expansion!

Let’s get some discussion going! What am I missing? Do you agree with the structure I have laid out, or have you structured your real estate company differently?

Thanks, as always, for watching!

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area. One of DeRosa’s mantras is “to make money while making a difference.”

27 Comments

    • Matt Faircloth

      Hey Jim,
      Good question! Getting setup as an S Corp is simply an election you make on your tax return. You can start with a regular LLC that is taxed as a partnership and change it to an S Corp in the future once you start taking on payroll expenses. This is done by your CPA when you file your tax returns. I hope that helps!

      Matt

  1. Great, that is a direct answer that I appreciate very much.
    We, my wife and I have a couple of rentals and a real estate firm and make our living with rehabs. We use one llc now for all of our real estate business now.. Should we be forming another LLC now. I am sorry to keep asking you questions but there are so many different opinions and I am not convinced my CPA is staying current as he is about to retire. I am looking for another but that is proving to be more difficult than I expected.

    • Matt Faircloth

      Hey Jim,
      No problem, I don’t mind the questions and love talking about this stuff. If you are doing flips and have regular income from it, you should be an S Corp now. As I said, you will need to pay yourself a salary as a W-2 but it can be a small one. You should talk to your CPA right away about it, or find yourself a new one for next year’s returns. Don’t worry about another LLC for now unless you have rental properties. Rentals should not be in an S Corp directly as you lose the tax advantages that rental give you. If you have rentals, set up one for your rentals and use the other for flips and other revenue.
      Matt

  2. Grant Fosheim

    Thanks Matt for the video. I am in the trenches trying to figure this stuff out now. I have multiple partnerships and LLCs and a total of 35 units. Question is: what are you purchasing new properties in: LLCs, LPs? How is the 49 unit you are closing on structured? And, what happens to residual profits after you take you W2 income?

    • Matt Faircloth

      Hey Grant,
      It sounds like you are well on your way, congrats!! For all my new deals I use Limited Partnerships exclusively. That’s because I am bringing in investors into my deals and it makes sense for them and me to position them as Limited Partners. They don’t have to personally guarantee any mortgage or take on any other liability outside of the loss of their investment. I have full control of the deal and get ownership for my efforts.
      For the S Corp, the profit the company has after payroll is taxed as business income which is not subject to self employment tax, saving me 15%. I do have to pay income tax on it but as I understand it, that’s taxed at the same rate as rental properties (passive income).
      I hope that helps!!
      Matt

      • Michael Cook

        Matt, thanks for all of the insights. How do you prevent your Limited Partners from having to personally guarantee the mortgages? The local banks I use are requiring that any investor with >20% equity stake must personally guarantee each mortgage. I must be structuring my LLC’s improperly.
        Regards,
        Mike

  3. Thom H.

    Matt,
    Good topic. Currently, I have five LLC’s, each owning one or more physical rental properties. We have grown to more than 50 total units across those LLC’s. Today there is no governing corporation, just individual LLC’s. We don’t really do flips at this time, and we are primarily long term rentals, owning all properties entirely within those LLC’s. We have no partnerships today, although I’d like to soon venture into larger scale opportunities and possibly consider bringing in limited partners on some bigger projects. I’ve been considering a separate LP for that future structure. My question is, what advantage does your S Corp concept have by funneling monies from LLC’s (and LP’s) into the S-Corp? By generating a W-2, do you lose any tax advantages, like depreciation pass through? And how exactly does the money pass from the individual rental LLC’s (and LP’s) to the S-Corp? Do they just essentially write rental profit checks (electronically I’m sure) from the LLC’s to the S-Corp each month? Just trying to better understand the benifits and any possible draw backs (additional cost of more corps, additional accounting, etc) from this type of structure. I get the scalability factor. Just trying to see what advantage it could be for our situation. Thanks for addressing a very timely topic for us. Regards, Thom

    • Matt Faircloth

      Hey Thom!
      Great comment. There is a lot of conversation here so I’m going to segment it out…
      – If you are managing your 50 units yourself, you should have the Separate S Corp setup right now and be funnelling off management fees to cover your overhead. If you are not managing yourself, consider taking an “asset managment fee” and pushing that over to an S Corp. If you have that many units I’m sure that you have time spent keeping things moving.
      – If you plan on doing fix and flips in the future an S Corp can step in to help with taxes.
      – Remember that you have to pay yourself a W2 salary from the S Corp to get the full benefits. if you are taking all your rental revenue as passive income right now and it’s working for you, talk to your CPA before making a shift.
      – I take my profit for the rentals (passive income) directly from the LLC. The S Corp has become another income stream from my fix and flips and management fees.
      Curious to hear your thoughts.
      Matt

  4. Anthony Colonnetta

    Matt, Thanks a lot for the video and the great info. I have a quick question.

    If someone was to begin investing in single family real estate with private money and/or a bank loan, would you suggest to being with LLCs? Once they build a real business with 10+units would you suggest to change to a S-Corp? Or would you suggest that the new investor starts with a S-Corp?

    Thanks a lot and sorry if the question isn’t clear.

    -Anthony

    • Matt Faircloth

      Hey Anthony,
      Yes, I would defintely start with an LLC. The S Corp doesn’t come into play until you start taking on more “captial gain” activity like fix and flips. I do flips and also take a management fee from my rentals so it makes sense to funnel this through an S Corp. But you ar correct, a new investor does not need to operate as an S Corp out of the gate. LLC is fine and look to transition to the S Corp once you start investing full time. Make sense?
      Matt

  5. Karl Huth

    Matt, great article. Thank you for sharing. I only have 4 units now but will look into creating a S-Corp once I get more units under my belt. Also sounds like I need to invest more time looking for a better CPA that specializes in real estate and understands my goals for growing my investment portfolio. Thanks again.

  6. David Velazquez

    Hey Matt thank you for the video, here is what I have going on:
    Over the last 5 years I have acquired 12 rental properties, I’m not in the business of flipping but rather buy and hold long term to generate cash flow. I do have some of the properties in LLCs but some are in my personal name due to the fact that usually banks do not lend money to LLCs entities. So the question is Am I doing the right thing or should I start on setting up an SCORP? btw I do have a full time job so Im a part time investor.

    Thank you

    • Matt Faircloth

      Hey David,
      It sounds like you are off to a good start. I would say that you can get a loan from a bank in an LLC at this point. Try your local small banks in your area or try B2R Finance, they advertise on BP. Don’t do any more deals in your personal name as it will drag down your credit with so many loans outstanding in your name. All in all it sounds like you are doing the right thing. If you are planning to quit your day job and do this business full time, I would do an S Corp at that point. Or if you decide to start taking on fix and flips or other projects with a high income tax penalty.
      Take care,
      Matt

  7. dakotah pena

    This all makes sense and is a good description. I’ve wondered though, if it makes sense to have an operating company and a management company (both S-corps) separately so your tenant-facing side doesn’t expose ownership and you can brand that with tenant marketing while the operating/investment company can do the ownership of LPs that hold the property and can brand itself as investor-focused. That would add more expense with accounting though.

    • Matt Faircloth

      Hey Dakotah,
      I do both ventures (tenant interaction and investor interaction) through one brand. You do have to have a brand presence that allows for that. Our company mantra is to “Transform Lives Through Real Estate” That speaks to both audiences. If you have a mantra of “offering alternative investments” or something like that, you won’t want to fly that flag infront of your tenants, lol. That being said, the real estate holding side, the one that you would wear to investors, would be a passive income company as well. So you wouldn’t need that one to be an S Corp, just the one that faces tenants and takes in management fees. But back to my original comment, I do it under one company and would recommend that for simplicity.
      Matt

  8. Zachary Konarska

    Hey Matt,

    Thanks for the great video! I am getting ready to do my first deal and I am pooling the money from a few friends and business partners to make it happen. For now I am assuming we should just create a partnership where I am directly paid to do the management. Do you think that in the future (Assuming I keep pooling partners) I should be doing some sort of partnership fund structure with an S Corp for my own management company?

    I am not new to investing but I am very new to REI so any insight would be helpful.

    Thanks.

    • Matt Faircloth

      Hey Zachary,
      I would go for an LP for your type of deal, not an S Corp. Take your fees for running the project from that company and also take a percentage of ownership of the deal. Don’t do this deal with out some ownership for yourself BTW. If you don’t you just negotiated yourself a job. Your money partners can be limited partners in the company and have ownership also. I would also setup another LLC that’s just you and charge the LP for management expenses for your work. If you do this a few times, that management LLC can then become an S Corp in the future. Sound good?
      Matt

  9. Robert Szewczyk

    Food for thought.
    This is my opinion. Each individual property should be in each individual LLC as we can then enjoy tax benefits that comes from owning real estate on personal level (LLC is a flow through entity). This will entirely depend on your personal situation but if you are in high tax bracket, I would suggest you keep your long term asset in LLC. If you want to of flips, I would set up separate LLC and elect it to be S-Corp. I would just keep it completely separate from any long term assets. Now, your drawing shows another entity that operates as property management company for this individual LLC owning long term assets. This could be an LLC or LP and difference is relatively small. LP offer some more privacy and makes to harder to get through when lawsuit comes your way. This management company or as I call it holding company that is structured/elected to be managed in each individual LLC’s could be tricky if you are not careful, so be careful. Money flow from LLC owning long term assets to “holding company” or as you call it “management company” and even back (from holding company to any of those LLC on the bottom is fine as long as money flows as contributions, capital funding, or loans. The moment holding company starts paying for any expenses related to operations of those LLC’s on the bottom, you have punctured corporate vail. If there is a lawsuit coming your way from any long term property, then any savvy attorney can find out that some expenses were paid but this “holding company”. They will then follow the track and try to find out what else this holding company “manages”. If this company pays any other LLC expenses you are exposing all of your long term rentals to potential litigation. Just be careful who pays for expenses.

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