Choosing a Legal Entity for Real Estate Investing

Disclaimer: I’m not a lawyer, tax accountant, or financial advisor.

I’m just a real estate investor who wants to share with other real estate investors what has worked for me.  Here’s what I know: it’s imperative to purchase your rental properties under a legal entity. Doing so provides legal protection to your personal assets.

Why is this important? Let’s say, god forbid, that someone slips and falls at one of your rental properties and decides to sue you. If you own the property personally, they can go after all of your personal assets, including your home and your children’s college funds. Yikes. A legal entity protects you personally.

Also, it’s much more tax-friendly to purchase properties as a legal entity instead of an individual. When your investing becomes a business, it is taxed as so. Businesses don’t pay taxes on the money they spend on business expenses. Any legitimate business purchases can be tax write-offs. Additionally, my favorite accountant, Tom Wheelwright calls depreciation magic!

There are many business entities to choose from: LLCs, sole proprietorships, S-Corps, C-Corps, etc. Personally, I’ve been advised to establish LLCs, because it limits liabilities. I think you’ll find that many accountants and lawyers will tell you that owning rental properties inside an LLC is the best option.

I’ve also been advised to set up the LLCs in the states where my properties are. I’ve also been instructed to hold approximately $150,000 worth of property in one entity. For us, that’s about three rental properties. Then, all of our LLCs report to a holding company.

Again, seek the counsel of your own lawyer and accountant to make the best decision for you and your real estate business.

We get tons of questions about this topic. Natali and I recorded an entire live stream about business entities! We answered questions about getting a mortgage in an LLC, liability insurance, and more. You can find that video here.  

Here’s what I know: it’s imperative to purchase your rental properties under a legal entity. Doing so provides legal protection to your personal assets.

The Real Estate Investor's Guide to: The 4-Hour Workweek by Tim Ferriss

New York Times Bestseller, The 4-Hour Workweek by Tim Ferriss is chock-full of useful information about living a deliberate lifestyle, and allocating time intentionally. This aligns perfectly with real estate investing. As you know, real estate investing is the best way to earn passive income and attain financial freedom.

In the book, there are three key principles that apply specifically to real estate investors:

Don’t exclusively save for retirement, make your money work for you today. Ferriss posits that we should disregard old-fashioned ideals about saving for retirement, and I tend to agree. What good is it to have $40,000 sitting in an account just waiting? A fantastic alternative is to take that money, purchase a cash flowing real estate investment, and create passive income that allows you to live the life you want now.

Have a clear list of priorities. If you haven’t written your goals down, you won’t have any direction. If you listen to my podcast, you’ll know that I’m a huge advocate for writing your goals down, and revisiting them frequently. If you set out to purchase rental real estate, it’s important to know how many properties you’ll need, and why. That’s where the Freedom Cheat Sheet comes in. Its purpose is to help you calculate exactly how many real estate investments are appropriate for your unique situation. 

Stop being “busy,” and carve out the life you want today. Align your actions with your goals. Set aside time every day to reaching your Freedom Number. Do meaningful work, not busywork. 

For more book reviews, check out our list of the 5 Must-Read Books for Real Estate Investors! 

In the book The 4-Hour Workweek by Tim Ferris, there are three key principles that apply specifically to real estate investors that can help you earn passive income and reach financial freedom.

Should You Buy a Rental Property with an HOA?

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A HOA, or homeowners’ association, is a group of voted members who set rules for residents and homes within a certain neighborhood. This could be a small gated community, a complex, or a group of condos or townhomes. The purpose of a HOA is to govern the community, and oversee the upkeep of the buildings.

HOAs collect monthly dues from the property owners in the community. I’ve seen HOA dues of $300-$500 per month, but the amount you will pay depends on the association. The money goes toward things like painting the buildings, and maintaining landscaping within the community.

The problem in paying these dues for investors is that money does nothing for your equity, and it comes out of your monthly cash flow.  You’re essentially giving that money to an association to take care of your lawn.

Another issue is that at any time, an HOA can change their bylaws. For example, an HOA might suddenly change its rules and decide to no longer allow properties in their community to be rented. As a real estate investor, that could cause a huge dilemma! It’s quite common actually; HOAs don’t want renters because it decreases the property value.

Not to mention, the HOA can make assessments, which are additional fees. This actually happened to me! I lived in a condo within a HOA, and they decided to replace all the roofs in our community.  The monthly dues the HOA had collected didn’t cover the expenses, so I (along with everyone else in the community) had to come up with $2500 to replace the roof.

There can be a lot of headaches for investors in HOAs, but this is not a black and white issue. Ultimately, everything you do in real estate should come down to ROI. If you find a property that has a high ROI within a HOA, then it’s a profitable investment! Plug the fee into your ROI formula, and if you can still meet a minimum of 10% ROI, it might be a sound investment.

What is your experience? Do any of your rental properties belong to HOAs? I'd love to hear your thoughts. Come leave a comment on our YouTube channel! 

 

There can be a lot of headaches for investors in HOAs, but this is not a black and white issue. Should you buy rental property with an HOA?

How to Buy Real Estate with Your 401k

Every year, I take a loan from my 401k plan to purchase a cash-flowing real estate investment. Are the bells and whistles going off yet? Typically when I talk about utilizing this strategy, I’m met with a lot of fear.

We’re told that we should under no circumstances touch our retirement funds, that we should never touch that nest egg, unless it’s an absolute life-or-death emergency. I have to disagree! This is the strategy I’ve used to build my real estate business.

I’m not talking about totally withdrawing from your account. This is different. I’m talking about taking a loan, under certain terms. Most 401k plans allow this with a few stipulations. Typically, there’s a maximum amount that can be withdrawn, and the loan must be paid back within one to two years.

Think about it: your 401k is YOUR money. And it’s just sitting there in some fund selected by your employer. Why give someone else the power? Why not take that money and turn it into a performing asset? Why not be resourceful? Why not leverage your money?

Here’s how it works: a 401k loan is a surprisingly simple process. You can log on to your 401k providers website, request a loan, and have a portion of your balance transferred to your bank account. Then you have a large chunk of cash with which you can purchase a rental property. 

You might be wondering about repayment. There is interest on this kind of loan. The good news is you’re paying interest back to yourself! You’re not borrowing from some big bank or other type of lender. Not only are you borrowing from yourself, but you’re also making your retirement account larger in the end!

It’s really a win-win. Also, most plans require that the loan be paid back automatically. The repayment is deducted from your paycheck until paid in full. Usually this strategy can be utilized once per year. 

Again, not every strategy is right for every investor, in every circumstance. There are many strategies out there! This is simply a method that has worked for me, and many of our investors. This can be a great way to begin your journey to financial freedom. 

This is the strategy I've used to build my real estate business. While not every strategy is right for every investor, I take a loan every year from my 401k to buy cash-flowing investments.

How to Create Financial Freedom through Real Estate Investing

We all want the same things: to have enough money to cover our expenses, to not have to worry about finances at retirement, and to spend our spare time with our families.

The best way to meet all of those goals simultaneously is to create passive income through real estate investing. And the only way to embark on this journey is to set a clear, attainable goal. Financial freedom will not just fall into your lap. You have to set a goal and work toward it.

That’s why I’ve created the Financial Freedom cheat sheet. It’s a formula that was born out of my own frustration. My situation was not dire; my bills were paid, but at the end of the month, I wasn’t saving anything. Does this sound familiar?

I have good news: the Freedom cheat sheet is a free PDF designed to help you calculate how many properties it would take for you to be financially free. This cheat sheet contains the exact step-by-step formula I, along with hundreds of others of investors have used to begin building passive income and legacy wealth.  Once you have a specific goal in mind, the possibility of attaining it becomes very real.

How would financial freedom change your life? Would you go on more vacations? Would you be more present with your children? Would you stop worrying so much about work? Whatever it is you’re seeking, rental real estate can help you get there. 

Ready to find out your unique Freedom Number?

We all want the same things: to have enough money to cover our expenses, to not have to worry about finances at retirement, and to spend our spare time with our families. The best way to meet all of those goals simultaneously is to create passive income through real estate investing.

5 Stories of New Real Estate Investors That Will Inspire You to Take Action

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What’s holding you back from becoming a real estate investor? Is it a perceived lack of financial options? Do you have fears and hesitations about the process? Or maybe you’ve just never seen anyone else do it before?

All of those obstacles are surmountable. People become real estate investors every day, despite their finances and apprehensions. Here are five stories of real people just like you who faced their fears, took action, and began on their path to financial freedom.

Kevin Brooks – Kevin is the father of two young children; he and his family reside in Los Angeles, which is typically a terrible rental market. He knew that if he wanted to make a high return, he would have to invest away from home. Like most people, Kevin didn’t have $40,000 sitting around to purchase his first property. But once he realized he could simply take a loan from his 401k, the idea of becoming a real estate investor became a reality. Kevin’s story is a powerful testament to the power of setting attainable goals and taking action! Listen to Kevin’s full story here.

Matthew Stellas – Once he calculated his Freedom Number and learned about turnkey investing, Matthew became the proud owner of a Midwest rental property in a matter of weeks. He put his faith in the process, took action, and now he collects rent checks every single month. Want to hear exactly how Matthew did it? Listen to his interview here. Matthew is a fantastic example of an investor who did his research and made an informed decision to create passive income. 

Sylvia Grugett – Although Sylvia has a sustainable career in the corporate pharmaceutical world, it’s not lost on her that no job is guaranteed forever. She wanted a backup plan, and she decided that real estate investing could provide financial stability. She financed her first property by taking a loan from her 401k, and is now building a passive income through real estate. Here’s exactly how she did it.

Josh Koth – As a self-employed photographer, Josh wanted an extra stream of income that wouldn’t take up his time. He realized that real estate investing could be totally passive, and decided to begin acquiring properties. He identified a clear goal: to replace his entire salary with passive income. He’s making it happen, here’s how you can too.

Keith Rorer – Keith is a single-dad who has always had an interest in real estate. He found that working as a realtor on the weekends did not fit his schedule or his lifestyle. As a parent of two teenagers, Keith’s time is his most valuable resource. Once he discovered he could earn a passive income through buy and hold investing, while still having his nights and weekends with his kids, everything changed. Keith is well on his way to financial freedom. Listen to his story here.

Are you ready to replicate the success of these investors? We can show you how. First, calculate your unique Freedom Number to determine how many rental properties you will need. Then, book a free, no obligations call with our team to discuss how turnkey rentals can help you accomplish your goals.

What’s holding you back from becoming a real estate investor? People become real estate investors every day, despite their finances and apprehensions. Here are five stories of real people just like you who faced their fears, took action, and began on their path to financial freedom.

5 Advantages of Buying a Turnkey Rental Property

Investing with a turnkey provider can be a fantastic way to get started quickly and passively. The turnkey company finds a property in a proven rental market with high ROI, rehabs the home, and places it in the hands of a trustworthy and established property management team. This process allows investors to collect cash flow without having to work, or worry! It's a great option for investors who want to make money without doing the heavy lifting. Here are five major benefits to purchasing turnkey rental properties: 

1)  Saves time! Many people that I know who are striving toward financial freedom are not looking to create a second job. Investing in real estate can be time-consuming if you’re going it alone! The process goes like this: find a property with high ROI in a great market, appropriately rehab the home to make it suitable for tenants, screen tenants or find a property management team. If you want to spend your free time with your family, working with a turnkey provider allows you to invest without putting every second of spare time toward your investing business.

2)  Immediate cash flow. Working with a turnkey provider is incredibly passive. Not to mention, turnkey providers are so experienced, the entire process is streamlined. Someone else does the work, you sit back and collect rent checks! 

3) Cheaper entry point. Unless you are well-researched, you’ll probably make a few mistakes starting out. I did—I overspent on the purchase and rehab of my first few properties. A turnkey provider knows how to find properties under market value. They also have all the pieces in place—materials, contracting team. Working with a turnkey provider is a great way to keep your costs low.

4) Diversification. Having a diversified portfolio is always a good idea, and turnkey rentals can help you spread your wealth around. Here at Morris Invest, our properties are in select Midwest markets. For most existing investors, our properties are typically located far away from their other investment properties.

5) Retire early. If you aren’t out there actively finding properties and rehabbing them, you can build your wealth faster! Turnkey properties speed up the process, so you can reach your Freedom Number quickly.

Ready to move forward with turnkey rental properties? Or do you have some lingering questions? Our team loves to talk to investors like you.  Our calls are free, with no obligations. Pick a 30-minute time slot from our schedule and we’ll discuss your goals and how turnkey rental properties can help you reach financial freedom. 

Five major benefits to purchasing turnkey rental properties - a great option for investors who want to make money without doing the heavy lifting.