In the first few years of my real estate investing career, I ran my business as a sole proprietor because I really didn’t know any better. Luckily, I survived with only minimal damage, but there comes a point when it’s time to assess the best legal structure to use for real estate investing. RealSuccess will provide our students with the best tools and options for covering their assets. If you ask 10 experts, you’re likely to get 10 different opinions. With that in mind, I’ll share my opinion and experience.
If you’re just starting out as an investor, it’s probably okay not to worry about asset protection until you actually have a few assets to protect. On the other hand, it’s a good idea to set up your business with the right foundation.
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Once you have assets and something to protect, then it’s time to set up your business structure.
Question # 1: what is your net worth?
Question # 2: do you have assets that are at risk?
If the answer to that question is, “Yes,” then you need to take the next step.
Assuming you want to set up an entity for wholesaling properties, the most popular is an LLC (Limited Liability Corporation), a C Corporation and an investment trust. There is much debate about which one is better, but I prefer the C Corporation because the first $50,000 is taxed at 15% and you can have an employee welfare plan to write off many expenses. With an LLC, the income is passed through. If you start making money, you’ll wish you could pay only 15% on some of it!
Why is the tax issue such a big deal?
Here’s a simplified example. If you make $100K personally you are taxed on the full amount (35%) and have $65,000 left. Anything you buy for yourself comes from after-tax dollars. However, with a C Corporation if you make the same $100K on paper, but you’ll have $50K in allowable expenses that you can write off. So you get taxed on that $50K at 15% and only have to pay $7,500 in taxes compared to $35,000 on your personal income.
What type of expenses can you write off in a C Corporation? It depends on how your Company is structured (see your accountant/attorney for details) but you can often write off basic expenses like a bed or even a swimming pool. You’re thinking, “No way!” Let me explain how it’s done. If you have an employee welfare plan that covers your medical expenses and your doctor gives you a prescription for aqua therapy, it’s possible to write off the cost of the swimming pool. Yes, it’s crazy, but I don’t make the laws.
A very wealthy man once told me “It’s very hard for a C Corporation to make any money!” What he was trying to illustrate was that C Corporations can expense pretty much everything and look like there is little or no profit. You still can buy the same stuff, but you are taxed less if you structure things correctly.
Investment trusts offer many benefits for savvy first-time and experienced investors, especially in the long term. They are easy to buy and sell and cover every major market, you favor a cautious or more adventurous approach to investing.
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