Oftentimes, beginning real estate investors are faced with the decision/pressure to incorporate, or form a business entity of some type for their real estate investing adventures.

Disclaimer: 

I am NOT an attorney, nor do I pretent do be one, and am not giving you legal advice, just my personal opinions.  You are getting this information for free.  If you want legal advice, consult your attorney.

Let me say this:

There are many gurus promoting things that make you feel like you must form a business entity right away, before you ever buy 1 property.  I’d like to propose a different scenario.

Potential Costs:

Entity Formation Fees.  If you use an attorney to draft your corporate documents and prepare them, you may face costs anywhere from $200-$500.  Along with your newly created entity, somebody will need to file business tax returns.  With the ways tax laws are written these days, it would be very prudent to have an Certified Public Accountant help you with this.  Your fees for simply completing your business tax return could run from $500 to $1,000. 

Dip Your Toe In First

I’d recommend seeing if you enjoy real estate investing, and prove that you can make a profit first.  Flip your first home, make $20K, and THEN consult with an attorney.  You will have money to invest in soliciting expert advice as to which entity would be right for your business dealings.

Different forms of real estate investing probably involve a different recommend business structure.  You may possibly be advised to complete your flips in an S-Corp, or an LLC taxes as S-corp.  Your rentals may be held in an LLC, or a limited partnership of some type.  Different states have different tax requirements.  So, be sure to consult with an attorney, AND an accountant.  They may have different advice depending upon your particular circumstances.

Don’t Put the Cart Before the Horse

The last thing you probably want to do is pony up money, form the entity, and lose money, and decide real estate may not be for you.  It is not for everyone.  It is quite possible due to your personal financial scenario, you may want to setup an entity from the Go.  And that is FINE.  However, I find that for most people, that is probably not the case.

Insurance:

An awesome protection that everyone needs is to be properly insured.  There are policies called Personal Umbrella policies which are GREAT!  They are inexpensive and can cover you in a wide variety of circumstances.  I highly recommend you talk with your insurance agent about what they may be able to offer you.

Remember, we are trying to make wise decisions, by putting our best foot forward, while making wise-monetary decisions.  Others may disagree with my thoughts here, and that is ok.  Like I said, everybody has different personal financial circumstances and they all must be evaluated by competent professionals who are licensed to give that advice.  I can only offer my opinions in the hopes that you make wise decisions that lead to fruitful futures.

 

Happy Investing.  Your Friend and Mentor,

Brandon Yeager

Filed under: Beginner

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