If you are looking to purchase investment real estate properties for the first time, you need to be concerned with HOW you own the real estate.  It’s easy enough to just buy property and put it in your own name, however this is not always the most prudent idea. Although real estate investing and developing can be very profitable, it also presents new liabilities leaving a property owner wide open for lawsuits against their own personal assets or other corporate assets.

The most popular trend in owning investment real estate, especially with smaller properties such as single family and multi-family properties, is ownership via a limited liability company (LLC). A limited liability company offers corporate protections without the corporate formalities. The tax consequences are usually the same as a partnership.* A limited liability company has members as opposed to shareholders in a corporation. As opposed to “officers” the limited liability company is managed by a “manager.” Instead of bylaws which govern a corporation, a limited liability company’s rules are laid out in an operating agreement.

For investors looking to really build their portfolio, you might want to consider utilizing a corporation as the manager of the limited liability company holding the property.  This way, individual properties are shielded from the liabilities of other properties while the manager (you) is further protected by the corporation as another layer of protection.

The formation would look something like this:

Limited liability companies and corporations are formed though the secretary of state of individual states. Most real estate investors are able to do this themselves. If you need a specific or comprehensive operating agreement, or are unsure of this formation, contact a corporate/ business attorney to assist you.

In my next blog, I will focus on which states are conducive for this structure and some inventive ways to make this process easier.

*Consult a Tax Professional